Tuesday, February 12, 2008

We Don't Know What We're Doing - Part II


I just finished reading a book called The Ingenuity Gap by Thomas Homer-Dixon His basic premise is that things are very complicated and we don't know what we're doing. In the previous post, I wrote about the grand experiment on our planet - considerably risky since we have so little knowledge of the ramifications of our actions. Today however, I would like to discuss economics.


First, the “market” is not a force of nature. It’s a man made concept. It seems obvious, but to hear free market advocates talk about it, one might think it’s as natural and inevitable as the weather.


Do the “experts” really know what the heck is going on? These experts – financial analysts, media stars on CNBC, get paid a lot of money because they supposedly have insight and analytical skills that allow them to predict what the market, and elements of the market, will do.


The expert’s track record indicates one of two things to me: either they are grossly incompetent or corrupt. Let’s consider three relatively recent large economic events: the 1997 Asian currency crisis, the 2001 dot-com meltdown, and the current subprime credit mess. What do they all have in common? All of these events showed a failure of the financial analysts and rating organizations to warn us in time. Right up to the end, in all of these cases, analysts were either pushing stocks (the dot-com meltdown) that tanked, or were rating companies and bonds (Asian companies, dot-coms, and mortgage backed securities) as good bets. The “system” that is supposed to help out the smaller investor totally failed us in these three cases. In retrospect, you have to wonder how they (or we) got it so wrong. Of course, the fact that the “experts” get paid indirectly by the same entities they rate (through investment banking deals, for example) leads me to think it’s not exactly incompetence, but a conflict of interest. Either way, it seems the “average joe investor” can’t really trust the experts to get it right – at least get it right in time for us to get out of the way of the financial avalanche. We have to do our own homework and act based on our own intuition – just following the crowd, even if that crowd is led by a so-called expert, could lead to significant losses.

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