Tag Archives: Financial crashes

Funny Things Happen on the Way to “Restoring Financial Stability”, by Charles Hugh Smith

This is not funny “ha-ha.” From Charles Hugh Smith at oftwominds.com:

We can also predict that the next round of instability will be more severe than the previous bout of instability.

Everyone is in favor of “doing whatever it takes” to “restore financial stability” when the house of cards starts swaying, but funny things happen on the way to “Restoring Financial Stability.” Whatever “emergency measures” are rushed into service to “stabilize” an inherently unstable system resolve the immediate problem but opens unseen doors to new sources of instability that eventually trigger another round of systemic instability that must be addressed with more “emergency measures.”

These unintended consequences proliferate as policy extremes are pushed to new extremes, and “emergency measures” become permanent sources of the very instability they were supposed to eliminate.

As @concodanomics recently observed on Twitter: “A major flaw of finance is that it nearly always mutates the very instruments meant to protect investors into crisis-inducing time bombs.”

Another major flaw in finance is the self-serving pressure applied by politically influential players to “enable innovation,” a.k.a. new opportunities for skims and scams. The usual covers for these “innovations” are 1) deregulation (“growth” will result if we let “markets” self-regulate) and 2) technology (generating guaranteed profits by front-running the herd is now technically possible, so let’s make it legal).

Broadening the pool of punters who can be skimmed and scammed is also a favored form of financial “growth” and “innovation.” “Democratizing markets” was the warm and fuzzy cover story for enabling everyone with a mobile phone to dabble in risk-on gambles with margin accounts (cash borrowed against a portfolio of stocks).

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Juggling Sticks of Dynamite: Our Fatally Distorted Sense of Risk, by Charles Hugh Smith

One day they remove the safety net, and people aren’t even aware of it until they hit the ground. From Charles Hugh Smith at oftwominds.com:

So when the gambler ends up juggling lit sticks of dynamite, he’s confident nothing bad can happen because nothing bad has ever happened, no matter how much risk he takes on.

The problem with constantly being saved from the consequences of our actions is this fatally distorts our sense of risk. The foundation of the ability to accurately assess risk is the experience of real-world consequences: hardship and losses.

If you are sloppy about positioning the ladder securely, the ladder falls and so do you. If you survive the fall, you’ve learned that risk is real and that precautions must be taken to minimize risk. Precaution requires thinking through all the components of risk and taking steps to remediate or avoid each specific source of risk.

If you’ve never really been pushed to your limit of endurance, you lack the experience needed to realize you’re dehydrated and in danger of succumbing to heat stroke. So when you run out of water on a shadeless climb exposed to the blazing sun, you fall into magical thinking: if we just push on, push harder, power through this, then we’ll be fine. But powering on is the worst possible choice, and so the inexperienced hiker passes out and expires.

The Federal Reserve and the rest of the Savior State has saved us from the financial consequences of rampant speculation for decades. As a result, few of those in the casino have the necessary experience of hardship and losses to accurately assess risk. The vast majority have only experienced being saved: the most profitable response to a losing bet is to double-down on the next bet because the house (the Fed) will amply reward every “buy the dip.”

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