Financial Crisis Perspective

I found a good piece on putting the financial crisis in perspective , especially for investors. I like this:

Right now we see fear among market participants as reflected in the widespread liquidation in which investments across all asset classes (with the exception of US treasuries) are getting crushed, regardless of fundamentals. Perhaps this is so shocking to people because we were in a 25-year bull market, in which we forgot that values do not always rise. Some of the growth during this period was real due to technological advancements, liberalization of markets, and financial innovation. A significant amount of it was artificial — false prosperity generated by unnaturally low interest rates which led to a preponderance of investments across all asset classes. The euphoria that went along with this easy money served to amplify the size of the false wealth creation.
This is nothing new; it is in fact a recurring theme in economic history. Artificially low interest rates generate a boom in which there are malinvestments that need to be wiped out in the subsequent bust. There have been booms in tulips, booms in railroad companies, booms in real estate, and booms in entire nations. The constant is that easy money incentivizes people to take on more risk than they normally would, causing money to flush into the sector or nation of choice. It is only when the poorer investments are liquidated that the markets can return to equilibrium and reflect the true value of assets, laying the ground for new real growth.

These words were written by a junior in college! Impressive!


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: