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Thursday, October 27, 2011
Economics/Business ...

No, my father was not an Assistant Treasury Secretary or a Federal Reserve governor or a partner at Goldman Sachs. So, he didn’t have very much impact on the global economy before dying in 1973 (at a too-young age of 50). But if he were here today, he could pinpoint exactly where all the trouble in today’s economy had come from.

Dad was a very pragmatic kind of guy. He always tried to think ahead, tried to keep trouble from happening. And he knew that there would always be trouble that you could not presently anticipate. So he always left some room for an unexpected turn of events. His early death was devastating for my mother, but he left her with a house fully paid for and no outstanding bills. We got by, thanks to his financial philosophy.

So I’m sure Dad would be rolling in his grave if he could keep up with our current global economic situation. About 12 years after his passing, when inflation rates, interest rates and unemployment rates finally dropped, the world fell in love with debt. Since the Great Depression of the 1930s, when my Dad was growing up, governments and businesses learned to treat debt with respect, and used it only when sufficient margins for error were in place. After 1985, that rule was increasingly tossed aside. Businesses interests borrowed incredible sums in takeover bids, households borrowed more and more to “have the home of their dreams”, and governments cut taxes while increasing services and defense measures.

All this took massive borrowing. But for whatever reason, there were plenty of people and interests willing to make those loans. Everyone wanted to make it all happen. So the borrowers stretched the envelop in coming up with the best possible scenarios to feed into the due diligence analysis, and the lenders didn’t ask questions.

But in 2008, the debt bubbles started popping in the American housing market, and the process goes on still with European sovereign debt (and maybe eventually, American sovereign debt). If only someone like my father could have asked all the commercial lenders and hedge fund managers and finance ministers and credit insurance underwriters and mortgage debtors and central bankers — if only he could have asked them, “do you have any room for error here?”

Obviously they didn’t. Obviously that was an old-fashioned idea that had seemingly become an anachronism. It was a notion that passed with “The Greatest Generation” (my Dad was in the Navy towards the end of WW2), something no longer needed by sophisticated Baby Boomers with their quant-based MBA training, and then the new breed of sophisticated, high-tech Gen X managers and political leaders.

So here we are, stuck in a long economic downturn caused by a debt collapse and all the fighting that necessarily takes place thereafter, as everyone involved scrambles to avoid “the big haircut”. Capitalism and democratic politics are wonderful human innovations, but they do have built-in self-destructive tendencies when things go bad. With some luck, the industrial nations will eventually get out of this economic funk, and the next generation of leaders will hopefully learn once more to have respect for what they don’t know, for the “unknown unknowns” as Donald Rumsfeld put it. Hopefully, it will become fashionable again to build in some leeway for the down-side. As my father would have told them.

◊   posted by Jim G @ 9:14 pm      
 
 


  1. Jim, What a nice tribute to your father.

    I myself have wondered often about the generations that follow me. I was stunned when several of the younger ones blithly filed for bankrupcy and simply forgot loans made to them–some of those loans by family members. Seemed there was not a second tho’t about it.

    Yet, who knew until the revelation came that even those considered “too big to fail” were also the ones who tho’t nothing about declaring bankrupcy and leaving other, poorer, members of society to take up the slack. Seems like it was a prevailing virus of some kind that was massively catching–a plague of some sort, I guess.

    Then too, I’ve found myself considering this: How is it the ones who have the “fancy MBA” (as you put it) are exactly the ones who seem to not be able to manage money well? Again, this seems to prevail on all levels of society and throughout the younger generations.

    I found myself reading recently a blog by a young (about late twenties) person who just “discovered” the difference between wanting something and needing something. OK, good, it was a step in the growth of the person. Yet, I found it odd that I learned that when I was about 5 years old when I asked my Dad if I could have a nickle for an ice cream cone, and he said, “What do you think I am, made of money?” That was the time I learned the difference between what I wanted and what I needed.

    I’m definitely not one to get nostalgic for the “good ole days” as I have lived through them and do not wish to repeat the experience. Yet, I find myself wondering about the young people of today and how long it takes them to grow up. Somehow or other older generations matured so much faster. Was it the harder times? Was it a general societal attitude? Maybe it’s the information age that requires a whole lot more to learn before one can mature? I tend to think, not really, but then again, maybe probably? Haven’t found the answer yet.

    Your tribute to your father is lovely. And your further comments are right on the mark. MCS

    Comment by Mary S. — October 28, 2011 @ 10:59 am

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