Lessons of the Financial Collapse

[From an attempted comment to Arnold Kling's post (Amar Bhide Monday) about Amar Bhidé's Wall Street Journal article "Don't Believe the Stimulus Scaremongers" and Econtalk podcast "Bhide on Outsourcing, Uncertainty, and the Venturesome Economy"]

MHodak:

> Only a people as ignorant of history as they are of economics can consider the current boom-bust cycle a failure of laissez-faire.

I wouldn't express it this strenuously, but it is difficult to argue with.

[but, be aware: if boom-bust cycles cannot confute laissez-faire markets, then, equivalently, boom-bust cycles cannot confute market regulation.  If market regulation does not stop boom-bust cycles, but meets other social goals, then regulation is working as _designed_, if perhaps regulation is not working as it is being _sold_ to the voters.]

I appreciate being on this side of the financial bubble.  I now know the hard limitations of many financial innovations:

* cheap cheap cheap lending as social policy

* credit default swaps

* mortgage securitization, or other alchemy used to turn shit into gold

* more alchemy: thinking that deregulation and/or regulation can turn shit into gold

* swapping really existing heavy tails with negligible light tails in modeling, for ease of modeling

* borrowing to invest, which was always speculation and always will be speculation, begin tarted up as "savvy leverage"

* hand-waving away concerns about alleged "systems of trust" that only reward for short-time-horizon goals

* relying on rating agencies in the pocket of those being rated

* not treating liquidity as a scare resource (in reality, you should force people to pay dearly for liquidity *now* as opposed to liquidity later); thinking that you can pull liquidity out of your ass

* in general, trying to profit from financial instruments that *you* don't personally understand

I didn't have the chops to puzzle out all these myself, and now I don't have to.  I am standing on the far side of the bubble.

I am weathering this current storm, not badly, not because of my smarts, but because my father and wife are fanatically risk-adverse, and I don't have enough energy to take them both on simultaneously.  So I am in a position to profit from lessons I am unworthy to have granted to me.