Financial Reckoning Day

Financial Reckoning Day Bonner & WIggin, 2003, is a post Internet Bubble book written by the folks that deliver the Daily Reckoning e-newsletter. It says that rampant consumerism in the US will result in a slow soft depression.

Here are some of the quotes that I liked from the book:

"We may not know how the world works, but we are immodest enough to think we can know how it does not work. The stock market is not, for example, a simple mechanism like an ATM machine, where you merely tap in the right numbers to get cash when you need it.

Instead, the investment markets - like life itself - are always complicated, ofen perverse, and occasionally absurd.

But that does not mean that they are completely random; thougth unexpected, life's surprises may not always be undeserved. Delusions have consequences. And sooner or later, the reckoning day comes and bils must be paid.

In this sense, the investment markets are not mechanistic at all, but judgmental. As we will see, they reward virtue and punish sin."

"...as Keynes once noted, the market can stay irrational longer thatn an investor or a business can stay solvent." (on the fall of LCTM a firm led by nobel prize winners Merton and Scholes)

"Minsky's financial instability hypothesis sets out to show how capitalism is inherently unstable.... Minsky refers to Keynes concept of a 'veil of money" between real assets and the ultimate owner of the wealth. Assets are often mortgaged, financed, leveraged, or otherwise encumbered. This veil of money gets thicker as financial life becomes more complex and makes it harder to see who is actually getting richer who is not. When house prices rise, for example, it seems that the homeowner should be the beneficiary. But homwowners now own much less of their homes than they did a few years ago.

Fannie Mae (eds note: in Canada the CMHC), banks, and other intermediaries have a strong stake in home values. In recent years, Fannie Mae has worn a veil of money as sticky as flypaper. The hapless homeowners hardly had a chance. They got stuck almost immediately. How they are hopelessly glued and cannot get away.

Instead of coming up with innovative new ways to make people rich, America's financial intermediaries - notably Wall Street and Fannie Mae, came up with ways to make them poor.

"The financial instability hypothesis" Minsky explains, "is a theory of the impact of debt on system behavior and also incorporates the manner in which debt is validated. In contrast to the orthodox Quantity Theory of money, the financial instability hypothesis takes banking seriously as a profit-seeking activity. Banks seek profits by financing activity and bankers,, like all entrepreeneurs in a capitalist economy, are aware that innovation assures profits. Thus bankers, whether they be brokers or dealers, are merchants of debt who strive to innovate in the assets they acquire and the liabilities they market"