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Archive for November, 2008

Financial Markets are Acting Rationally

Posted by Reed on Tuesday, November 11, 2008

Let’s see here:
I once heard, “An irrational response is often a rational response to an irrational situation.”
Let’s call all financial institutions banks because it is short and easy to type – okay?
There was and remains a liquidity crisis due to banks making few loans to each other or businesses or individuals.
Banks know they each have a bunch of these toxic financial instruments.
Each bank knows how much they have.
Each bank does not know how much other banks have.
Each bank knows toxicity of instruments they hold.
Each bank does not know toxicity of instruments other banks hold.
Banks are afraid if they lend money they won’t get their principle back because they do not have any way to estimate who will fail next.
Banks really like to get their principle back.
Financial reporting by banks is apparently inaccurate and possibly outright false.
Financial reporting by businesses is no longer trusted.
Think Enron, Worldcom-Sprint, …. there are so many I can’t easily remember them all.
So the banks come to conclusion and announce they do not have confidence to lend.
Banks are just groups of people working together.
Now, when someone asks to borrow $10 from you, then you only lend it if you have confidence you will get it back.
So, if you don’t have confidence in the other person, what did other the person do?
The other person did something deceitful, deceptive, untruthful or similar.
Banks have done same thing!
Banks are acting rationally: They do not trust others and thus have no confidence in others!

So, now banks and businesses want taxpayers to “bail them out” because they were deceitful and deceptive while a few of highest level employees took over-sized compensation packages (think Lehman; or AIG $400K for a spa retreat…).
Problem is it is not all banks and businesses who are deceitful and untruthful.
Rather, it is just enough of them to muck up entire world financial system.
So, why is United States of America and many other countries around the world bailing out the miscreants?
Seems it would be much more gentle, kind and loving to help individuals weather this storm.
Seems we should be helping those who are at income levels where they are choosing between food, clothing and shelter and not the multimillionaire miscreants.

(11/12/2008 Correction from …Lehman and $400…)

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