Human Error Leads to Investment Disasters as Credit Bubble Bursts

“Well…which is it?”

We put this question, rhetorically, to a group of dear readers, in Melbourne.

The background for this question is as follows:

To Err is Human, we had told them. Mistakes are always being made. In a properly functioning economy, these errors are always being made…and corrected. People go broke. Investments go bad. Projects are cancelled…discarded…and rejected.

But in the last quarter century, interest rates were generally falling. This created a very forgiving economy. Mistakes were still made. But the cost of them went down. You could pay more for a house than you should have paid…but no problem; you could refinance at lower interest! And then, the price would go up – problem solved. Or, you could overpay for a stock. Again, falling interest rates were generally pushing up stock prices – you almost couldn’t lose.

Then, in the last six years, mistakes almost disappeared. People might have wanted to go broke – but lenders wouldn’t let them. The lenders kept showing up with more money! You could buy a house…or a Structured Investment Vehicle; no matter how big a mistake you made, you’d be rescued by easy money and rising asset prices.

Looking at the economy itself, as the flood of money gushed in…mistakes disappeared beneath the surface. Typically, in the United States, there was about one quarter of correction – with negative growth – to every four or five quarters of expansion. But more recently, the ratio of correction to growth fell to only one quarter out of every 19. Which was where our question began:

Either humans are less prone to error than they used to be…or there are a lot more mistakes in need of correction.

But we’ll have to explain this tomorrow. Today is already over here in Melbourne…stay tuned.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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crank up boom ? as the katrina phenomena took off the early risk takers work hard and long and made good money. other people looked for good profits. eventually everybody was a real estate tycoon. sadly the feds forgot to raise interest rates and instead decided to ignore their education guardians ludvig von mises and/or murry rothbard. it’s very hard to make a housing complex pay if the workers are underpaid, especially if for $5 per hour the social security scam costs $.75 income tax for workers is 35%, liability insurace is 100%, and health insurance is 600%. whats a… Read more »
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