What Will You Do Differently In The Next Financial Crisis?

There’s not much new to write about finance. As a financial writer, I can assure you that the basics haven’t changed in your lifetime. Even the advent of new financial products has just changed the way you access your finances, but not their nature. The same way a new pen might change the feel of writing in your diary, so might a new-fangled card or online account change the feel of using your money. The diary and the money, though, remain unchanged.

The last big financial invention I remember was my mother getting her first ATM card when I was a boy, and watching her use it at the bank drive-in, thinking, “Wow, I got to get me one of those!” It never occurred to me that she or my father had to put the money into the machine via their bank account before it would come out. Apparently, that thought never occurs to Congress or the Federal Reserve, either.

The reason I bring up today that not much changes in finances is that we’re spending too much time pointing out repeating patterns without showing people how to behave differently the next time the pattern repeats. So, let’s all agree right here, right now, that we will face another financial crisis. Asking too much? Fine, then let’s take a moment to add some heft to the idea.

From my new book, Financially Stupid People Are Everywhere: Don’t Be One of Them, page 38:

Key contributors to almost every financial bubble are easy money, lots of debt, speculation that drives up prices, rising prices that attract more speculators, more speculators that need more money to borrow, and more borrowed money that drives up prices even more. Financial firms will always hire lobbyists to put politicians in their pockets. Politicians will always give in to incentives and bribes. Financial firms will always be let loose. Once let loose, they will always run wild and offer more debt than people should accept, and encourage rampant speculation. When it all falls down again, politicians will act “spitting mad” at the irresponsible financial industry — even as they use money from their tax-paying constituents to prop up their friends in finance. Together, government and financial firms take money from rubes in the creation of the problem, and again in its solution using tax proceeds, and the rubes are too stupid to ever figure it out.

Sound familiar? The problem is that nobody remembers anything, or ever notices such patterns to begin with, so they can repeat. Only the naive think the latest phase of politicians acting “spitting mad” and going up against the financial industry — happening as you read this — will do any more to prevent the next financial crisis than it did the last time they “reformed” finances in 1989 after the Savings & Loan Crisis. Lot of good those reforms did us, eh?

The failed attempt at reform 21 years ago was called the Financial Institutions Reform Recovery and Enforcement Act of 1989. The current attempt at reform that will fail is called the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The next one will probably be called the Palin-Paul Dark Pool Liquidity and Idiot Credit Card User Clemency Act of 2031. Actually, most onlookers doubt we’ll make it that far before another meltdown. Switching the 3 and 1 probably gets us closer to the truth: 2013.

Andrew Ross-Sorkin sighed in Monday’s Dealbook Column at the New York Times that “here comes the Dodd-Frank Act, which is supposed to ensure that we never repeat that 2008 finale of Wall Street Gone Wild. The bill, if signed into law, might help us avoid another sorry episode like that. But one thing it won’t do is prevent another crisis…”

Right, but mostly just ipso facto because one component of a financial crisis is its taking us by surprise, so nothing ever will prevent another one. That’s easy enough to remember, right? Nothing will ever prevent another crisis because markets are made up of fallible humans acting in their own interests, and the most powerful among them are almost assuredly not acting in your interest. Toss in a creaky governmental mechanism in which the elected must appeal to powerful corporations for financial favors, and you’ve just baked yourself a heavy cake of calamity.

It’s the reason bankers get away with murder, and always will. Remember, nothing ever changes? We can recount decades, indeed centuries, of this repeating pattern.

So, then, can we finally just accept this and move on to protecting ourselves against the next bust-up around the corner? Can we finally give up on politicians ever acting on our behalf instead of on behalf of banks? Can we finally just see that regulators are always eventually bought off by every industry they’re supposed to regulate? Can we ever move past the surprise and outrage at these findings, chalk them up as an unsurprising fact of life like gravity, and put in place mechanisms to deal with them on a personal level?

I think so, and that’s why I wrote my new book. It deliberately does not propose solutions to these unsolvable realities. Books on parachuting don’t spend a lot of time trying to solve gravity, do they? Similarly, books about personal financial defense should not spend time trying to solve financial crises or the corruptions that precipitate them. Yet, too much political and financial writing obsessively complains about these constant, unchangeable facts of our society.

Get over them, and get yourself ready. How? Start with this great new book I know.

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  1. Michael Nettrour
    Posted July 1, 2010 at 11:06 pm | Permalink

    Unfortunately, I have to agree with you Jason. The system is not going to change, unless you believe getting worse is change. I subscribe to many conservative political newsletters and the common theme is how corrupt the current system is. I’ve grown totally weary of sending faxes and writing to politicians. Most of them are part of the problem. Just ordered your new book. I have gone so ultra conservative with my finances in the last six months that some say I am a doomsayer. I think the economy will get worse. If I can’t pay for it with cash I don’t need it. I need to read in detail what you now recommend doing with money available for investment and how to protect what I have. I know some older immigrants who survived the inflation of post- WWII Europe. The things they remembered will happen here if we don’t cut personal and government spending.

    • Posted July 2, 2010 at 1:29 pm | Permalink

      There’s collective head-scratching among the smart money people I know, as no asset class looks immune to a deflationary system reset. I maintain that land, even if it falls in fiat monetary value as part of an across-the-board drop in prices, will retain the best intrinsic value. Even land, however, isn’t moving these days. I’ve written a lot about pristine resort area land being among the best to watch. Parcels that don’t normally ever make it to market at all because of long friends-of-friends waiting lists around them, are now stagnating in the MLS.

  2. Alan Stockton
    Posted July 1, 2010 at 6:52 am | Permalink

    I agree with much of your posting, but I don’t think that this situation is grounds for giving up on trying to change the political playing field to reduce corporate influence. Our government “…of the people, by the people, for the people…” may now have been replaced by government “…of the corporations, by the corporations, for the corporations,” but the immense scale of Congress’ addiction to corporate money is a fairly recent phenomenon, and there is at least some hope of reversing it if enough of us get sufficiently aroused. For a starter, please take a look at Larry Lessig’s recent talk at http://fixcongressfirst.org/NCtalk , which includes a startlingly relevant comment by Abraham Lincoln on the possible corporate takeover of the government.

    • Posted July 1, 2010 at 10:17 am | Permalink

      A thoughtful comment, Alan, and one worthy of an in-depth reply. Please see tomorrow’s article for that reply.

  3. Posted July 1, 2010 at 5:34 am | Permalink
  4. Posted July 1, 2010 at 5:32 am | Permalink

    I cannot wait to read the book you sent me! I am very much looking forward to reading it after readin this preview article you just wrote. Thanks for writing this book. Hopefully, we can convince a good amount more people to read it. You should do an audio book too because people with less time to read prefer audio books.

    • Posted July 1, 2010 at 9:07 am | Permalink

      Thank you, Jason! You should have it in a couple of days. Enjoy writing a review of it. I know you’ll do a good job. On the audio version, I mentioned it to my editor at Wiley and she’s going to get back to me on the options. I’d like to read it myself for the audio version.

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