How to Scare a Kid

40 years from now, when the full extent of the mishandling of this whole crisis has been felt, the primary emotion of your then adult children will be terror.

What is the best way to scare a kid? Put a massive lien on his inheritance before he knows how to work.

Bryan,
I’ve been trying to understand what has been going on in Iceland (they’re close to an agreement with the IMF). I suspect that there were some people trying to scare all foreigners dealing with Iceland’s three banks (someone has already accused Gordon Brown, the UK’s PM, but the evidence is weak). I let you know when I finish my review.

I just got into trading last year. By last month, I had doubled my initial investment. I even managed to make big scores after the peak in late 2007. Since then I lost almost 50%, so I’m almost back to where I started (I’m a little ahead).

I laughed hysterically as the market plummeted, even though I was losing globs of money in minutes. I certainly care about the money I lost, I would be better off if I had seen the panic and sold. I laughed because the valuation of my portfolio is a constantly fluctuating number, based off what the last person has paid for identical items. I laughed because it’s all happening in such a short period of time, the outrage and panic is so very hyperbolic, yet the pain is nothing like the horrors of starvation seen in Mao’s China, or any other longer, more severe “failures.”

Yes, a market crash is easily caused by fear. All you have to remember is that market cap isn’t the real valuation, it’s just the # of available shares times the LAST sale. Even if millions of small investors aren’t scared, a few large hedge-fund managers try to convert stocks to cash when no one is particularly bullish and you get a deflation of valuation of the portfolio. But since the market cap is based on the last trade, you can’t just say “this is what it would cost to buy the company,” because you have no reason to expect a majority of the shares would be sold for that price.

I’m not making any decisions until volatility subsides, so what’s my portfolio valuation? What’s the value of a portfolio on weekends or holidays when there’s no trading?

You mean the subprime issue was marginal? That all that complex leveraging was unimportant? Were P_B’s soothing words (before begging for 700 B) that caused the world to panic and run on Lehman?

The psychologically fueled panic concept is an interesting and innovative thought to why some economic panics do occur. Many times throughout history people’s perceptions of events, whether skewed by media and politics or not, have caused an event to occur or become more drastic. For instance, runs on a bank caused the bank’s failure which is serendipitous because the fear of the bank’s failure caused the run on the bank to occur in the first place. The truth is simple that people in general become panicked for really no reason at all but our panic causes a reason for us to become panicked.
Caplan also makes a good point, that the previous upset provided by Paulsen and Bernanke could have caused the reaction to the only seven percent drop to be more drastically recognized. I personally agree with Caplan that if fear had not been built up for weeks that the reaction would have been less severe if even existent. I believe an event like this also occurred concerning the gas crisis recently. Until people began to run to the gas station to beat the high prices that were expected, there was in my opinion no danger for a rise in gas prices. However, when people began to run on the gas stations causing them to run out of gas it essentially in my opinion caused the gas prices to increase.
While there are other lurking variables that I believe do contribute to many of these economic panics, I certainly feel that the psychologically-fueled panic concept is something to be respected. However, this concept is underestimated. I feel that we as a nation could prevent some panics, if we would realize that we in fact can cause the object of our fears. I also believe that if we could take a step back to realize that when we panic it hurts us in the long run, it would help us as citizens to improve many and even go as far as to prevent some economic situations. A roman statesman, Appius Cluadius said “Each man is the architect of his own fate”, while I understand we cannot as individuals influence the entire market, I think that our perceptions do influence the outcome of many economic situations.

If you want to get a good laugh, all you have to do is tell a Democrat that the economy is fundamentally sound.

I believe that market commentators suggesting such explanations are, in effect, admitting they don’t understand it.

That’s OK, the whole premise of why central planning can’t work is because central planners don’t have available to them all the information they need to make good decisions. Your inability to explain the market is simply a manifestation of that fact.

one of your best.

1. Bernanke, Paulson et al did not cause the crisis. The management teams for Bear Stearns, Lehman Brothers, Fannie Mae et al were the ones.

2. Without the speeches and warnings that they made prior to the pushing through the bailout plan, it would not have succeeded. And we would be on the very brink of a Greater Depression.

3. To close their mouths and pretend life is carrying as it is would be causing disservice and a clear failure of their roles as public servants.

4. By clearly warning the public and other government that there is systemic failure in the credit market, it is the crucial first step to rectifying and repairing the financial markets and later, the type of regulations and oversight needed.

So, I don’t agree with your thoughts that they contributed to the crisis.

Far from it, if it doesn’t turn out to be another Great Depression, both of them would have earned their salaries and then some.

If you tell people it’s the new Fed Chairman has the distinction of being expert at the Great Depression, you are telegraphing that you should expect it.

El Presidente makes a good point. All of the Fed’s actions over the last 14 months of this “credit crisis” have worked to deprive the market of information. The TAF allowed troubled banks to borrow from the Fed anonymously and therefore the market was not able to differentiate between the good banks and the bad banks. That is why the Paulson/Bernanke scare show worked so well. In that information vacuum, investors had to assume that ALL banks were in trouble even if that was demonstrably untrue (someone else’s remarks about how the “credit crunch” hasn’t affected his or his neighbors real lives).

To El Presidente’s comments about the economy, there is no doubt that a recession was in the offing and things were getting worse, but it is the actions of the Fed that have prolonged the agony. And now the scaremongering has turned a routine recession into something that is likely to be much worse. Business activity came to a halt while everyone looked to DC for a solution.

The economy is suffering from a panic induced by government intervention. Part of that intervention was the scare tactics of P/B and it did have an effect, but it wouldn’t have been as effective without the previous interventions (TAF, TSLF and all the other alphabet soup programs).