What if?

[Trevor]

I have a question: if the majority of people had realized in, say, 2004-2005 that there was a bubble, is there anything that could have been done? Granted, nothing could prevent a collapse, but looking back, is there anything that could have been done to soften the blow and make the depression less severe?

[Marc]

Good question, Trevor. Fiscally and monetarily, I would say, sure, there were things which could have been done in 2004–2005 to soften the blow of what we're financially experiencing now: either do the bailouts, backstops, interest-rate reductions, and quantitative easing we're now doing, and/or get the banks to knock off giving out the EZ-access mortgages and other big credit that they were giving out like hotcakes at about that time. However, from a behavioral-finance and political standpoint, I feel that it would have been not possible to do this, no matter who was US President or Prime Minister elsewhere or head of the Fed, etc. To use John's wondrous analogy, it is rather like a drunk who needs to hit rock-bottom to finally get himself to change: we think that we're invincible until we find out that we are absolutely not. At that time, we felt that we didn't need the bailouts and so on, and the most cautious or moralistic President or US Congress or whatever wouldn't have been able to stop the banks/financial institutions from what they were doing (who were also at least tacitly supported by many Americans who would swear that "The American Way" was at play in allowing the democratization of credit as it existed in 2004–2005).

Maybe others have a different opinion here, but that's how I respectfully see it; thanks again for the relevant question! —Best regards, Marc

[Trevor]

The bailouts may also have helped to reduce the severity, if all the banks and other companies had stopped committing fraud. The problem is that they haven't. They're still doing it, either willfully trying to destroy the world financial system or deluding themselves into thinking that they can be bailed out a second time.

[Marc]

The bailouts may also have helped to reduce the severity, if all the banks and other companies had stopped committing fraud. The problem is that they haven't. They're still doing it, either willfully trying to destroy the world financial system or deluding themselves into thinking that they can be bailed out a second time.

Exactly; that intimately relates to all those EZ-access mortgages, bogus credit ratings, jerry-built exotic financial derivatives, secret short bets placed on the aforementioned, etc., etc. Again, to quote Prince, too many actors still wanted to "party like it's 1999" — and to a large extent, we're indeed still doing it, and we won't stop dancing until the music stops playing.

And, we're going to eventually have the hangover of the century as a result. —Best regards, Marc

[Trevor]

As you said, like anyone who's addicted, we're going to have to hit bottom before we learn our lesson. Since China's got a trade deficit, which was once considered to be an impossibility, it's got to mean that their economy is slowing down as well. It seems to have started around the middle of last year. They're where we were in 2008, when the problems were obvious but the majority still believed that nothing was going to happen. I don't have any money in the stock market, but I know people who have 401Ks and they're going to suffer.

[Marc]

I think that anyone who is really into "medium-horizon trading" is taking a crazy amount of risk: I think it is safer to day-trade (albeit with lots of smarts and protections accompanying it). Combining very-short-term trading with some prudent long-term trading is likely the best way to go, and yes, the viewing of a 401(k) as a good nest egg in the medium-term is surely a dicey thing to do. (Again, just my opinions there, but I really think I'm right on those things ) —Best regards, Marc

[Trevor]

My father's got one and he's hoping to retire in a few years. It likely won't happen as things stand now. If you do know what's coming, it's possible to make lots of money once everything has collapsed and stocks have hit their low point.

Let's see... Spain, Portugal, and I think Italy are in a recession. Greece is in full-scale collapse. How this is going to affect us we'll find out in the next few months.

[Marc]

I also think that the next few months will give us some great data in regards to how the Fed and other highly-relevant governmental entities behave; that will be, I feel, very valuable information to know for investors. —Best regards, Marc

[Trevor]

Of course, now that Greece has defaulted, it means more attention is going to be paid to Portugal. They're not quite as bad off, but pretty close. What I'm worried about is what this means for us. I looked again at the section "The Bubble That Broke the World" and I still have a hard time understanding why we continue to do this, in spite of what happened in 2000 and 2007-2008.

[Marc]

I feel that we continue to do what we do because: 1) We feel that we can (and can continue to get away with it); 2) We look at what Greece, Ireland, etc. are going through as "barbaric" to have to go through ourselves in America; and 3) There are no doubt many American leaders who look at bailouts, backstops, etc. as a better deal than, say, having to jump into even more military conflicts which have been generated by economic depressions occurring somewhere in the developed and developing world. And I could add: 4) Politicians in America want to get re-elected or keep their non-elected jobs. That's my educated guess on all that —Best regards, Marc