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Author: WatchingTheHerd Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 461252  
Subject: Re: Congressional Leaders Stunned by Warnings Date: 9/20/2008 7:52 PM
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We cannot do that. Things like this WILL happen in the future, it is unavoidable (see Minsky)). The likelihood can be reduced, as well as the extent of the damage, but we WILL at some point in the future see another financial crisis in which institutional collapse threatens the whole economy, regardless of whether or not the Fed is prohibited from bailing people out. Systemic risk is an externality. As such, the market is not very good at dealing with it.

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You are correct. I was being somewhat facetious. However, any systemic risk in a system dependent upon human behavior poses vastly greater risk when forces are allowed to concentrate that human decision making in fewer and fewer brains. Concentration in manufacturing or services poses considerably less risk since a drop in demand for what's being manufactured or serviced usually corresponds with an increase in demand for some other good or service. Concentration in the industry that drives the creation of credit and fiat money produces exponential contraction when it fails and affects all market segments simultaneously by disturbing confidence in the basic mechanics of markets (prices, contracts) and withdrawing the very lubricant of the engine -- money.

In my opinion, those feeling somewhat better this weekend after a 700+ rebound in stock prices are missing the larger picture from an investment standpoint. The federal government's continued intervention in the RESULTS of the market without correcting obvious flaws in the regulatory model applied will merely amplify the peaks and valleys of normal markets while making the intervals between the peaks less predictable. Even for investors with the time and confidence to use shorter term trading strategies instead of LTBH, achieving any arbitrary level of returns becomes more difficult over the long term. If that is true, investments in American interests will decline in favor of other economies willing to sacrifice a few highs for a more even keel, further reducing long term American productivity and growth.


WTH
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