“ONCE-IN-A-LIFETIME CIRCUMSTANCES.” I continue my debate with myself on how much to blame the bankers. Sir Howard Davies in an article in the Financial Times for October 1, writes that: “These are highly unusual, once-in-a-lifetime circumstances, and it is not reasonable to expect that all financial institutions could have positioned themselves to survive market conditions of this severity.” His recognition of how unusual the situation is appears to support the view that I should not blame the bankers. But his phrasing calls attention to the fact that there are financial institutions all over the world that did not take the risks that the banks we are reading about took. Because they didn’t, we haven’t heard as much about them.
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Crashes are not unprecedented — not at all. The S and L crash occurred only 20 years ago. If we included the dot com crash and the batch of Enron-type accounting frauds, we would have four crashes in those twenty years; hardly once-in-a-lifetime. Should those crashes be included? I don’t remember much fraud in the dot-com bubble, and the Enron scandals don’t seem as widespread as the 1988 and 2008 scandals. Perhaps one could start to classify crashes. Some, such as the OPEC-generated problems, don’t seem to be due to moral hazard. Some accounting frauds, such as the kinds Abraham Briloff used to point out, are not as easily replicated as the 1988 and 2008 frauds and so not as widespread. Another feature of big crashes is excessive leverage for many enterprises. A subcategory is the placing of the same large bet by many firms. This feature — failure to recognize a lack of diversification — might be unusually significant here, but basically the people placing these bets did a lousy job of risk management. I’m also impressed by this remark: “If you’re too big to fail, you’re too big.” Elmer
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