Tuesday, March 20, 2007

Lessons from History

David Callaway of Marketwatch, last week:
In subprime mess, another dumb theory falls

SAN FRANCISCO (MarketWatch) -- It seemed so obvious at the time, back at the peak of the Internet bubble seven years ago this month. Profits no longer mattered.

You see, it was different this time. It was a new paradigm. Internet companies were changing the world and old measurements of success, such as profitability, didn't apply anymore.

Until of course, they did. And we're still living with the fallout from the resulting collapse in Internet stocks and tech stocks in general, seven years later.

The parallel with what's happening in the mortgage market seems eerily familiar. In the media, the general rule of thumb is that the next big crisis in the financial markets will come from something totally unexpected. An earthquake in Japan (Barings collapse); a plunge in Asian and Russian currencies and debt (Long-Term Capital Management); a shell game in the executive suite at one of America's most respected new economy companies (Enron).

The thing about the brewing mortgage debacle, however, is that everyone saw it coming. They just refused to believe it. Questions have been asked about risky mortgage loans going back to 2003. What would happen to all the leverage taken on by home buyers when interest rates started to rise and the market turned around.
I'd just add one thing: the thing that makes the surprise about the end of the housing bubble even more... er... surprising, is that if we look back just one decade before the internet bubble, we can see what happened to the last big housing boom. In other words, we not only have an example from the recent past of an unsustainable bubble, but we specifically have an example from the recent past of an unsustainable housing bubble, and what happens when it's over. I think we can learn a lot about what to expect in the next couple of years by looking back at the early 1990s.

Maybe that's why I love studying history so much...

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