Monday Alan Greenspan, “The Maestro,” told us what he thought the problem is. In a Financial Times op-ed piece Saint Alan says that our financial calculators are just too simple–if we only had more complex computer models, we never would have gotten into this pickle.
Is he serious? Complexity helped cause this mess. Talk about not seeing the forest for the trees!
By some estimates, we have about $50 trillion of real assets in the world. Factories, land, buildings. But we have about $150 trillion of financial assets. When times are good, lots of people load up on debt and try to exploit the growth with leverage. When times are bad, the assets get sold and the loans paid off. That deleveraging can be really destabilizing. And that’s what’s happening now.
The problem was an excess of leverage combined with a deficit of wisdom. The solution will be fewer loaned dollars, and more common sense.
Douglas R. Tengdin, CFA
Chief Investment Officer
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