April 4, 2009

Dumb Money 2009: What Went Wrong? Thoughts from Daniel Gross

The financial services industry tends to get exactly the amount of regulation it wants.
--- Daniel Gross

Ideas often move from innovators to imitators to idiots. What if the innovators turn out to be idiots too?

We love stories and simple explanations of complex happenings. Looking back, we see causality that may not exist or that we did not see at the time. Journalist Daniel Gross helps make sense of the latest financial crisis in Dumb Money: How our Greatest Financial Minds Bankrupted the Nation.

There's not one culprit or cause. Blame (in no particular order, Wall Street ("smart money"), the US central bank, the rating agencies, the regulators, the politicians, the media, ... All the way down us (also known as "dumb money"). 

Dumb Money feels more like a long magazine article (or series of blog posts) than a book. It was released on Feb 23, 2009 in ebook and audio formats. That allowed much quick publication than print. And saved trees. Until April 14, when the print version becomes available.

Four Optimistic Assumptions

Is a dream a lie if it don't come true
Or is it something worse?
--- Bruce Springsteen, The River

Daniel identifies four problematic assumptions
  1. interest rates will stay low forever: the death of inflation
  2. asset prices will increase forever: especially real estate, which turned houses into bank machines, letting consumers spend money they didn't have through mortgage equity withdrawals
  3. debt will be serviced forever: no defaults or missed payments, especially on home mortgages
  4. markets for packaging debt will remain strong forever: securitization and derivatives to control and spread risk ... any risk
Unfortunately, nothing lasts forever. 

As long as the music is playing, you've got to get up and dance.
--- Chuck Prince (Summer 2007), former CEO of Citigroup

Unfortunately, we don't know when the music's going to stop.

What About Canada?
The book is written for an American audience, as the following interview question shows.
Q (from Ottawa): What are your thoughts about Canadian banks and the regulations that control them? They are still very profitable and none have failed.

A: Don't know that much about Canadian banks.
That doesn't mean that people outside the United States should be smug. The world is suffering.

Mixed Marketing
This book has not attracted much attention. A Google search for "dumb money" currently shows these top five hits
  1. 2005 article by the author (Slate magazine)
  2. 2000 book with similar title from Gary Wolf (amazon.com)
  3. definition (stock-market-crash.net)
  4. unrelated article (Time magazine)
  5. article about mutual funds (Yale University)
Not even an ad appears. A Twitter Realtime Search for "dumb money daniel gross" currently shows only 12 results.

In contrast, search for "outliers" and four of the top five results are for Malcolm Gladwell's newest book (which I discussed earlier). There's a lesson here: avoid using generic words in a title unless you're really popular. 

In an extreme case of self-marketing, you'll see that all these links come from the author!?! Maybe there will be more attention when the print edition becomes available. You may find these links give you enough information, letting you save your money.

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