7 Reasons Leaders Always Fail to See Catastrophe Coming
Paul Farrell notes that “Many, many experts did predict and warn of the 2008 meltdown years in advance.” Yet it seems that business, finance and political leaders ALWAYS fail to see the next collapse coming. Why is that?
To answer this, Farrell channels Jeremy Grantham:
“Why do national leaders fail over and over to learn the lessons of history? Grantham said it best in a Barron’s interview a couple years ago: “Why is it that several dozen people saw this crisis coming for years? I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even Treasury Secretary Paulson and Fed Chairman Bernanke, none of them seemed to see it coming.”
Farrell enumerates seven reasons this always has, and is likely again, to lead to more trouble. He advises you to not forget any of the following elements:
1. Many, many experts did predict and warn of the 2008 meltdown years in advance.
2. Wall Street banks, corporate executives and Washington politicians are short-term decision-makers.
3. Most business, banking and financial leaders are short-term thinkers, focused on today’s trades, quarterly earnings and annual bonuses. Long-term historical thinking is a low priority.
4. As a result, it is virtually certain that America’s leaders will focus on upbeat, good news and always miss the next meltdown because warnings of a coming catastrophe are ignored.
5. Warnings from the few with a long-term perspective will always be dismissed during every investment cycle and every future recession/recovery cycle. Always. It’s in their DNA, trapped in their brain cells and demanded by their followers.
6. If you are a typical left-brain Wall Street or corporate executive, it’s virtually certain that you will miscalculate the timing/impact of the next meltdown, the next big collapse that’s off your radar. As a result, your company’s assets are at risk of suffering massive losses that are “predictable, not random.” But because you’re in denial, you will not deem it necessary to take steps to protect your assets.
7. If you’re a right-brain thinker, your longer-term historical perspective will give you a clear advantage in preparing for the next crash and the depression that follows.
File this away, and look back at it in a few years — I like to do that with Outlook or Yahoo Calendars, and get a pop message. This one is scheduled for 2014 . . .
>
Source:
2008 crash deja vu: We’ll relive it, and soon
Paul B. Farrell
Marketwatch, April 26, 2011
http://www.marketwatch.com/story/2008-crash-deja-vu-well-relive-it-and-soon-2011-04-26
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April 28th, 2011 at 11:48 am
Let’s not forget that most of these guys are surrounded by sycophantic yes men who exist to stroke their egos and affirm their warped thinking.
April 28th, 2011 at 11:56 am
Paul is such a cheerful sort. You just want to give him a big hug and lots of meds.
April 28th, 2011 at 12:12 pm
So what is everyone else doing to prepare for the oncoming catastrophe? I have liquidated my stocks and purchased ammo and a good shovel.
Next, maybe a Doberman. Then, plant a nice vegetable garden and buy a couple of goats.
April 28th, 2011 at 12:14 pm
What this all comes down to is:
1.IBGYBG.
2. Who cares, the Government will bail everyone out anyway. Aka Moral Hazard.
April 28th, 2011 at 12:15 pm
I refrain from calling them leaders.
They embrace type II errors, which is refusing to act in spite of growing evidence.
Same about green house gases, why worry the thermodynamics of the atmosphere?
Acting, opening themselves to type I error, would stop a few very wealthy folks’ music. Maybe before they grabbed their chairs.
April 28th, 2011 at 12:21 pm
BP, make sure you’re using seeds that haven’t been genetically modified by the gubmint!
April 28th, 2011 at 12:24 pm
Serious Questions for a serious man.
Taking into consideration two very important economic issues:
1). Trillions of US corporate dollars sitting overseas with US corporations scheming to repatriate these funds back to the United States in as near to a tax holiday as they can get.
2). The FED’s jam in having. a bloated short term balance sheet and no way to unwind QE without incurring a substantial uptick in treasury yields.
Why would it be either sound or unsound fiscal policy for the US to grant a 100% one time tax holiday for these US corporations, if. e US required ese US corporations to repatriate these trillions of dollars drectly into US 30 year treasuries?
Would these corporations be getting a fair deal?
Would tax payers be getting a fair dea, even if yields were issued at as high as 7%l?
Would the FED and member banks be getting a fair deal?
What would happen to the FED’s balance sheet?
How would this either help or hinder the US recovery?
Thank you very much for your attention to my questions,
A curious 1.
April 28th, 2011 at 12:25 pm
This sums up everything: “It’s in their DNA, trapped in their brain cells and demanded by their followers.”
Leaders and politicians are not inherently incapable of seeing disaster coming. They simply have been conditioned to be reactive in nature to insure their own continued existence.
The proactive attempt to stop a disaster before it occurs is simply not popular (or advisable to be re-elected). It is more politically expedient to create the disaster than to prevent it.
The voting public wants the party but complains about the hangover. This is not a problem stemming from politicians–it is simply human nature.
April 28th, 2011 at 12:35 pm
And the next serious question is, as I keep saying, that when, after re-structuring the tax code, “O” gets more than 50% of Americans paying NO Federal Income taxes (It’s about 48% at present), then the majority is going to vote for a free ride. That’s when, throughout history, democracy has collapsed.
April 28th, 2011 at 12:40 pm
File this away, and look back at it in a few years — I like to do that with Outlook or Yahoo Calendars, and get a pop message.
Excellent piece of advice! I’ve been doing this for the past two years with predictions people and bloggers make. Easy way to filter out the garbage. There’s a lot of garbage out there.
April 28th, 2011 at 12:45 pm
New opinions are always suspected, and usually opposed, without any other reason but because they are not already common.
– John Locke, English philosopher (1632-1704)
April 28th, 2011 at 12:48 pm
I suspect that this was but one of the reasons that one of the Scandinavian countries legislated the proportion of women required on boards of directors. The result of this legislation has, apparently, been very positive. I can’t imagine why…. ;-)
Apparently, one women is ‘just a woman,’ two women on the board are ‘the women,’ but three or more women on a given board are treated as equals. Psych 101, really.
BTW, you’re a Mac user; so, there’s iCal, too. ;-)
April 28th, 2011 at 12:51 pm
I would add an 8th reason…. that the prices which might have signalled the collapse earlier…. those of the derivatives and insurance related securities, were in rigged non public markets….
Those CEO’s never understood that their own firms were masking the signals that might have warned them…. although more likely it would simply have hastened the collapse….
April 28th, 2011 at 1:22 pm
Paul Farrell notes that “Many, many experts did predict and warn of the 2008 meltdown years in advance.” Yet it seems that business, finance and political leaders ALWAYS fail to see the next collapse coming. Why is that?
—-
Not to quibble, but didn’t Doug Kass just recently tell us:
“There were few of us (naysayers) with this view back then — in fact, you could count them on two hands, with Bill Fleckenstein, Nouriel Roubini, Barry Ritholtz, Josh Rosner, John Mauldin, Dave Rosenberg, Meredith Whitney and Gary Shilling among the only disbelievers who sounded the foreboding scream of skepticism and economic warning.”
?
http://www.ritholtz.com/blog/2011/04/kass-false-sense-of-security/
April 28th, 2011 at 1:28 pm
set your pop-up for mid-2012, or you might miss it, in my humble, cantankerous opinion.
April 28th, 2011 at 1:38 pm
Are you sure that Yahoo will still be around by 2014?
April 28th, 2011 at 1:41 pm
there are some good ferrell points i agree with the title.
i find the ex post triumphalism of many claiming to have called ahead the details of last one a bit much…
ferrell is talking about many saying major trouble in july 2007, 18 mo before we really went over the falls. but by then most housing paper was seen to be bad, and the banks massively stopped believing each other Aug 8 2007
earlier permabears were moaning about debt and overdone housing, but what kind of crash and in what year? and would any rescues be effective?
you were as good and early as anyone i know.
but roughly no one including me saw before 2008 that;
most of securitization incl auto loans would dry up as the investors ran away
trade finance would collapse
muni govts would see their funding dry up following banks banks selling them garbage swaps
few besides planet R types who hated government generally saw that Fannie etc were bankrupt, and their paper should be marked down most of a trillion or paid for by the taxpayer–you certainly didnt.
We dont know much about the next collapse
other than its out there somewhere, likely preceeded by a bubble, and it will look a lot more like last one than it should.
it will also look a lot different. Ferrell doesnt know doodley about his roughly 18 months timing for the next. Cause Grantham says so? Please
ill bet you 4/1 the 4Q 2012 GDP will be plus
much less the depression Ferrell is babbling about
April 28th, 2011 at 1:44 pm
8. Cognitive dissonance – “It can’t end badly; this is the great free-market experiment we’ve been working on for 30 years!”
9. “Collective denial” or a kind of group-think. – The business, finance and political leaders who were all benefiting from the game couldn’t see what was plainly staring them in the face because they were all telling each other and everyone else how great it was. E.g., “The US economy is the greatest story never told!”
.
“Hear no evil, see no evil, speak no evil”
Proverbs
April 28th, 2011 at 1:47 pm
“What we learn from history, is that we do not learn from history”.
[I've seen that one attributed variously to G.W.F. Hegel, Mahatma Gandhi and Benjamin Disraeli - definitive attribution would be appreciated].
April 28th, 2011 at 1:58 pm
Is it not like the “intelligence” problem? Of course there are people who in hindsight should have been listed to but that is the whole point it is a matter of hindsight.
How do you decide amongst the clamour that a prediction, itself a fraught art, is real? Particularly if there are adverse consequences to taking action? Is not a sand in the head a preferred option?
Like for example, global warming – the remedies for which are economically dangerous, internationally debatable and morally difficult?
Absent a change in mindset, from growth oriented and atomistic ideals, I would expect no change in boom/bust economic cycle.
April 28th, 2011 at 2:22 pm
BR: check out one fab call Farrell made a few years ago:
sell gold at $320. an ounce.
suggest you, as a student of history, check out all his
predictions.
btw, Farrell knows i remember , because i called him on it
many times. his response was: you can’t be right all the time.
April 28th, 2011 at 2:28 pm
Here are the problems I have with this:
1. To which naysayer do you listen? Some (e.g. Roubini) seem to be stuck in the permanently “on” position. Many point out above that these leaders are surround by “yes” men. True, but believe me there exists no dearth of pessimists and folks who want to point out that others are wrong. (Barry this is why I come here everyday. Your pragmatism helps a lot.)
2. What’s the timing? Sure enough we’re going to hit a real wall in the next few years, particularly with inflation and runaway deficits. But, when will it hit? If, as someone above says, I buy guns and ammo now (or 9 month ago), I just missed one heck of a market upside.
3. To be honest, the folks being criticized above do not get rewarded, and their company stock does not go up, for being defensive, prudent risk managers. They do, however, get yelled at by shareholders and board members when XYZ competitor just released blockbuster earnings and why didn’t we as well? (Not excusing the behavior but let’s be realistic as well.)
April 28th, 2011 at 3:19 pm
Yogi Berra said it best, “It’s tough to make predictions, especially about the future.”
As Casual_Observer notes, to which naysayer do you listen? Clearly there is money to be made ignoring their prognostication in the run-up to a crash, just as there is money to be made on the way down.
Besides, isn’t Capitalism all about “Creative Destruction”? It’s unrealistic to think the economic world can follow a constant x% growth rate. Humans are not perfectly rational; there will always be Tulip Manias. This Time Is Never Different.
April 28th, 2011 at 3:38 pm
The trouble is we don’t know whom to listen to until after a catastrophe proves a Cassandra correct.
Prophets are always ignored or assailed ahead of the fact and only anointed afterward when their predictions are confirmed.
April 28th, 2011 at 4:21 pm
I think there are a lot of reasons that political leaders and financial / economic professionals fail to see or predict crises. I agree with some of the comments already made.
While a few people warned of problems far in advance (years), no one that I am aware of issued accurate “tactical” warnings of the crisis as it evolved in September / October 2008. IMHO it proved to be a very “tricky” chain of events.
I have seen many predict that there will be another crisis, albeit still years away. Others profess that they are certain that another major “crash” or financial crisis will occur, but don’t seem overly concerned about it.
My analysis indicates a) another major crisis will occur much sooner than most expect and b) it will prove a mistake to underestimate its severity.
April 28th, 2011 at 4:38 pm
“Why is it that several dozen people saw this crisis coming for years?”
There are certain “experts” who are constantly seeing a crisis coming. Most of the time they are wrong (except they believe the crisis is just a few weeks later than they predicted), and when a crisis does come, even if it doesn’t take the predicted form, they crow about how they were right.
But there were some true experts, who are not prone to crying wolf, who did see the crisis coming. Why didn’t the leaders, both political and business, heed these warnings? Leaders, aside from being surrounded by Yes-Men, are also constantly approached by people with apocalyptic warnings. People who constantly see risk and crisis. Leaders get very good at ignoring the nay-sayers. Even when an intelligent, rational voice of warning approaches, their voice is often drowned in the crowd that sees danger everywhere. Even if they can be heard by leadership, they sound just the same as the crazy nay-sayers, and are easily ignored.
April 28th, 2011 at 5:07 pm
isn’t odd that the 48% who aren’t paying income taxes. aren’t all poor. in fact a lot of them are in the top 1% of all of earners. they just don’t pay any taxes.
April 28th, 2011 at 5:25 pm
#3 is what I have a problem with……….No Doubt, its right…….but, its really vague even for Wall St…..
Incentives. Both at the executive level and, especially, the political level.
Ultimately, these incentives are endorsed by the collective. Be it short term political desires by the electorate, and by shareholders.
Who has an incentive to think long-term? Only the wage slaves in middle management, and those who aspire to make it there. The only incentive they have is to keep the wheel spinning.
The solution? Allow markets to clear! AND NEVER FORGET that humans are consistently prone to emphatic, exuberant/pessimistic reactions that are affected and reinforced by market signals.
When will we, as a species, admit that we cannot control and manipulate the collective indefinitely? Surely we must once again begin to rewire our collective conscience to immediately mistrust over exuberance and pessimism when it comes to the business cycle. We had a great start at that in the 19th century. But, ultimately, and expectedly, we were seduced by the technology of the 20th century.
It is at this point that I recall Jesse Livermore……..”speculation in stocks will never change, because speculation is as old as the hills.”
There will never be an algorithm that can detect the will of the mob. Assuming we can one day create one reveals the folly in the heart of arrogance.
April 28th, 2011 at 5:33 pm
I just read the Ferrell article, sheesh this guy takes the cake, doesn’t he? He makes Roubini look like a Pollyanna.
I’m pessimistic: I don’t see how this extended printing of money to keep interest rates low can end well, but I don’t see anything like the bubble we had in bad paper and real estate in 2008.
What exactly is it that is going to “blow-up” and crash in the next 18 months? Much of the bubble evidence he cites seems to be outside of the US anyway. Maybe there is more leverage in the system yet, than I realize. But I would think banks have positioned themselves better to reduce risk by now.
Yes, China is clearly in a bubble in real estate, but they have so many people, there is no telling how long or how far it can go! And they don’t have nearly the debt we did; most people there 50% make down payments or pay cash up front from what I have heard. So how much damage can be caused when there is so little leverage in the system? But I don’t have any real data on it, so maybe he is right.
I saw the RE bubble bursting at least couple years in advance (no, I didn’t know the exact timing, but it was clearly coming, and I think most people with any common sense at all could see it too). And I think something bad is going to happen again within the next 6 to 18 months, I just don’t have a clear idea of what it will be this time.
The normal outcome should be deflation and serious recession, but I just don’t see how that happens with Ben at the press. I always come back to inflation as the only acceptable path Ben and O can take.
April 28th, 2011 at 5:58 pm
philipat @ 12:35;
If a tax will be voted into the sky as soon as less than 50% of the voters does not pay it, then explain why inheritance and capital gains taxes have been lowered to the absurd. Last time I looked the majority of voters had no capital gains and not a chance in hell of inheriting over a million. But I guess you guys on the extreme right don’t worry about checking the facts against your opinions.
April 28th, 2011 at 7:34 pm
Politicians: I need to be reelected
Investors: Success is always and only short term
People: OH NO! Tuition up, Orthodontist, Car crapped out, et fucking etcetera. And you want me to be rational when I dip into the 401(k)?
The really, really, really smart guy (there’s about 3 in the Northern Hemisphere) will resist the temptations and leave the stuff alone. Of course then he suffers through the best days, worst days, average days and (drum roll) always REALLY NEEDS the loot the day after the market tanks OR the day before it has one of those 5 BEST DAYS.
April 28th, 2011 at 7:47 pm
ewmayer,
http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=We+learn+from+history+that+we+do+not+learn+from+history.
above, attributed to G.W.F. Hegel..
similar constructs are attributed to A. Huxley, and, former, Chief Justice Earl Warren..
this .. “What we learn from history is that we do not learn from history” is, often, attributed to Benj. Disraeli..
~~
given that, though, maybe these ‘Categories’ are apropos..
http://cryptogon.com/?cat=10
http://cryptogon.com/?cat=7
http://cryptogon.com/?cat=31
~~
http://www.thefreedictionary.com/apropos
April 28th, 2011 at 7:47 pm
@De Dude
Firstly, I am nowhere near the extreme right, closer to the Libertarian slightly right of centre in fact.
Secondly, the reason for the tax breaks for the rich and Corporations is entirely different but it also relates to a broken political system and a corrupt congress, a wholey-owned subsidiary of the Corporatocracy.
On my original point, perhpas I should have hidden behind the original quotation:
“A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury.”
Alexander Tytler
April 28th, 2011 at 9:05 pm
More completely:
“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. The average age of the world’s greatest civilizations from the beginning of history has been about 200 years. During those 200 years, these nations always progressed through the following sequence:
From bondage to spiritual faith;
From spiritual faith to great courage;
From courage to liberty;
From liberty to abundance;
From abundance to selfishness;
From selfishness to complacency;
From complacency to apathy;
From apathy to dependence;
From dependence back into bondage.”
Hmm, wonder where we are in the cycle?
April 28th, 2011 at 9:29 pm
Democracy is a fairly new thing and far from abundant among the world’s greatest civilizations. The process described is not about democracy but about the tendency of groups in power to eventually to give in to shortsighted stupidity and selfindulgence.
April 28th, 2011 at 11:58 pm
@DeDude
The United States is what, 234 years old? Yes I know it is technically a republic, it disenfranchised 50% of the population for some 120 years and some significant minorities until recently – but as an organizing principle of government is has been around for years. Democracy in Iceland, The Isle of Man or some other countries are even older.
How many governments or forms of governments have come and gone in that time? National Socialism, Fascism, Dictatorships, Warlords, Imperium, Monarchies or Communism of various stripes?
April 29th, 2011 at 3:10 am
I think I missed something here. How do we know these “leaders” didn’t see the crisis coming? How much money did they lose in it? Is Paulson hurting?
Unless you can show that the ‘leaders’ suffered in the crisis, it is hard to understand why they should be motivated to avoid it.
April 29th, 2011 at 12:15 pm
There are good neuroscience and evolutionary reasons for all of this. The behavior is actually quite “rational” — short-term.
All animal brains are hyperbolic discounters and hyper-defensive of the status quo and moods of the moment. This is the only operational mode of hyper-competitive biological ecosystems.
The human brain is not going to change. In fact, it will get “worser” under stress.
So given these realities what are we going to do? Moralizing/political cant may feel good for the moment but doesn’t help problem-solving.
http://richandco.wordpress.com
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