Many eulogies have already been written for the worst decade in the post-WW II era, and we had better learn from the past if we do not want to repeat the same mistakes. The stakes couldn’t be higher: another decade like the last could permanently erode American power and prosperity.
There’s plenty of blame to go around, but the crises of the past 10 years center around five distinct episodes of collective insanity.
First came the dotcom bubble at the start of the decade. During the rise of the NASDAQ, companies with little or no revenue were selling at price-to-earnings ratios that defied all economic logic. The subsequent crash would not have been nearly as devastating if millions of average investors hadn’t dumped most or all of their retirement savings into tech stocks, trying to ride the bull market to riches.
This violated one of the key principles of investing: don’t make high risk bets when you are close to retiring. The trillions in savings wiped out during this episode disrupted the plans of millions of Americans, many of whom have yet to recover.
The second bout of collective insanity was the housing boom, where again millions of Americans were convinced that the laws of gravity no longer applied. Enticed by record low interest rates, and encouraged by supposedly knowledgeable economists, Americans from all walks of life took part in a frenzy akin to the Dutch tulip craze of the 1600s. (As someone who has recently been shopping for a house, it’s astonishing to see the absurdly inflated values that people paid for homes just a few years ago.)
Because of its impact on construction and the toll that it took on consumer spending, the housing crash would likely have caused a severe recession under any scenario. But it would not have led the world to the brink of a financial meltdown if home mortgages hadn’t been securitized, sliced and diced, and sold in the derivatives markets at insane leverage ratios.
This was the third episode, and it’s especially striking. Here were the very people who are supposed to be experts in financial markets—hotshot PhDs from the world’s top schools and CEOs paid scores of millions to manage risk—making bets premised on completely unrealistic and unsustainable assumptions. It boggles the mind that so much money was put on the line in ways that most people didn’t even understand.
The fourth instance of insanity happened between the dotcom bust and the housing bubble: the public response to 9/11. Faced with the terror of that day and the graphic nature of its violence, America slipped into a period of extreme paranoia. We unwisely elevated a relatively small band of cave dwellers to the level of Hitler, Stalin, and Mao. As a consequence we proceeded to mismanage not one but two wars, the second of which was completely unrelated to the threat posed by the jihadists. During this dark period, the press corps became sycophants for an Administration that used fear and hyperbole to pursue its radical agenda.
This led to the fifth bout of collective insanity: the “re-election” of George Bush in 2004. By this time it was clear that Bush was not only incompetent, but intellectually unfit for the challenges America faced. His Administration was marked by a level of cronyism and politicization almost unparalleled in modern American history. No matter how poor a candidate was Kerry, a vote for Bush was a vote to reward failure. Bush didn’t disappoint, leaving America in shambles.
In many ways, the election of Barack Obama was not only a repudiation of the Bush decade; it also represented a yearning for a more reasoned and cool-headed approach to the world. So far Obama has done a good job of creating a more stable economic climate, and projecting a sense of calm. While many in the traditional media foolishly criticize his cerebral approach to the issues, it’s exactly what the country needs.
But no nation can rely on its leader alone. Americans must look within themselves, and recognize their own contributions to the messes that we created over the last 10 years. Only them will we be able to resist the pull of the irrational forces that will surely tempt us once again.
Jason Scorse