The shocking fragility of recently issued debt is another singular feature of the 2007 downturn — alarming numbers of defaults despite high employment and reasonably strong economic growth. Hundreds of billions of dollars of mortgage-backed securities would, by now, have had to be recalled if Wall Street did business as Detroit does.
Benjamin Graham and David L. Dodd, in the 1940 edition of their seminal volume “Security Analysis,” held that the acid test of a bond or a mortgage issuer is its ability to discharge its financial obligations “under conditions of depression rather than prosperity.” Today’s mortgage market can’t seem to weather prosperity.
If my selection of the above quote seems to suggest that either Grant’s piece or my blog is focused on the extraordinary nature of this credit crisis, I must assure you that I mean to say precisely the opposite.
How severe is this problem? That’s a question best left to others – I have no special competence in that area – but, speaking of special, the question of just how special this crisis is can be answered quite easily. It’s not unique; it’s not unprecedented – and it is consistent with much of human history.
Have you ever noticed how frequently the word “unprecedented” is used when discussing matters financial and economic, and how rarely it is used in most other fields – fields where the experts are, by longstanding custom, less given to overexcitement?
I don’t mean to say that everything is surely safe, certain, and normal; rather I mean to say that insecurity, uncertainty, and abnormality are the historical norm. People who tell you otherwise (including those who say such swings in price and sentiment are “entirely unprecedented”, “a one in a million occurrence”, etc., etc.) know too much statistics and too little history – and by history I mean history properly read, which is to say history read as the participants lived it, not history read through the eyes of a modern man who knows how everything ends before it begins. History is only inevitable when read in reverse.
It’s often said (by experts no less) that now is not the time to act because so much is unknown – because so much is uncertain. Humanity has not been blessed with certainty; but even mere mortals are capable of computing the odds on a quote and making a good bet when given the chance.
There may be good reasons to stand on the sidelines, and I welcome their enumeration – but neither uniqueness nor uncertainty ought to be listed among them.Read more