WILL WE EVER LEARN?

This is the title of an editorial appearing in the September 29, 2008 edition of BusinessWeek magazine.


In the '90s, the smartest people were telling us that the Internet Revolution had vanquished the business cycle by sending productivity on a perpetual upward climb. Etoys and Pets.com were in their glory. Economic laws no longer applied. And then the bubble burst.

In the '00s, the smartest people were telling us that Wall Street had vanquished the business cycle by gaining mastery over risk. No mortgage was too absurd, no leverage too great, no structured product too reckless when risk-spreading models were so brilliantly engineered. Commonsense laws no longer applied. And then the bubble burst, again.

So the big question, as we absorb what's happened to Freddie and Fannie and Lehman and AIG and Merrill and, oh yes, Bear Stearns, is this: Do we have the capacity to learn? Despite temptation, can we resolve to assume that if something sounds crazy, it probably is?

The business cycle is real. The economy has some direct relationship to supply and demand. Housing, which has grown at roughly the rate of inflation for many decades, probably can't grow a whole lot faster over time. You can't sustain a market based on lending when the borrowers don't have the resources to pay back the loans. It's all pretty basic!

Any comments?


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