Michael J. Panzner is a 25-year veteran of the global stock, bond, and currency markets who has worked in New York and London for such leading companies as HSBC, Soros Funds, ABN Amro, Dresdner Bank, and J.P. Morgan Chase. He is the author of When Giants Fall: An Economic Roadmap for the End of the American Era (Wiley, 2009), Financial Armageddon: Protecting Your Future from Four Impending Catastrophes (Kaplan, 2007), and The New Laws of the Stock Market Jungle: An Insider’s Guide to Successful Investing in a Changing World (FT Prentice Hall, 2004). He has also been a columnist at TheStreet.com’s RealMoney paid-subscription service and a contributor to AOL’s BloggingStocks.com. In addition, Mr. Panzner is a New York Institute of Finance faculty member specializing in Equities, Trading, Global Capital Markets, and Technical Analysis, and is a graduate of Columbia University.
What brought about the worst financial crisis since the Great Depression?
There are many reasons why we reached this point, but one, in particular, stands out: hubris. By the spring of 2007, for instance, the conventional wisdom on Wall Street was that the financial world had been totally transformed and the business cycle had been repealed. People were confident that reams of research and the lessons of history would prevent policymakers from repeating the mistakes of the past. Powerful technology and rapid innovation would ensure that risk was fully monitored and efficiently managed. Industry consolidation and the globalization of finance would allow any excessive or unwanted exposure to be offset. In sum, the “masters of the universe” thought they had it all figured out—which, of course, they didn’t.
Was it just those who worked in the financial industry who felt this way?
Not really. Insiders and outsiders alike—including central bankers, regulators, and the political establishment—came to believe that markets and economies were virtually bullet-proof, no longer exposed as they once were to the fallout from exogenous shocks and endogenous eruptions. In a sense, the prevailing view was that with all the rules, strategies, and mechanisms that were in place, neither Wall Street nor Main Street would again find themselves taken by surprise, as they were during the Asian financial crisis of 1997–1998, the 1998 meltdown of hedge fund Long Term Capital Management, and on many other occasions before that.
How about the man on the street?
To be sure, confidence about existing conditions and the notion that the good times could carry on indefinitely was widespread. Although there were clear signs that something was amiss, many people drank the bullish Kool-Aid and warmed to the fantasy of a Goldilocks economy. They believed that society no longer had to be a slave to market and other natural forces. In today’s sophisticated and globalized world, people were the masters of their own destiny, economic or otherwise. Not surprisingly, these perspectives spawned widespread complacency. Unhealthy imbalances were permitted to grow and fester. Prudence was seen as highly overrated. Planning for hard times took a back seat to riding the crest of the wave. In the end, of course, those notions proved dangerously misguided.
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