Sunday, October 26, 2008

I Caused the Fiscal Meltdown

A couple of weeks ago, I experienced a visceral glimpse into the inner dynamics of an economic crisis.

When the crisis hit, and money market accounts were doing the unthinkable, dropping below $1/share (i.e. losing money, which money markets are not supposed to ever do), I immediately surfed over to the web site for Vanguard, where I keep my money market account. There I was reassured by a
statement from CEO Bill McNabb, which included this comforting note:
"I'm very proud to say that the portfolio managers of our money market and bond funds have weathered this storm very well. In our money market funds, for example, our managers began in the summer of 2007 to emphasize the most liquid and high-quality securities."
Ah, good old conservative Vanguard! I can trust them to be cautious and not take chances with my savings! Thank goodness they were prudent enough to pull back and only invest in sure things, so I needn't worry about my money market account. I am reassured and well-pacified. I am prudent. I am good.

But wait. Isn't the collapse due to a credit crisis brought about by scared money managers who tightened the free-flowing credit which fueled the nation's engine of commerce? In other words, retreating to the "most liquid and high-quality securities" was the very problem! Yet my feeling of relief and reassurance remains! This, of course, speaks to the very nucleus of the kernel of the heart of the matter.

My parents were among the first to build a house in their area of Suffolk County, Long Island, and they ruefully complained about the hordes who soon followed, increasing traffic and pollution and utterly spoiling what had been bucolic countryside. They never once realized that they, themselves, were the spoilers.

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