Sunday, March 15, 2009

Boomers have Screwed Up

This topic deserves a lot of reflection: what exactly have the boomers contributed to human well-being, especially compared to the hopes that have been invested in them, and their own endless self-congratulation for being compassionate, open, deep, etc.?

For now, the present economic crisis. This time, the boomers have no "establishment" to blame other than themselves.
Gordon Pitts in the Globe and Mail, February 10:

So how could people who came of age in the financial crisis of the late 1970s, who became so immersed in financial news, who thought they were so smart about money, end up looking so dumb? For all their apparent cleverness, this generation is now mired in the worst equity meltdown and economic downturn since the 1930s.

The lesson from all this is that information alone does not make wisdom, says Monica Townson, an economist who in the 1970s was one of the rare Canadian journalists who specialized in economics. She blames a lot of the current panic on the 24-hours news cycle. The bombardment of news every minute feeds a herd mentality, she argues.

That mentality has fundamentally changed the way the stock market prices assets, Prof. Levi argues. At one time, people got information in different ways at different times and thus could disagree on the price of a stock.

"You need disagreement to find a market price. If you think it is worth $10, and I think it is worth $8 or $9, I'm willing to sell and you're willing to buy, and we can have a market."

But now we all receive the same news at the same moment through the Internet, Prof. Levi says. "So we've all got bad news or good news instantaneously. There is no room there for much disagreement between two people or parties about what something is worth."

Therefore, we all try to sell or buy at the same moment. Eventually, the market does find an equilibrium price, but only after extreme volatility, with prices going up and down several hundred points in a single day.

That volatility, in turn, scares people. According to Prof. Levi, investors expect a much higher rate of return to compensate for this systemic risk. That drives prices even lower during a market downturn.

So the generation that came to maturity in the 1970s and 1980s may be much better informed than their parents, but this cascade of information makes it more susceptible to manias followed by panics. People are prone to more irrational choices, whipped on by the constant flow of news and views.

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