Skip to comments.Yes, Virginia, there really is a Free Lunch
Posted on 01/21/2013 11:20:29 AM PST by Pete
Do you remember the Financial Crisis of 2008? You woke up that morning in September, took a shower, had your first cup of coffee, turned on the news, and heard that, apparently out of nowhere, we were on the thin edge of a financial disaster that would make the Great Depression look like a picnic. Do you remember how you felt, the sense of disbelief, the feeling of real fear? How? Why?
It happened because Congress passed a law that allowed the banks to take the risk of mortgage default, and then transfer that risk to someone else. Congress even encouraged the banks to offer mortgages to anyone, regardless of their ability to pay, because everyone should be able to own their own home, right? And then Wall Street firms bundled these mortgages and sold them. But these firms didnt take the risk either because they had transferred it to someone else. And the bankers and brokers got bonuses for doing this, the more they sold, the bigger the bonuses. Remember?
Most of us didnt understand how it had happened because most of us dont understand risk. Risk scares us. We may talk about it vaguely but most of us dont understand how it works exactly, how it can be transferred exactly, how we can protect ourselves from it exactly. And so we try to steer clear of it, hope it doesnt happen to us. Think about something else anything else.
Actuaries understand risk. They know how it works, how to transfer it, how to be protected from it. That is their area of expertise. Many of them like the feeling of power, knowing about something that scares everybody. They have done a terrible job telling anyone else how risk really works. In fairness to actuaries, nobody else really wanted to hear about it anyway.
My three sons and I are actuaries. My eldest son and I talked about the coming Financial Crisis in 2000, when we saw the banks transfer the risk of a mortgage default to someone else. That made the risk exponential. That meant that there would be a Limiting Factor to this risk because all exponential risks have a Limiting Factor because exponential risks cant go on forever. The way they work is that everything looks OK, and then one morning you wake up to discover that, apparently out of nowhere, the roof has caved in.
Are you thinking right now that I am bragging, being condescending, rubbing it in that I know something you dont? My defense is this: I am trying to warn you that it is going to happen again.
I have written a book about it that is available online, The 29th Day: Changing our Future (check out www.29thday.org). The 29th day is what I call Limiting Factors. The reason these exponential risks are occurring now is because the 21st century is different than past centuries. The difference is that in this century we have computers and the internet. They have unleashed a force which I call CIC (kick). It is an exponential force created by combining Creativity, Information, and Communication. This force is making everything else exponential because of the way we now communicate. You are not imagining the world is moving more quickly. It is. So we are living in a world of exponential problems and trying to solve them with linear solutions, a holdover from the old days of the Industrial Revolution. Problems are becoming crises too quickly now and our solutions are just too slow. My book discusses how to substitute exponential solutions for linear solutions. Exponential solutions can avoid another 29th day; linear solutions cannot. Im not a very good writer and Im not famous so very few people have read it.
If you are still reading this, lets go back to the 2008 Financial Crisis. Who paid for this exponential risk? Who got left holding the bag? Was it the banks or Wall Street or politicians? Not hardly. No, you and I paid for it, you and I ended up being the risk-takers. You and I paid for their Free Lunch, Virginia. And most of us didnt even know how it had happened.
Did your 401(k) evaporate that September? Did you lose your job? Did the value of your home drop below the amount of your mortgage? Did you lose some of your choices, some of your freedom? If so, then you have already paid for it. For the rest of us (for all of us), the rest of the payment has been deferred, but not forgotten. If you think about it, you know where it is. It is buried in our National Debt.
What are the big ticket exponential risks right now, for which there will be 29th days guaranteed and in our lifetime, to boot. Well, we have the National Debt, Social Security, Medicare and Medicaid, unfunded public pension liabilities (bankrupting states and cities), Irans foray into nuclear weapons, the Arab Spring, just to mention a few. Are there linear solutions that can avoid them. NO! Are there exponential solutions that can protect us from them. YES!
Why am I telling you this? Am I just perverse? No, I am telling you this because CIC did something else. It transferred power to you and to me. Now we have a voice with our computers and the internet, with email, with Facebook, with Twitter, with Blogs. If enough of us use these tools, our leaders will hear us, they will have to hear us. They will realize that we understand these exponential risks are real, that 29th days are guaranteed unless concrete action is taken, that we are the ones who are taking these risks, and we dont like it.
If we expect our politicians to understand risk, to figure out exponential solutions to exponential problems, then we will be looking for answers in the wrong place. They are motivated to kick the can down the road, to hope that somehow these problems can be deferred until they are out of office. You know it and I know it. We will have to make it crystal clear to them that we are demanding concrete workable solutions now.
I know you are busy, that this seems like an impossible task, that it seems too complicated, that you may be hoping someone else will do it. I know that the news just seems like a TV Reality Show, that we feel helpless to change it. But this is real life, your life that is on the line.
I say to you with all the earnestness that I possess, begin to speak out, tell your friends to speak out. The effect of your action, at first, will seem insignificant, that nothing is changing. Be patient because what you will be doing is exponential. At first, it will appear that nothing is changing because that is the way that exponential forces work. But something will be changing. And someday, you will wake up one morning, have that first cup of coffee, turn on the news, and hear that you have been heard guaranteed.
If we do nothing, then someday when we turn on the news, we will learn that, apparently out of nowhere, we will have lost our standard of living, we will have lost our freedom, and our worst nightmare has suddenly come true. Still dont believe me? Show this to an actuary. See what he (she) says about it.
For the moment, the choice is ours. The price-tag is our future.
Remember. The exponential clock is ticking. tick tick tick.
actually started in August 2007, but why quibble.
“If enough of us use these tools, our leaders will hear us, they will have to hear us. “
He supposes they care. They are presently trying their DAMNDEST to get out of our hands the ONLY tools that make us loud enough for them to hear us.
My understanding of the trigger on the Financial Crisis gun was the declared bankruptcy of Lehman Brothers, with more than $600 billion of assets, on September 15, 2008 (the biggest bankruptcy in US history), and the subsequent appearance on television of Treasury Secretary Paulson. It sounds to me like you were alert enough to see clear signs of this Crisis at a much earlier date. My complements on your astuteness.
You are absolutely right that some of them dont care. But some of them do. They are the ones to whom we must give our support. For those who dont care, they do care about keeping their positions of power. They are prepared to do whatever they have to in order to keep it. What we have to do is persuade them that the only way to keep their power is to listen to us. Let that thought affect what you speak out about. Remember. Someone with no integrity will bend if the breeze is strong enough. If someone is doing something wrong, they may change if you tell them. If you want to be sure they will change, then tell everyone. That is the power of CIC.
As to what to do with that money since -- well, I put it mostly in mutual funds across countries and in steady bonds or in a house in a new country
Do I expect to earn a lot with that? Nope. I'm no financial genius. But, anyone who wasn't taken in by the irrational exuberance of October 2007 got out.
I saw the signs in aug-sept. 2007 with the hedge funds going whacky..but I got busy with other things and didn’t get out of the market til Nov. 2007.
Lost a little but it could have been way worse.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.