Tuesday, May 20, 2008

 

Credit Crunch: Millions of Dumb Decisions, In Their Own Voice

I haven't listened to this show yet but I imagine it contains some interesting insight into bubble psychology.

A special program about the housing crisis produced in a special collaboration with NPR news. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.


In a mania people forget that prices can go down.

The broadcast also explained the role psychology played. A mid-level manager said his mortgage brokers would complain when they learned that loans deemed "too risky" for their firm to approve, had in turn been approved by competitors. The manager would complain to higher-ups, who would then further relax loan standards. Soon the whole industry was watching itself and waiting for "who takes the next step" in approving ever-riskier loans. There were many of those steps, and in each case the whole herd would follow.

Greed, fear, greed, fear, it is the human condition and rising above the crowd before the bubble bursts takes a great deal of courage. No likes to be ridiculed when the mob has grabbed hold of a fad with both hands.

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