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Saturday, December 20, 2008

An interesting take on the credit crunch ...

The great thinker and author of 82 books, Dr Edward De Bono, recently made these interesting observations on the reasons for the credit crunch...

"You may trust a person's honesty - but can you trust that person's intelligence? This may have some relevance to the current credit crunch or banking crisis. We can pick out at least five factors contributing to the problem and reflecting habits of thinking.

  • If everyone else is doing it - it must be alright. Who wants to be left out?
  • If you spread the risk among a large number of people that reduces the risk. Probably true but not if all the people fall into the same bracket (sub-prime borrowers). That is no longer a diversified risk.

  • A mortgage is usually a very safe loan because there is the real value of the house that is being mortgaged. But if the mortgage is securitised and fractionated, no one knows who owns which assets.

  • Once a market starts to decline in value there is an incentive to drive it further down in order to buy at a lower level in a market that is sure to recover one day.

  • Bonuses and incentives for short term performance tend to ignore long term risky behaviour.
There are many more factors."

It is certainly true now that anything that used to be considered certain should now be viewed with scepticism at best!

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