Thursday, August 16, 2007

Why Fear and Greed?

I have named this blog "Fear and Greed" because those are, famously, the two significant drivers of major movements in all markets with free trade.

My Economics 1 professor at Lehigh told my class he wanted us to always remember two things from his class: 1. there is no such thing as a free lunch and 2. supply always equals demand at equilibrium.

The markets over the last few weeks has shown us both fear and, consequently, a paucity of demand.

Furthermore, the markets became overvalued in the first place because people forgot that there's no such thing as a free lunch. To borrow another well known maxim, they were hoping for some greater fool to purchase their position before the markets reflected the real value of what they were buying. This was true in the housing market (among those who speculated) and on the part of securities purchasers.

It had been clear for some time that the market was priced to perfection and that future returns (as reflected in high prices) indicated a higher tolerance for risk than normal.

The housing market was expected, for over a year, to be the first domino to fall when markets finally started to reflect the real cost of risk.

We are now seeing significant fear in the markets as buyers are afraid that not all of the bad news has been factored into prices. In fact, it is widely expected that defaults on mortgages, as their interest rates are adjusted over the next few months, will significantly rise. Nobody, however, can be sure how bad it will be.

What is happening is extremely complex, with many dimensions. There are many bloggers commenting on market conditions and their interpretation of what has happened; and what will happen. Most of these people are making extremely good observations and, while opinions may differ, they are adding significant value to the general understanding of what is happening and why. There are also some bloggers that are making irresponsible comments.

As the famous New Yorker cartoon said, "On the Internet, nobody knows you're a dog."

I will attempt to be one of those making good observations. I hope that you'll feel free to share your thoughts (although, I am moderating comments and inappropriate comments will not be posted).

I look forward to, what I hope will be, a productive discussion.

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