 TODAY’S MARKET VOLATILITY:
Why did it happen and what can we do about it?
By Jack Etzel
The person to whom we turned for this month’s perspective is
steeped in international cultural and economic issues. Donald Orr, a
professor and department chair of International Management and Studies
at La Roche College, earned his Ph.D. from the Graduate School of
Public and International Affairs at the University of Pittsburgh. A
native of the island nation of Malta, Dr. Orr has traveled the world
as both a consultant and student of global business and economics. He
resides in Franklin Park. North Hills Monthly Magazine: Dr. Orr,
what do we do now?
Dr. Don Orr: It depends on your age. It’s just paper, unless you’re
living off of it. If you’re in your 30s or 40s, you can continue
carefully investing. You have time. I’m 61, and at that age or older,
you have to start harvesting your resources and making careful
decisions. If I were younger, even 10 years younger, I would be
investing in real estate. Some of the housing is selling for 30
percent below its value. If you’re older and living on a pension, it’s
very likely that you’re safe because of the guarantees by the federal
government. NHMM: Why is the stock market and the world financial
stage in this conundrum?
Dr. Orr: Credit is the fundamental problem. We speak and hear of
money problems, but money is actually a form of credit. And you have
to have trust in it. If you don’t have trust in it, then there is
nothing else to back it up, other than future promises. It’s something
like Santa Claus. If you believe in Santa Claus, you probably had a
nice Christmas last year. Today, people are having doubts, not about
Santa, but about the economy, starting with banks that abused the idea
of credit. They created these fantasies of assets, which are not real
things, these mortgage-based securities. They were layered with
derivatives, so when you bought these securities, you really didn’t
know what you had. NHMM: How did a relatively few people avoid that
pitfall?
Dr. Orr: One of the wealthiest people in the world, Warren Buffet,
says, “I won’t buy anything that I don’t recognize.” He never touched
these things. That’s why he is such a bright and wily investor. For
others, this was a crack in the belief system. Then it was fueled by,
I wouldn’t call it fraud, but at least a lot of greed and
irresponsibility. Everybody seemed to jump on the bandwagon. You had
all this money looking for somewhere to go. So they pushed that money
down to the broker-mortgage level, and the brokers started looking for
people to lend to, instead of it being the other way around. NHMM:
Can you expand on that? Dr. Orr: This is what has happened to
capitalism in the last, say, 30 years: earlier, capital was there for
us to make things. Now, capital looks for things to make capital. It’s
as if our tool got away from us. It’s a confluence of a number of
things that have come together; first, the bubble of the Internet
stocks, but that settled down. These mortgages were just as
overvalued, just like the high-tech stocks were. I think that people
of my generation, you know, the baby boomers, were saving and looking
for a place to put their money. And rather than put it into
responsible kinds of assets and savings, they put their money into the
hands of these gamblers. NHMM: It seems that there were very few on
Wall Street, or on the world financial stage, who saw this coming.
Dr. Orr: What you said falls into a category known as ‘groupthink.’
This is a situation where a group of like-minded people, and who are
very dependent on each other, find that they are more likely to doubt
themselves than to doubt the group. What happens in these situations
is that no one wants to be the spoiler. No one wants to say what
second thoughts they have, so they just go along with the flow. NHMM:
For example? Dr. Orr: Take the chairman of the Federal Reserve
Board, Alan Greenspan. Greenspan, in particular, was practically
deified. He simply could do no wrong, that man. Or, at least a lot of
people thought so. He dismantled the regulatory structure. Instead of
only issuing money to commercial banks, the Fed began lending money to
investment banks. The legislation that allows this dates back to the
Great Depression, but it has never been used before. They took a
gamble and blended the line between commercial banking and investment
banking. What do they call it to slow down or stop a raging wildfire?
A firebreak. And suddenly, that firebreak was gone. NHMM: Is putting
hundreds of billions of dollars into banks and big businesses the
answer? Dr. Orr: You can’t allow the system to implode. So you have
to re-create the fiction. If you believe enough in it, and we start
acting as though we believe in it with each other, things will not be
so bad. We have to trust it again. If we continue to operate purely
out of the two basic emotions that you find right now on Wall Street,
fear and greed, that’s not good. Fear drives the bear market, and
that’s why it collapsed. And why my retirement is postponed five
years! Additional Reading and Resources Improve your knowledge of
the stock market and get the latest business news at these websites:
Market Watch: www.marketwatch.com
Yahoo Finance: http://finance.yahoo.com
CNN Money: www.cnnmoney.com
For students (of every age) who want to learn more about investing,
check out the Stock Market Game. You get a hypothetical $100,000 and
learn about the highs and lows and dos and don’ts of investing. Best
part? Even if you lose, it’s just a game. www.smgww.org |
