In the '90s, the smartest people were telling us that the internet revolution had vanquished the business cycle by sending productivity on a perpetual upward climb. Economic laws no longer applied. And then the bubble burst.In the '00s, the smartest people were telling us that Wall Street had vanquished the business cycle by gaining mastery over risk. No mortgage was too absurd, no leverage too great, no structured product too reckless when risk-spreading models were so brilliantly engineered.
Commonsense laws no longer applied and the bubble burst again. So the big question is this: "do we have the capacity to learn ?". Despite temptation, can we resolve to assume that if something sounds crazy, it probably is?. The business cycle is real and the economy has some direct relationship to supply and demand. Housing, which has grown at roughly the rate of inflation for many decades, probably can't grow a whole lot faster over time.
You can't sustain a market based on lending when the borrowers don't have the resources to pay back the loans. It's all pretty basic. That guy on tv who's telling us how we can make a killing on a real state, with no money down? we're probably better off resisting the urge to chase that particular dream.
We should focus on the signs of whether we are, or are not, learning from our mistakes.
Source: smart editor's memo from BusinessWeek.
