I recently finished reading James Grant’s “Mr. Market Misses”, and he noted in his newsletters years ago that something was terribly amiss in the home and mortgage markets years ago.

Some time ago I read Nassim Taleb’s “Fooled by Randomness and “The Black Swan”. Both books dealt with the issue of randomness and the associated risks when random events are either ignored or deemed to be the result of delusional talent. An experienced trader, Taleb warned of the interconnectedness of the financial system and how the fall of a major financial institution could bring many others down with it. A financial collapse seemed almost inevitable.

Recently we have learned that George Soros has made well over a billion dollars betting that the current crisis would happen. There were other hedge fund managers that made more than him.

The point is that there were bright and knowledgeable people who saw the risks in the market and either avoided it or profited from it. Yet there were no such people in the entire Congress, the Treasury, the FDIC or the SEC.

And you can be assured that no such insight guided the managers of 401k’s holding the life savings of schmucks like you and me. There was little such talent available for many charitable trusts and community foundations.

To be fair there have been many perennial bears who have predicted financial disasters for the last 25 years. Sooner or later they were bound to be right.

But the status quo was deaf and blind to challenging opinions. Few were invited and even less were given serious consideration.

Again we fell into a trap of believing that the elite and the smart could not only control the economy but could engineer the economy to deliver the political utopia of something for nothing. We had people smart enough to give us the mix of growth, low inflation, low unemployment, by just tweaking the inflation rate and monetary policy. This was no different than the Great Inflation that was engineered by the government economists from Kennedy to Reagan.

We thought Greenspan was a genius when the stock market was high, and a fool when the market collapsed.

But even with the resources of the entire government and the Federal Reserve we seem no more immune from Black Swans than before the Fed ever existed. In fact the Fed has delivered more severe and longer recessions and depressions than existed before them.

Yet we still insist on electing the intelligent over the principled. It wasn’t eighth grade dropouts that developed or applied Gaussian cupola formulas to investment risks. Our addiction to ‘intelligent’ sounding people is an extension of the same people who want to believe that we can have something for nothing, stocks and home prices that go up for ever, low inflation and low unemployment with out any fiscal discipline, and government programs without cost.

We always rediscover basic principles after we learn the cost of ignoring them.

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