August 17, 2007 - History is a teacher

History can and should be a good teacher. In school I always enjoyed the subject because I felt there were lessons to be learned from those who came before us, lessons that perhaps could help us avoid mistakes. Unfortunately, our memories are short and unfortunately, all too often lessons learned, quickly became lessons forgotten.

We have a “prime” example right now in the crisis in the sub-prime and home mortgage industry. You should recall several years ago when the savings and loan debacle cost companies billions of dollars, many people lost their jobs, homes and investments, and billions of government dollars were spent to bail out the floundering savings and loan industry. It all happened because of questionable lending practices on the part of the industry.

It’s apparent that lesson has been forgotten, so here we are today in a crisis that is shaking the economy around the world; not just in the housing industry and not just on Wall Street, but we have watched the agricultural commodity markets experience some down-limit moves because of the crisis. And yet, had we paid attention to what happened in the past, perhaps we could have avoided what is happening now.

Just reflect on some of the commercials you have seen offering credit, whether it be for the purchase of automobiles or houses; commercials that offer loans without a credit check, with no bank statement or income tax returns, no closing costs and with interest only and no principal payments for the first two years. Attractive indeed, and it enabled many people to buy homes they otherwise couldn’t have afforded and, in light of today’s crisis, can no longer afford.

There is plenty of blame to go around here...the lenders for these borrowing practices, the borrowers for not being realistic about their credit situation, the government agencies responsible for oversight of the industry and not enforcing stricter rules for lenders and borrowers.
The lessons were there had we remembered the history of just a few years ago. History is full of lessons of how we as investors should deal with the ups and downs of the market place. I would close with these history lessons I have learned....prices never go the same way forever, there is always a correction and, as former Secretary of Agriculture Earl Butz told me many times “the cure for high prices is higher prices and the cure for low prices is lower prices”.

Let history be our teacher.

My thoughts on Samuelson Sez.