Wall Street’s attack dog mentality

When a person trains an attack dog, the way it is done is to prod the dog into attacking countless times and each time allowing the dog to win. The result of this is a dog that thinks that he cannot lose a fight. Given that attitude, and the aggressive nature of the animal, dogs so trained attack relentlessly and without hesitation. The same rules seem to apply to traders in the stock market. If a trader has been investing recklessly and never seems to lose, usually because everything is going up and it is impossible to lose, that investor begins acting as though it is impossible to lose money in the market.

We have just gone through another cycle of this kind of investor behavior on Wall Street. This kind of behavior was prevalent at the end of the 1920’s, up to 1987, and up to 2000. It is repetitive behavior and comes back regularly in bull markets. The investor class never seems to learn that the possibility of failure exists or ignores it because the upside is so very appealing. This is the reason why regulation of the markets first came into being and the upside of great riches from investing is the reason why we regularly disregard regulations.

What to do? What to do? That some of our regulations let to this crisis seems likely and that some of the regulations which weren’t enforced helped seems very likely. Those issues are discussed by Floyd Norris in his NY Times article, “After the Deal the Focus will shift to Regulation.” There is plenty of blame to go around and it is probably counterproductive to be discussing who was guilty of what here; we should rather be trying to figure out how to prevent the cycle from repeating itself again and again.

I reluctantly project that the infusion of Federal funds into the Stock Market will at best assuage the problem, but it will not restore faith into the market. We are in for a prolonged period of uncertainty and distrust in the Market. There is nothing that anyone can do about it. Moreover, with the outsized powers now being given to the Secretary of the Treasury, can we really be sure of what will be done to the Economy. I, for one, would never give such economic power to one unelected official.