Learning cross the street safely is one of the first things a child is taught after it learns to walk. The first lesson: Cross at the cross walk. Second, only cross when the light is green. And, the cardinal rule -- always look both ways before crossing.
The financial markets made folly of these rules of thumb over the past three years, transforming once seasoned street-crossers into mere toddlers overnight. People withdrew their investments from the roiling equity markets and sought safe havens in cash. Mattresses replaced major financial institutions as the most trusted stewards of national wealth.
Pedestrian investors came to no longer believe in the safety signals. After all, they had lost money on home mortgages that, up until 2008, were considered among the world’s safest investments. Almost all the economic models showed that housing values would never decline. But decline they did. For those who lost their investments, it was like getting hit when the light was green. A few of the more cautious investors even looked both ways and foresaw the bursting mortgage bubble. They wisely moved into other investments, believing that the crisis would be contained within the housing industry. They were wrong. The mess spilled into the overall economy, causing a global financial meltdown. The goody-two shoes got hit too.
Those that managed to survive limped to the curb where they stayed put for two years. The merest movement startled them. With a look of betrayal in their eyes they looked up at their parents – the media pundits and the Federal Government -- for answers. They instinctively reached for a comforting hand – placing their precious eggs in the Federal Government’s nest. 2008 witnessed record purchases of U.S. Treasuries by foreign and domestic investors looking for a safe place to ride out the storm.
The rush to safe haven started out as a reflexive, instinct-driven stampede, but quickly turned existential. Fear became the new normal. The question turned from ‘when is it really safe to cross the road,’ to ‘why would a chicken ever cross the road in the first place?’ People were so concerned about preserving what little capital they had left that they lost all concern for how to grow their wealth. Not losing became the new winning.