Large Institutions Do Not Deserve Our Unquestioning Confidence
Merely because a large financial company creates clever ads for TV or runs a Super Bowl commercial does not prove that it can automatically provide magical investments virtually assured to be successful. These large, well know financial institutions have proven they can really mess up – and in a big way. In fact, their short comings have gone a long way toward creating the present day crisis – a crisis that may well go down in history as “The Panic of 2008”. And what do “Panics” tell us about large institutions?
Below is a response to this question as provided by one of the FED’s governors:
Panics can thus be understood as periods in which key articles of faith are cast in doubt. How does this happen? After long periods of economic prosperity–in the most recent case, the so-called Great Moderation–articles of faith accumulate. Some of these understandings are strong and enduring and well grounded; others, more problematic or misplaced; others still, properly and promptly discarded. Some of these articles of faith are rooted in government policies; others develop as a matter of private practice. Regardless of their cause and contour, when faith is undermined, the resulting fear and ambiguity can accelerate the deterioration in economic performance.
Some key articles of faith have been undermined with respect to some financial institutions. And that is as it should be. Risk-management failures at some large, systemically significant financial institutions are now legendary. In some cases, investors and counterparties came to rely to their detriment on these entities and their financial wherewithal. As wholesale funding markets became tougher to navigate, many financial institutions suffered, some rightly so.
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