Weekend Wisdom: The Cycle of Greed

"There is no calamity greater than lavish desires.  There is no greater guilt than discontent.  And there is no greater disaster than greed."  Lau-tzu (604BC - 531BC)

I have observed that power is often created and destroyed by the same force.  The current market cycle is no exception to that observation. 

This "Weekend Wisdom" post spotlights the human nature to fulfill the need to continuously expand our lifestyles and "lavish desires" and points to the rise (and impending fall) of consumer and business spending, which was brought about by historically low interest rates.  But greed is the underlying force from which, as Lau-tzu said, "there is no greater disaster."

Greed begets greed begets greed:  Hedge funds have recently come to represent the extremes of investor behavior -- greed and speculation. A prime example made news this week with the recent crisis at Bear Stearns to revive two hedge funds specializing in mortgage bonds.  The funds lost 20 percent because of rising delinquencies in sub-prime loans.  Ironically, the Bear Stearns crisis sums up a "disastrous" cycle of greed that Lau-tzu himself would acknowledge:

• The consumer, "discontent" with their current home, desires the bigger, "better," home but has a poor credit rating;
• The consumer then borrows at a higher interest rate with a "sub-prime" mortgage from a finance company preying on the desires of consumers to obtain bigger homes;
• The "secondary market" repackages the mortgages and sells them as investments;
• Hedge funds, seeking to capitalize on the trend, purchase shares of the packages to add to their fund holdings, then sell shares of their hedge funds to wealthy investors chasing higher returns.

Can you see the cycle of greed?  Can you see that it begins with "lavish desires?"  As I recently commented, when will the spending end?

The foolish pursuit to "have more" becomes increasingly destructive as the capacity to do so increases.  Although I am thankful to live in a free country that was built on capitalism,  I can't help but point out that we are free to make mistakes just as we are free to avoid them.  Lau-tzu's wisdom is over 2500 years old.  While many have made and will continue to make the same mistakes, timeless wisdom exists to provide leverage to the few who seek it.

That is the way of a financial philosopher...

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a fee-only, registered investment adviser based in Mount Pleasant, SC, near Charleston.  ACI specializes in retirement, investments, and financial planning.

Comments

[David]

Good post, Kent.

I think you've taken a look at the meeting points of some prominent social and financial trends, traced them back to their root causes, and summed it all up nicely.

I wonder how many people believe the politicians who claim that only "greedy Wall Street" is to blame for the subprime fallout.

[The Financial Philosopher]

Any independent thinker will not believe anything politicians say. Personally, I believe "Wall Street" is a facilitator of greed as a collective whole. As always, there are some (but not many) who are driven by things other than money...

Thanks for the comment...

[rod]

Hi Kent,
I am a retired fee based adviser from UK.

Nice piece.

Do you have the same problem that i had, in getting your clients to understand fear and greed, rather than exploiting it as most advisers do?

[The Financial Philosopher]

Rod:

Yes. I feel that my first responsibility is protecting the client from themselves...

Thanks for the comment...

TFP