Mar 22, 2010

Saving Money May Be a Post-Traumatic Stress Disorder

Back in the 1950s it can be argued that the richest man in the world was a Texas oilman named Sid Richardson, the bachelor uncle of today's ultra-rich Bass Brothers. You though they made that money all by themselves? Richardson made his fortune from West Texas crude and he owned a refinery in Midland, Texas. One day, a crane operator working on construction at the refinery swung the boom of his crane around and smashed into one of the catalytic cracking towers, knocking the tower clean over. There was a massive oil spill, the kind we'd really worry about today. But this was back in the days when DDT was good and oil spills didn’t matter so much. Still, the accident did cause more than $1 million in damage, and since the refinery was self-insured, that million came straight from Sid Richardson's pocket. When the catalytic cracking tower was knocked over, everyone had to come have a look, including Richardson. And when they had all shaken their heads and pointed at the destruction, Richardson finally said it was time to get back to work and he sent the crane operator back up to the cab of his crane.

"You can't send him back to work on that crane!" the refinery manager shouted to Richardson. "The guy can't be trusted."

"Believe me," said Richardson, "he's not going to make that mistake again."

There is a lesson here for all of us, because -- just like that crane operator -- stressful experiences eventually teach the rest of us lessons, too. But unlike that crane operator, it usually takes us two times to figure things out.

That’s what Professor Vernon L. Smith learned decades ago in economics experiments conducted at the University of Arizona -- experiments that earned Smith the Nobel Prize in Economics in 2006. Smith conducted real money experiments with groups of students. The students in their buying and selling of assets somehow inevitably created an asset bubble that eventually collapse. Given another try the same group created a second bubble that also collapsed. But given a third try, the same group consistently showed it had learned its lesson and no more bubbles were created.

Third time is the charm, as my Grandma Pearl liked to say. 

And so this three-strikes-and-you're-out (of danger) apparently works in real life.  That explains why American savers and investors suffered through the Florida Land Bubble collapse in 1925 followed by the Wall Street stock bubble crash of 1929 and the consequent bank panic of 1933 then that same group assiduously avoided repeating any of those behaviors on a similar scale for the next 50+ years.

We had bubbles and we had recessions, but we had no huge bubbles and no depressions.

The Great Depression turned Americans, who had not been savers in the 1920s, into savers for the rest of their lives. Then what Depression gave us generational transitions and Reaganomics took away so savings rates began to drop in the late 1980s just as the Gipper was on his way back to Santa Barbara.

What this means for today is that our generation has experienced the 1990s dot-com bubble and its pop, the 2000’s housing bubble and ITS pop, and now the Great Recession. We’re in our third time and likely due our own bit of subsequent wisdom as a result.

The irony here, of course, is that while we credit the SEC and FDIC and maybe World War II for saving us from the Great Depression, it may have been that we were simply fed-up.

And whatever Bernanke, Dodd, Geithner, and Obama finally do to reform the current U. S. financial system may matter less to our future prosperity than the painful lessons we’ve been learning as a people. It’s us, not them. We’ll make the pols look good for a few decades until enough time passes and the cycle of boom and bust starts all over again, as it inevitably will.

But until then, like Sid Richardson’s crane operator, our generation -- and ONLY our generation -- has probably learned our lesson: we aren’t going to do that again.


Robert X. Cringely is Adam Smith’s sidekick.  The 12th employee of Apple Computer, Cringely has been making or writing about high-tech history since 1977.  He was field editor at InfoWorld, a computer industry trade paper, from 1987-95.  His best-selling book Accidental Empires: How the Boys of Silicon Valley Make their Millions, Battle Foreign Competition and Still Can’t Get a Date was published in 18 languages.  His PBS documentaries, including Triumph of the Nerds and Nerds 2.01: A Brief History of the Internet, have been shown in more than 60 countries. A blogger since 1997, he has 300,000 weekly Internet readers and more than a million words in print. A former columnist for Worth and Inc magazines, Cringely has written for Forbes, NewsWeek, MIT Technology Review, the New York Times and many other publications.  The companies he has helped to start have a market cap in excess of $500 billion.

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