Of Thanksgiving and Light

Thanksgiving is one of my favorite holidays of the year. It is a warm, pleasant, kind, family day. Not surprisingly, it is a day of reflection for me, despite of—or because of—all the family and busy activities involved with the day. As busy as the day may be, it is for my mind and spirit a day of rest, a very family day, a day when all is right because the family is right. It is a day during which I reflect with gratitude upon how, through the blessings of God, I have been able to provide for my family and that we have been able to enjoy so many good things. We gather rich in the mutual affection we have for one another, comfortable in how pleasant it is to be in each other’s presence. It is very appropriate that we celebrate with a bounteous meal shared by as much of the family as we can gather and often with fond friends, representing the bounties that God has bestowed upon us in the previous months.

Thus in our home, Thanksgiving Day is a time of reflecting on the abundant blessings of the past. It also serves as a gateway to our Christmas celebration, in which we celebrate all of the good things of life made possible through Jesus Christ. On Thanksgiving night, as soon as darkness has descended, we turn on the outdoor Christmas lights for the first time of the season. There is the apple tree, shining in brilliant white lights in memory of the Tree of Life, which Tree is a representation of “the Love of God, . . . the most desirable above all things . . . and the most joyous to the soul” (1 Nephi 11:22, 23).

Beside that tree, red lights flame the upward and outward branches of a maple tree, symbolic of the tree of the knowledge of good and evil, in opposition to the tree of life. This illumined tree represents how by the exercise of our power of choice we also unleash our energy to become good or evil—and that we do not always exercise that power for good (see 2 Nephi 2:15, 16).

In the middle of the yard, our flagpole is transformed into a tall, narrow multilight cone topped by a bright white star of light, again representing a tree, our Christmas tree. This and the tree we decorate inside the house are bright reminders that through Christ we can obtain “every good thing” (Moroni 7:25), whether spiritual or material.

The doorway to our house is outlined with a garland of evergreen also illumined with light to proclaim to family or friends that they will find welcome inside. Similarly, our lamppost is trimmed with red and green lights as if to say, “Here we are, don’t lose your way. Come and celebrate with us.”

In many ways it is very appropriate that we initiate this holiday season with a celebration of gratitude. The spirit of gratitude is the foundation of humility, and humility is the first step to opening our hearts to receive the Christ. So bring on Thanksgiving, welcome the family and friends, and open our hearts and homes to Christ, who brings us every good thing.

Of Financial Panic and Lessons Learned

Late last month I met with a group of German businessmen. They were on a visit to improve international understanding through cross-Atlantic dialog. As you can imagine, they were most interested in how the economy was doing. The German economy is off to a quicker recovery than is the U.S. economy, but in all fairness the Germans have not had to overcome as much government help as we have (during and following the financial panic of 2008)—although they are very worried about having to swim while being chained to drowning economies like Greece and perhaps others of the European community.

Among the specific issues that they asked to discuss was the question, “Have we learned lessons from the recent world economic crisis?” As I pondered that question, I came up with a list of eight lessons that we perhaps have learned. There are certainly others you or I might add, but here are the eight lessons learned that I came up with at the time, in no particular order of priority:

1. Economic and financial models are not as good as advertised. Much of the financial regulatory program of recent years was based upon the notion that regulators and the firms that they regulated had come up with powerful models to identify how well financial firms and the economy were doing, models that could be relied upon to control the economy. In fact, confidence in models was so high, that policymakers were starting to rely upon them to help predict the future. It turns out that economic reality is far more complex than any models, regardless of how powerful the computers are that run them. Once again we have seen that no group of policymakers, regardless of how smart they are or how much information they have, can control the economy any more than they can control the weather, and we should not fault them for failing to do so. We can only fault them for trying.

2. Fannie Mae and Freddie Mac are not the best run companies in the world. This lesson seems so painfully obvious that it is hard to believe that there was a time when people held them out as examples for emulation of corporate and financial management. But that was their reputation. We now know that the government privileges that they enjoyed allowed them to become sloppy in many crucial ways, especially in the management of their financial risk.

3. The biggest risk to the financial system is regulatory risk. Nearly every one of the financial firms that were strongly “persuaded” by policymakers to take government TARP money suffered market and reputational damage from those investments far worse than any financial challenges that they had. Nearly all of the largest recipients of TARP money paid it back as fast as the Congress and the regulators would let them, at a very expensive rate of interest. While a few have complained of these and other regulatory costs, more would if they were not afraid of the danger of being sent to the cornfield if they did, so they just say that it is “all very good” as their highest new costs today come from government regulations.

4. Economic reality always catches up with you, eventually. By the laws of economics, housing prices cannot long continue to exceed the rate of economic and population growth, but during the housing bubble the myth was that housing prices do not go down, at least not by much and not for long. The same was said about oil prices, by the way, as they grew even faster than housing prices. All came down, and all who believed and acted as if they would forever go up paid for expensive lessons. The same lesson is true today about government deficit spending. In spite of economic reality, too many policymakers act as if there is no limit to how much debt the government can put into the market. That false notion will crash on the rocks of economic reality, eventually.

5. Accounting rules, especially mark-to-market rules, are highly pro-cyclical. Accounting rule makers are on a multi-year crusade to force all companies to value practically everything by what you can sell it for in the market place right now. That means that in times of exuberant markets everything will look great and better than it really is, transferring market manias onto the financial books of companies. It also means that in times of panic, all things will look worse than they really are, accounting rules making sure that panic prices are written onto companies’ financial books. Mark-to-market financial rules were the amplifiers that helped puff up the housing balloon, just as they helped feed the subsequent financial panic.

6. You can hide risk, mask risk, but you cannot avoid risk. All economic growth comes from someone taking a risk. There is risk in whether a new invention will be well received in the market place, or whether a new store will succeed in its new location, or whether the new employees will do a good job, and on and on. There is a natural human tendency to want to harvest the rewards of investment without being exposed to its risks. So people try to get others to take that risk, or try to pretend it is not there, but the risk will be there, and the less obvious it is the less likely that people will take precautions to manage it. The biggest problem from the housing boom was that people thought that building houses and lending people mortgages to buy them were riskless, when in fact they are loaded with risk. A variety of things masked that risk. When it finally asserted itself, people who thought that they had made no-risk investments panicked. The same is happening today with people who invest in “no-risk” government securities. You might be able for a time to hide the risk; you cannot avoid it.

7. Bad underwriting is bad. When a lender decides to lend money he first evaluates the ability of the borrower to repay the loan. That evaluation is called underwriting, it is the lender making the determination that the loan is a good investment. Lenders and others will make mistakes: borrowers will get into unforeseen troubles, their new invention might not work as well as thought, their business might face a new and better competitor, some tax or new regulation might eat away anticipated profits. The lender expects that some small portion of loans will run into repayment problems, and the lender plans for that by setting aside reserves for loan losses. But when the lender does not pay attention to the risks that he can see, then he engages in bad underwriting, and no amount of reserves can absorb those losses. Would we have had a housing bubble and then a housing crash if so many mortgages were not provided to people who could not afford the houses that they were buying? Not enough lenders looked carefully enough into that question.

8. Financial firms cannot long offer products that policymakers and the public do not understand. Recent legislation and regulations are aimed at curbing some of the most successful financial products and practices, largely because policymakers and the public do not understand them. In times of financial turmoil, policymakers look for something to do, and one of the first things that they try to do is stop what they cannot understand. The public is vulnerable to the rants of people seeking to deflect criticism from their failings to products or practices that the public does not understand. The credit default swaps market was one of the few financial markets that worked extremely well throughout the recent financial turmoil, never freezing up while other markets pretty much stopped. As another example, bank investments in the securities markets—other than loans—were an important source of diversified income for banks, helping keep banks afloat when bank loans were suffering heavily from people and businesses that defaulted. Recent legislation and regulations are placing heavy new burdens on these profitable activities, and in some cases banning them entirely, because policymakers do not understand them. Financial firms have to be more active in explaining everything that they do, or they will continue to find many of their newest and best financial activities curbed in times of regulatory fear.

As I say, you can probably add to this list, as could I. As I ponder now the question that the German businessmen put to me, the actual lessons that we have learned seem to me less important than whether we will remember the lessons.