Thursday, September 17, 2009

Harvard versus EPJ on Lehman's Three Big Mistakes

HarvardBusiness.org lists Lehman's "three big mistakes" as:

1. Too much leverage

2. Risky debt-to-equity ratios

3. Upside-only compensation schemes

Here's my list of Lehman's three big mistakes:

1. Not understanding Austrian Business Cycle Theory which teaches that Fed money pumping distorts the capital/consumption ratio in favor of capital, and when the money printing stops, the capital goods sector collapses.

2. Not watching the money supply, which would have alerted them to the coming collapse in the capital sector

3. Not reading EPJ, since I warned about the complete slowdown in Fed money printing in the Summer of 2008. See here, here, here, here, here, here, here and here.

3 comments:

  1. If ABCT is correct, can't it be used (roughly) to guide the investment decisions of traders and fund managers? E.g., invest in capital goods during booms and short them during busts.

    ReplyDelete
  2. These are silly:

    1. Too much leverage

    "Too much" implies a comparative and comparatives imply calculations between competing alternatives. In other words, this implies a measurement of cost and benefit to determine what is 'the right amount' of leverage. And how do these objective value theorists propose to measure that, if not individually and on a firm-by-firm basis?

    2. Risky debt-to-equity ratios

    There will always be risk. The only way to avoid risk is to not take any action. Of course, even that provides an element of risk through currency swings.

    3. Upside-only compensation schemes

    This is supposed to be worse than, what, downside-only compensation or non-performance based pay? Socialists are in love with 'equal pay for everybody'!

    ReplyDelete