Thursday, October 9, 2008

The financial crisis of 2008 explained for art students and engineers

Ever since 1995, stocks have been historically expensive. In 1996, Alan Greenspan famously described the market conditions as "irrational exuberance." Since then, the market, even after the dot com bubble, has been propped up by financial engineering. Everything that's happening right now is the result of the last decade being built on a house of financial cards.

Don't think of what's happening as a crash. It's just the hangover from a great party. You were looking at you account's value through beer goggles.

About the chart (for the engineers): the trend line was chosen so that prior to 1995, roughly as much was below it as above it. No reasonable trend line makes even 2002 look like a 20 year bargain. The chart is on a log scale, so consistent, growth, e.g 10% annually, would be a line. This is the least scary chart. Linear and logarithmic charts of the Dow following 1970 are a lot more depressing.

The shaded areas represent the following recessions: