Blast from the past

Need more proof the past repeats itself?

“Although interest rates have subsided from the 1981-82 peak, the low and slowly changing interest rates of former years are plainly gone with the wind, as are the former government decreed limits on interest rate competition for savings accounts and the favoritism for [investment institutions] over banks. But an agency of the U.S. Government (…) continues to insure savings accounts in the [investment institution] industry, just as it did before. The result may well be bolder and bolder conduct by many [investment institutions]. A sort of Gresham’s Law (“bad loan practice drives out good”) may take effect for fully competitive but deposit-insured institutions, through increased copying by cautions institutions of whatever apparent-high-yield loan and investment strategies seem to allow competitors to bid away their savings accounts and yet report substantial earnings. If so, if “bold conduct drives our conservative conduct,” there eventually could be widespread insolvencies caused by bold credit extensions come to grief.

Sound familiar?  Banking ‘crisis’ of 2007 maybe?  This was a letter from Charlie Munger to shareholders of Wesco in 1984.  My use of ‘investment institutions’ was a replacement for ‘savings and loan’ in Mr. Munger’s letter.

Ignore history at your own peril.


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