Financial Crisis: What Really Happened

By Andrew Paparozzi
In September 30, 2008

Forget the jargon, posturing, and finger-pointing and think for a minute about what really happened on Wall Street. Complex financial instruments were created that no one—including their creators—really understood. These instruments were purchased with a seemingly unlimited supply of cheap credit. And because they were rated investment grade, they found their way into pension funds and other places they never should have been given their risk profile.

This all took years to develop. And none of it—not the complexity, the leveraging, or the inaccurate ratings—mattered as long as the home prices that supported many of these instruments kept rising. But they didn’t. The lesson for every one of us: Risk that is not well defined cannot be measured accurately and, therefore, cannot be managed effectively.

We incur risk every time we make a capital investment. Have we defined the risk clearly? Have we considered the realities of the investment as carefully as the potential return? Have we asked the kinds of questions raised in the NAPL State of the Industry Report 2009? If we have, we’re building a sustainable competitive advantage. If we haven’t, we’re making the very mistake that is at the core of the current financial crisis.

In our next posting we’ll discuss why it’s critical that the focus of the debate in Washington move away from one of bailing out Wall Street fat cats vs. Main Street, or one of dependence on market forces vs. creeping socialism and placed where it belongs: What are the ramifications if we don’t restore confidence in the financial system and clear up the logjams that are developing in the credit markets?

Andrew Paparozzi
Joseph Vincenzino
Kong Wang

Andrew Paparozzi

Epicomm's Andrew Paparozzi, Vice President/Chief Economist, is well-known for his accurate and thoughtful discussions on the economy and US commercial printing industry. A foremost author and speaker on economic business trends in the printing industry, Paparozzi heads Epicomm's Printing Economic Research Center.

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