People Do Not Learn From Their Mistakes!

This morning there is a post at FT Alphaville noting that foreign currency borrowing is on the rise in Poland at the retail level. This would seem to dovetail with the many articles out there today talking about the drop in consumer lending in the US and the deleveraging that is underway here that will hurt US GDP.

Icelandic borrowers took out mortgages in euros because the rates were so much lower then when the kronur cut in half in the crisis mortgage payments literally doubled. There was a similar effect to Hungarian mortgage seekers who borrowed money from Austria and Latvia is still sorting out something similar from borrowing money in Sweden. This also hurt the lenders.

One thing I have observed in my time is that people rarely learn from their own mistakes and even rarer is learning from the mistakes of others. Where personal finance is concerned simple, plain vanilla is and has always been the best way to go. Part of the mess we are working through today is built upon people taking out very risky credit products that start out as being short cuts (like being able to live in a $600,000 house for $2000 a month with no down payment).

With capital market investing these things usually involve concentrated bets or chasing yield. No matter what these behaviors repeat over and over. A 10% yield in a 2% world is a risky proposition. Taking some risk is reasonable but concentrating assets on the risk is usually not yet people do it anyway. At some point in the future people will again get themselves into trouble with mortgages or other forms of credit. There will be future investment bubbles that somehow most people will miss and investors will be caught grossly over-exposed.

Right here right now are you going to learn from others’ mistakes or will you repeat others’ mistakes? That is harsh but vital for financial success.

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