Have the Rules Changed?

In response to my previous post about when the recession will end, a reader named Neal wondered aloud if we’re entering a new paradigm — one in which the old economic rules no longer hold.

“We could always say that the market will do this or that based on history. But based on what is going on now and the conditions we are in, is that history valuable?”

While I understand where Neal is coming from, I’m always hesitant to jump on board when people claim that the rules have changed. Remember the late 1990s, when stock prices just keep going up, up, up as we approached the pinnacle of the dot com boom?

The pundits told us that the rules had changed, that the old view of stock valuations no longer held, but… We all know what happened next. The bubble burst and things came crashing back down to Earth. The old rules held.

So, dear readers, what do you think? Given recent events, have the rules changed? Are we witnessing a paradigm shift, or is this just another blip?

13 Responses to “Have the Rules Changed?”

  1. Anonymous

    “Countries like India produce the equivalent of MILLIONS of MIT graduates in fields of science, engineering and high tech.”

    No they don’t.

    USA graduates more engineers annually than India.
    On average the quality of education in India is not as high as US colleges.

    China graduates more engineers but again the quality isn’t all MIT level. In both cases of India and China what they count as engineering / science graduate is vague and often includes 2-3 year college level which is not the same as bachelors.

    Don’t get me wrong. There are certainly many great engineers and scientists in countries like India and China
    But there simply aren’t millions of MIT quality engineers & scientsts.


  2. Anonymous

    The hypothesis is “this time it’s different from times in the past.”

    These comments that “in the past, it hasn’t been different” do nothing to weaken the hypothesis.

    The whole question is whether this time *isn’t* like those other times! We already know there’s been a perfect record of events that looked different but weren’t. Empiricism is the wrong way to answer this question.

    By the way, if you want to see something that qualifies as “different”, check out stock index growth between 1980 and 2008, and compare it to all the time before that. Now who’s different?

  3. Anonymous

    Unless we see a wholesale change in the way people do business and make money, I don’t think the rules have changed. I think back to the time after 9/11, when everyone pulled together and helped each other. Attitudes changed for a short while, and people were actually polite to each other. But our normal patterns eventually returned. I see the same thing happening with the economy. There are too many people interested in turning this around for it not to happen.

  4. Anonymous

    I don’t think the rules have changed, and I don’t think they will in our lifetime.

    If anything, the behavior of the past 10 years has been the exception to the rule, and things are finally returning to normal.

    People got careless – notice I said careless, not greedy – and it finally came back to bite people. We’ll go through a correction, and then things will continue much as they were before.

  5. Anonymous

    I am not sure what you mean by rules, I am assuming it means that this recession is different then the past.

    The cause might be different, the solution will be different, but at the end it will come out the same.
    Those who believe this will be different I encourage you to ask yourself:

    1. Will I stop eating
    2. Driving or taking transportation
    3. Will I cut off my cell phone, cable and internet
    4. will i stop going to the movies
    5. I will stop my mortgage, loans and other credit cards

    The answer is most likely NO, NO, NO, NO and NO. We may cut down on things right now, but we will get back to “normal” live.

    Unless you say yes to those and are planning to go back in time, no the outcome of this recession will be the same as any other.

  6. Anonymous

    Well I guess that depends on what precisely we mean by “the rules.” Assuming we’re referring to the most basic of financial principles like:

    1. Spend less than you earn
    2. Buy and hold profitable companies

    …then I don’t see any reason why they wouldn’t still be true. 🙂

  7. Anonymous

    The rules haven’t changed but there has been a fundamental shift in the players.

    America will soon be burdened with 79 million boomers retiring and not producing a single thing. Countries like India produce the equivalent of MILLIONS of MIT graduates in fields of science, engineering and high tech.

    the markets will continue to function and wealth will continue to be made but it will be done in places like Asia and the Middle East not the U.S. if things don’t seriously change.

  8. Anonymous

    An economic recession (or boom for that matter) has its roots in collective human behaviors.

    And our collective memories are rather short. Accordingly, we create and live through cycles of prosperity and contraction. Always have, always will.

  9. Anonymous

    Whenever you hear people say “this time it’s different,” the trend (whatever it is) is about to end. In the dot-com boom, people said, “this time it’s different,” that stock prices no longer correlated with earnings. We know what happened next. In the housing bubble, people said, “this time it’s different,” that house prices will never fall. Now again we are hearing, “this time it’s different.” My first rule of investing is, it’s never different.

  10. Anonymous

    I don’t think the rules have changed and history is still as good an indicator as it ever was. History always has ups and downs. This recession will get averaged in with all the others in the past 70 years but the overall picture of history won’t change a huge amount.

    A lot of people thought the rules included buying homes with 0% down, they thought homes never dropped in value, they thought stock always gave 12% annual returns, they thought the stock market wouldn’t drop 40%, they thought that having 100% of their retirement funds in stocks at age 60 was safe. That way of doing things was never a good idea and still isn’t.


  11. Anonymous

    I think our global economic system is too complicated for the rules to suddenly change. When Warren Buffett says he still adheres to investing principles he read in a 50-year-old book, the rules can’t have changed much at all.

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