Tyler Durden once said, "On a long enough timeline, the survival rate for everyone drops to zero." He must have one hell of a Keynsian invisible friend. John Maynard "Father of Time" Keynes put down some common sense ideas in the near obsolete vernacular of proper english and a lot of these ideas explain the farce that has become of today's investment banking, in particular the role of confidence as it relates to a stock's value.
Keynes truthfully notes that until humans build space ships and develop ESP we have not shot at consistently predicting the future and definitely not during "abnormal" times that we are in today:
A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady. In abnormal times in particular, when the hypothesis of an indefinite continuance of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exists for a reasonable calculation.
But you say, the Obama and the Federalettes are passing out bailouts during the 7:30 performance to encourage the stimulation of lending and credit. Fail.
A collapse in the price of equities, which has had disastrous reactions on the marginal efficiency of capital, may have been due to the weakening either of speculative confidence or of the state of credit. But whereas the weakening of either is enough to cause a collapse, recovery requires the revival of both. For whilst the weakening of credit is sufficient to bring about a collapse, its strengthening, though a necessary condition of recovery, is not a sufficient condition.
Yikes. Well once this thing stabilizes (hopefully before 2020) we might be able to get back to hearing Eddie Money's 1987 hit "Business as Usual." Well actually, no, because much of the gains of the last decade or more have come about from using the hysterics of confidence to create a Las Vegas-like bubble in the housing and financial sectors.
Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.
People have played the stock market like a casino, Performing thousands of transactions for the short term gain. Investments were originally directly tied to the creator of the business venture, therefore making his stake in the business' success a personal matter. With the invention of stocks however an investor could put money into a venture but swap his investment for another if his confidence in the venture were to waiver.
I'm sure Kramer would say, ''that's how you make the $$$$" but Keynes would disagree. He in fact thinks we'd be better off in a European Welfare State, where as in London, the heavy taxes impede the ability to quickly transfer stocks. Somewhere Rush Limbaugh is trying to roll over in his sleeping casket but is unable.
The jobber’s “turn”, the high brokerage charges and the heavy transfer tax payable to the Exchequer, which attend dealings on the London Stock Exchange, sufficiently diminish the liquidity of the market (although the practice of fortnightly accounts operates the other way) to rule out a large proportion of the transactions characteristic of Wall Street.[5] The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.
Keynes-daddy questions about ability to even manage the "convention" of stocks due to the instability of human nature to act morally towards there future. Humans fallible? I think whole religions are based on that fact.
Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.
Keynes gets a bit Darwinical too - spouting that we are not predisposed to making decision solely on numbers. That no matter what our most objective desire is we still tend to act on instinct or gut feelings. Somewhere in Texas an ex-president is fondly reminiscing about the last 8 years.
We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance
If this isn't a "d**g-slapping" of any Secretary of the Treasury, the Federal Reserve and interest rate hawk out there I don't know what is. As Clinton should have said, "It's about the confidence, stupid". Interest rates, in all there man made glory, have no effect on the system. Long term planning and regulation is the point to be followed.
For my own part I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.
In finution, stocks are a sham, basing an economy on stocks makes for a sham economy, the ability to deflect failure via stock trades promotes risky behavior, and if this has not been figured out since the time of ziggurats, every human convention made or invented has the distinct weakness of being run by humans. If you've seen The Wire you'll know what I'm talking about.
1 comment:
I didn't spell check that. I have a sham(e) economy in the last paragraph.
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