Investors: Beware the Quackery of Economic Goats, Whitewashers and Charlatans
In William Hogarth's famous engraving of 1721, the world of finance, corrupted by the phantom of the South Sea Bubble, is cruelly satirised. To represent market cheerleaders, a goat sits astride a spinning carousel and asks: 'who will ride?" Lured by this charlatan, investors crowd on to the shaky, but thrilling merry-go-round. In another corner a winged devil with a scythe throws chunks of Fortune's body to a greedy crowd. And in the right hand corner - 'trade lies dead'.
Today -- as global trade lies dead, as unemployment rises, as wages and incomes plummet, as US consumption (70% of US GDP) and investment falls -- share prices zoom upwards and commodity prices rock. According to Fortune magazine, the stock market climb of these last few months is the fastest on record. By November, the S&P 500 had surged by 62 percent to 1,093.08 after sinking to a 12-year low in March.
A trade that remains in the shadows -- 'the carry trade' -- roars ahead. (For the uninitiated: it's just another version of 'buying cheap and selling high'. Traders in money borrow e.g. dollars, at the Federal Funds rate of 0.25%- and then lend in countries (and currencies) where rates (or yields) are higher.
Nice work if you can get it -- especially as a banker, with the competition wiped out, the Fed keeping interest rates low, and the risk of gambling with your own capital replaced by taxpayer-backed money.
It's especially nice work if, while playing away, you can short the dollar and so ensure that on returning home to pay your dollar debts, the rate is lower. Fine and dandy of course, until either the dollar or the Fed rate rises. Then all hell will break loose, as traders scramble to repay debts at climbing rates. But until then, the unregulated 'carry trade' carousel will keep spinning round the globe.)
In another corner of the financial forest, and partly financed by the carry trade, the global bubble in equities, commodities and other risky assets is expanding into what Nouriel Roubini calls a 'monster'.
Many economists are helping to pump it up further. Some, like Abby Joseph Cohen at Goldman Sachs gave the bubble a puff by declaring the recession at an end in August. Jim O'Neill, chief economist at Goldman Sachs is a perma-optimist. He told me in an August 2008 BBC radio interview that this recession was 'just another periodic crisis - I have already lived through five', he remarked.
When a British economist Danny Gabay of Fathom Financial Consulting argued that poor GDP numbers could be explained by the fact that "the UK has some formidable headwinds, not least of which is the over-burdened consumer which is having to cope with a broken banking system, rising unemployment, and falling income growth," his view was dismissed as "baloney" by Kevin Daly at Goldman Sachs, who, according to the FT, put greater weight on more optimistic recent surveys of companies.
These happy (and well-compensated) souls are joined by PhD-trained academic economists who cheered the recent 3.5% growth in US GDP, even though wiser heads declared this analysis a whitewash, and noted that 'cash for clunkers accounted for 1.7%, i.e. half of the increase and the lower liquidation of goods in stock accounted for another 1%. In other words, 80% of this "growth" came from a temporary government boost that is already gone or was essentially technical in nature.'
But the cheerleader that investors should most beware of is one Prof. Frederick Mishkin.
In May, 2006, this American economist and one-time Federal Reserve governor, wrote a report called "Financial Stability in Iceland" commissioned by the Icelandic Chamber of Commerce. (See 'Iceland as Icarus' by Prof. Robert Wade.) In this report he and his Icelandic partner opined thus: "Although Iceland's economy does have imbalances that will eventually be reversed, financial fragility is not high and the likelihood of a financial meltdown is very low". We know that Fred Mishkin (now of Columbia University) was not the only academic economist to act as cheerleader for Iceland's reckless bankers. Prof. Richard Portes, President of Britain's Royal Economic Society, played a similar role. (For more about Professor Portes's role in the Icelandic saga, go here.)
Mishkin's report was published in the same month that the IMF mission to Iceland came to very different conclusions. According to Prof. Wade, Mishkin "pocketed $135,000 for his contribution to the modest report." A modest fee, we might add, for puffing up massive capital gains on behalf of reckless Icelandic bankers.
In the autumn of 2008 Iceland's economy 'debtonated' and the country was quickly bankrupted. Bank failures, unemployment, political upheaval and massive destruction of value followed.
The disastrous bursting of the bubble created by Iceland's bankers, has not punctured the Professor's confidence, nor deterred his sponsors at the Financial Times or in the banking sector. On Tuesday, 10th November, 2009, Mishkin was given a column in the FT. The apparent purpose of the piece is to debate the risk of bubbles. Instead he emphatically puffs up the 'monster bubble' in risky assets. He does so by posing a rhetorical question: "if bubbles are a possibility now, does it look like they are of the dangerous, credit boom variety?"
"The answer" writes this academic purveyor of advice and encouragement to the carousel set, "at least in the US and Europe, is clearly no."
To paraphrase Wordsworth: William Hogarth, thou shouldst be living at this hour: Economics hath need of thee: she is a fen of stagnant waters.
Ray Brescia: What Would Lincoln Do? Financial Regulation in Times of Crisis
Many features in our current financial system were also present in the financial system at the outbreak of the Civil War. The lesson we can learn is that reform will take radical steps over a long time.
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The 3.5% GDP was only temporary? Wiser heads? Someone tell the president and huffpo.
I wonder how people are going to react when they realize that the so-called stimulus produced an even more dangerous bubble?
Bankers and stock/derivatives traders should be paid what they are worth, and no more.
They are skimming the profits off of the top using other people's money.
This takes away from the profits the owners would have otherwise had.
The next question is what are they worth?
In my opinion, they offer no value to society or to me.
Minimum wage, and no bonuses or perks.
This would be just, and we should make it so.
The Cause And The Cure
Of Financial Crises
Non-Violable Laws Of Nature In Social Science Vs. Man-Made Laws
Abstract
It should be perfectly clear to everyone by now that the crisis occurs because THE PRICE IS WRONG! The incorrect solution of value is the basic cause of most and the current financial crises, and the correct solution of value is the cure. Being mathematically rigorous, the solution of value is a non-violable law of nature in social science. This seminar presents three policies based on non-violable laws of nature for the formation of a permanently stable economy. The current financial crisis is used as an actual application of the three policies. The seminar points out the necessary historical development of the economy moving from regulation to deregulation then in the future to regulation by non-violable laws of nature.
Three Policies Based On Non-Violable Laws Of Nature To Form A Permanently Stable Economy
To view entire article, please visit: http://www
I seriously wonder WHAT it will take for the Public at large to wake up and demand accountability from those with the title of 'leader' .. we.the public foot the bill in more ways than we realise for perpetual wars, but WHO.exactl
It will take the very last bit of trust in our market, finally wrung from us for profit along with the last bit of legitimately generated value left in the past fifty years of economic development.
There is no such thing as a free lunch, but in this case, our apparent inability to universally despise for-profit operations as they deserve to be despised is being tapped as a resource with which to, essentially, loot as much as possible from the corpse of our nation. The insistence of fools that people who work only for their own benefit will somehow benefit everyone else is causing what you describe.
That is to say, our problem is that of a religion - the blind, and utterly and obviously incorrect, belief that Enlightened Self-Interest can improve any non-trivial economic system.
"...a completely different system needs to be developed, based on real human needs from the ground up..."
Such a system already exists. It is called democratic socialism, and the American aristocracy fears it to such a degree that they will do anything and everything in their power to prevent it.
Until jobs come back to this country, and people feel secure, the economy cannot recover.
So far it is all a paper game and people manipulating the market to their benefit to get what is left of fools who buy into it--then the plug will be pulled and we will be at a total collapse with no return.
Wake up America! The powers that be( banks and corporations) are getting away with the murder of America.
So gamblers and cheats are to be richly rewarded, and respected for their business "acuity", while people who are skilled at actually building, making, fixing things, helping, and caring for others are paid as peasants and kept to the margins of society. Capitalism is just fine and dandy. Certainly worth fighting for.......
We are facing a regime of immense proportions. And it is not our government. It is the ones who tell it what to do.
Global players of finance and big business since WWII have made corrupt dictators open nations for the free market.
Everything those countrie's people owned was up for sale for a pittancve. - And WE profited from it. When Jeltsin took power with our support 2 million Russians lived in poverty. After 10 years of free market and rising russian oligrarchs it was 74 million.
When the asian markets fell we were "better". No asian profited from that more than necessary. Our multinationals grabbed up the bits and pieces of a market destroyed by our World Bank and the IWF. - And our fortune rose.
Now, as the parasites have sucked every market in the world dry, they turn on us. - And we cry "FOUL"!
It is not wrong because we are now its victims. It is wrong because IT IS WORNG.
Only when we strip ourselves of the idea that profit is good even if it means millions more in poverty in Africa or South America will we be able to see the real enemy. - The one who controls not only our government but more than 90% of the planet.
It is a dictatorship we have to bring down or we will end up as did russians. Sittng in the dark without heating while 2 miles away billionaires hold crash-races in Ferraris.
Well said. Societies that divorce compassion from the market always end up in tyranny.
Unfortunately, the solution is not another compassionless model,
like democratic socialism--that is just the antithesis to runaway, imperial captialism.
We need a synthesis of compassion and trade.
All it would take is changing the way we value things, people, time and resources.
Once we truely value the fair governor over the basketball player; the modest volunteer over pop tart;
the local farmer over the filmaker, then we will move the market to something sustainable.
And how are you going to bring that one about, eh?
Actually, many modern democratic socialist nations do indeed have markets - they're just well-regulated, and the government directs industries that can't reasonably be run by a regulated market. And I imagine a system that actually has welfare for its' citizens must have some small degree of compassion.
So democratic socialism is hardly the antithesis to our disintegrating capitalist system - rather, a disintegrating centralized, communist economy would be (Soviet Russia would be the last of those, to my knowledge).
Full time employment has been declining dramatically for two straight years. This is the worst employment picture in the post-WW2 era and it's continuing. Despite initial unemployment claims being the lowest since early January of this year, at 502,000 it was worse than all but one week in the 2001 to early 2003 recessionary period (the week of 9/29/01 was worse, right after sept 11th), which is still horrible. Also, mominal wages have declined in this recession for the first time since WW2. Revolving credit (credit card debt) has declined this year for the first time ever. Non-revolving consumer credit (like car loans) continues to decline as well. So my question is, why have stocks of retail companies gone up about a few hundred percent since March and why are they trading at multiples suggesting consumer spending is going to exploded incredibly for the next two years??? The consumer spending picture becomes even worse when you take into account the continued drops in business investment. Businesses didn't even start investing in the last cycle 'til the spring of 2004, a full four quarters after the big explosion in consumer spending coming from the housing bubble and loose credit. Right now the housing market is dead and credit is tight (look at last senior lending officer surveys). So how do we justify these outragous equity prices???
Hi Dugan,
Good question and there is an answer-
http://mar
Denninger says quite clearly (there are charts!) that the equity market is a flight from the dollar to stocks. Our government is devaluing our currency for many reasons but there is an intentional promotion to give "confidence" to the little people who have 401K's etc.
I wonder if this is the harbinger of inflation that we've been waiting for, or just another bubble we get to watch blow up.
Oil and commodities (including gold) are tracking this way as well.
Good Luck to us all!
Because our wealthy class is clearly cutting and running from America - and to effectively do that, they need to liquidate everything.
Liquidation generates capital which increases asset value, at least in the short term.
You mean, after a few centuries of knowing it was all a 'ponzi scheme' for the in crowd we are still prepared to believe in an economic system. We are off our heads. Fortunately, I think the general public is not fully buying into it, and as a few more weeks pass I think we will all know the whole system will soon crash ... and it won't be peasant for anyone.
Ms. Pettifor's info and analysis is convincing, and more importantly conforms to reality. Economists like Mishkin are giving the profession a bad name at a time when we need integrity and reality-based analysis. If what they are saying does not pass the smell test, then disregard.
Part of the reason we did not avoid a devastated economy with a financial collapse is because of economists like Mishkin, Greenspan, too many to count. Not only were they useless, they were a danger to our country.
Ann...grea
Folks, do NOT get caught up in this game....bu
it happened one year ago people and you are falling for the same old trick less than one year later!
the economy is not recovering, the US stock market is WAY overvalued
thanks again Ann for doing this service for HuffPo readers.
stop in at zerohedge dot com sometime..
I find it hilarious that they keep going on TV to assure us the recession is over when more and more people are being fired.
Hey, Wall Street-- Recession is over when Americans aren't in double-digits unemployment. Maybe if you stop shipping jobs overseas, you'll actually have a market for your goods again.
VERY well SAID !!!!
It's not really a recession anymore. It's a depression. The second Great Depression, probably.
Don't let the corporate media dictate your vocabulary.
Can anyone say "ponzi"? We the American people bet on this everyday, we buy stocks, we buy goods we can't afford, and we go on vacations we can't afford. We now have 15 million people living on the street - how many will have to move to the street before we stop the madness? Will all the reasonable people be on the street? and leave all the nuts running the country?
in response to screenName05: The nuts are already running the country.
Wow the tidal wave of negativity towards all investment classes by "experts" who have never managed a dollar of someone else's money continues unabated. Usually by someone pushing yet another book about the imminent collapse of the global financial system. Without a doubt there is a bubble in government debt as rates racheted lower and lower and as investors gave up return for relative safety. The carry trade which use to be dominated by borrowing in Yen has now also added the dollar with artificially low rates as the Federal government attempts to boost GDP. The stock market has had this massive run because profits have improved dramitically across most business's, a lot of this thru capitalist Darwinism, companies facing global collapse 12 months ago have shed employee's down to the bone, now with global growth coming back rapidly {don't forget 60% of the worlds poulation has been freed up from communism, dictatorships, and poverty over the last 10 years and the rich and middle class of theses emerging economies demanding more goods and services global trade is in the process of exploding. The American consumer is slowly paying off their debt binge. The government debt binge is probably at its high water mark {the choice being a collapse of our financial system with worldwide depression or massive deficit spending } Why are the worlds greatest investors buying stock hand over fist? Don't ask the were all gonna die crowd, your wasting your breath. Negativity sells and it is rampant.
You have an amazing ability to spin straw into fool's gold. Are we reading the same headlines?
The world's _greatest_ investors would be the ones making out with all the money right now, despite the fact that the things our economic assets supposedly represent are getting successively worse.
The competent time to buy stocks if you did believe there would be a recovery is after the next market collapse, but before any government regulation passes (which might restore consumer confidence and increase stock value).
Welcome to the machine aka The Great American Ponzi Scheme.
I see you've swallowed it whole, hook, line and sinker.
Welcome to the machine aka The Great American Ponzi Scheme.
I see you've swall0wed it wh0le, hook, line and sinker.
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