Two Lessons from the Last Century 13 comments
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It really beats me how some still seek to place the blame for this crisis on hedge funds and clamor for their extensive regulation and taxation, plus curbing the pay of alpha-producers, when hedge funds are the only type of institution which behaved in line with the fabled "free market capitalism": those which guessed wrong went under, those which got it right made it big.
One hears cries for re-engineering the financial regulatory system as if it was lack of regulation which caused all this havoc!
Today we hear from Europe about this big conference hosted by France – and apparently not attended by the US – where economic planners quasi-communists bewailed free markets while ex-champions of free capitalism beat their chest and proclaimed they saw the light and are now believers in state intervention.
And what if the US had been represented – with layers upon layers of laws and regulations, following a legislation-as-business model emulated from staid Europe, it is hardly the "Go West" of old.
Alone at my desk, reading about these things, with the S&P 500 again down 2% for the day, I hit myself on the head, how could I be so thick to keep being surprised by these antics now that I am fifty?
I am writing a book on behavioural finance and students of the brain know that morality and a sense of fairness are wired in the brain. The reaction to the antics is therefore emotional, comes from the wiring, but donning my investment hat I try to look at things coolly, with a skepticism I oil and try to keep healthy, and, stoically, smile wryly, and get on to the next item.
One makes money by following the trend or turning contrarian when the trend has gone too far on popular but false beliefs. All systems have a direction and all go too far. And healthy skepticism is an investor's number one tool because it lets him or her see a little more clearly than the fanatic next door.
What free market capitalism are we talking about when the boot is pressed to the floor printing money like crazy to fix a problem itself caused by the excessive printing of money by avowed Ayn Rand-ians? (I used to belong to an Ayn Rand club too, for a while, until I got to be the skeptic I am now and threw ideology out of the window.)
What's this humongous money supply going to create down the line? And how can we trust the driver to release the gas pedal and put on the brakes at just the right time? I was reading this article about hyperinflation in Germany in the 1920s (link).
and got to thinking that maybe a few years down the line we get our money replaced by New Dollars where each old dollar is worth a new cent.
So now hardworking savers are being taxed by 0% interest in order to shore up what we euphemistically call inefficient users of funds. That's free market capitalism for you.
Then again I am not in the hot seat executing policy and seeing what they see from atop the hill – maybe this tax on savers is a small burden to pay considering what they see as the alternative. Perhaps it is this thinking which is making the market sink further: if you do what you do because of what you see then you must be seeing something awful. Time will tell, or autobiographies of old folks when it is too late.
To recapitulate two main lessons of the century: assuming they ever existed, communism does not work nor do free markets. As a humanist, I hope upon hope that there is a grey central area somewhere in between which does, give or take a minor crisis every now and then.
How to find the centre? Throw away ideology, don the skeptic's hat, and abide by the one law which seems to have withstood the test of time: don't do unto others what you don't want others to do unto you.
Planned social economics? No. Free to choose? Yes. Rapacious banditry? No. Effective policing? Yes. Witch hunts? No. Peace and commerce? Yes. Duh!
Disclosure: None
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This article has 13 comments:
Real wealth? Yes.
Stupid Presidents? No.
A President that doesn't vacation all the time? Yes.
Starting a war that makes oil prices rise? No.
Sharing war costs with allies or not doing it at all? Yes.
Letting your debt pile up in foreign wealth funds? No
Making sure your own citizens can afford to buy your treasury notes? Yes.
Letting the head of your stock exchanges commit fraud? No.
Getting a SEC head who actually does his job and concerns himself with the protection of investors and the integrity of the exchanges? Yes.
Appointing a Treasurer who bet on a mortgage crisis his company helped start by getting people to buy derivatives that they shorted? No
Appointing someone to clean house and help the Fed uncover fraud? Yes.
Letting the Fed pay interest on Fed deposits so they can encourage banks not to spend their money and still get enough interest to pay their hidden losses thus causing delflation? No
Making the Fed get approval when they blow up their balance sheet more than the federal deficit in one year since it all goes to banks? Yes
Making the fed report exactly where such money and backstops went? Yes
Giving away $350 billion without any tracking of how the money is spent with another $350 billion accessible any time for any reason without condition unless Congress can have an over riding veto? No
Making spending bills that actually define how they are to be spent? Yes
Hmmm, I thought this would be easy. I'll stop now only because I can go on forever.
Now, about reading a book on behavioral economics written by a former Ann Rand soldier. I seem to remember a behavioral economics person calling himself professor who gave a talk at my university praising behavioral economics to the high heavens. When the deal went down I felt it necessary to inform him that his talk would probably be about the last on that subject that I would tolerate at my university in the foreseeable future. He got the message, and now that a new term has begun, I suspect that I will have to borrow some of Constructe's observations to fend off the wisdom of colleagues and graduate students.
I think this is partly what you were partially saying despite early comments in your article. Good article.
news.yahoo.com/s/ap/20...
On Jan 12 08:00 AM constructe wrote:
> How about mass deficits? No.
> Real wealth? Yes.
> Stupid Presidents? No.
> A President that doesn't vacation all the time? Yes.
> Starting a war that makes oil prices rise? No.
> Sharing war costs with allies or not doing it at all? Yes.
> Letting your debt pile up in foreign wealth funds? No
> Making sure your own citizens can afford to buy your treasury notes?
> Yes.
> Letting the head of your stock exchanges commit fraud? No.
> Getting a SEC head who actually does his job and concerns himself
> with the protection of investors and the integrity of the exchanges?
> Yes.
> Appointing a Treasurer who bet on a mortgage crisis his company helped
> start by getting people to buy derivatives that they shorted? No
>
> Appointing someone to clean house and help the Fed uncover fraud?
> Yes.
> Letting the Fed pay interest on Fed deposits so they can encourage
> banks not to spend their money and still get enough interest to pay
> their hidden losses thus causing delflation? No
> Making the Fed get approval when they blow up their balance sheet
> more than the federal deficit in one year since it all goes to banks?
> Yes
> Making the fed report exactly where such money and backstops went?
> Yes
> Giving away $350 billion without any tracking of how the money is
> spent with another $350 billion accessible any time for any reason
> without condition unless Congress can have an over riding veto? No
>
> Making spending bills that actually define how they are to be spent?
> Yes
>
>
> Hmmm, I thought this would be easy. I'll stop now only because I
> can go on forever.
>
Clearly it is better for us humans to dedicate our scarce resources to 'butter' instead of 'guns' and especially if the war is a futile reality show war for the rich, such as the Vietnam war or the Iraq war.
So if we are going to learn anything from the history of the twentieth century, it will be that more futile wars, based on the paranoid fantasies of the rich, will be fought in the twenty first century and therefore weapons manufacturers will prosper.
The next lesson is that we haven't got the slightest idea which technological and scientific discoveries will bring value into our lives or even if new ones will be discovered.
For example, it is NOT an urban legion but is true that around 1900, the head of the U.S. patent office advised that the patent office should be closed down, not because he thought it was a socialist plot to take over America but because he honestly thought most inventions had already been discovered and so there was no need for a patent office.
This was a common attitude around 1900. It was also thought that physics had discovered everything there was to be known and would thereafter be even more boring than the average citizen thinks it is today, because it would just be a matter of memorizing results.
But there were a few tiny, almost academic puzzles which were barely visible on the horizon but which produced the quantum physics and relativity revolutions which blew away the illusions of the classical physicists and ushered in modern technology.
That is to say,almost everyone was wrong about the future of technology at the beginning of the twentieth century.
Consider: When railroads were invented in the early nineteenth century, it was thought that they would be useful only as feeding lines to canals because shipping was considered the major form of hauling goods.
When Marconi invented the radio (the wireless) in the beginning of the twentieth century, he thought it would only be useful in ships because it wasn't possible to lay wires between ships and the shore. Some people thought it might be useful on Sunday because it was the only time when people sat around and listened to one man talk.
David Sarnoff, who was a poor immigrant, was the only one with enough vision to imagine it could be used for other things and he became the president of RCA.
When the laser was invented at AT&T in the mid-twentieth century, the scientists and lawyers at AT&T didn't even think it was necessary to patent laser technology because they couldn't foresee any applications in the telephone business. Of course, lasers turned out to be, arguably one of the most important and lucrative discoveries of the twentieth century.
This list could be expanded almost indefinitely.
We also don't even know where to direct our basic research:
Bernard Riemann was an obscure German mathematician of very poor health and almost pathologically shy. In the 1870s, he developed a very arcane area of pure mathematics called differential geometry which had no applications at all and was considered by everyone to be of academic interest only. Riemann had no interest in money and made very little.
In the early years of the twentieth century, an obscure physicist with a very bad academic record who also had no interest in the practical world or in money, just happened to be working in a government patent office, where he used the differential geometry discovered by Riemann to build a theory that solved one of the obscure puzzles of physics. He called his solution Relativity Theory.
Relativity Theory was scoffed at by most classical physicists well into the twentieth century as of academic interest only, and as a kind of mathematical trick without practical value. After 1945, all scoffing stopped.
The lessons of the twentieth century:
1. Wars will continue to be fought and associated stocks will rise.
2. The most important scientific and technological research will be in areas that conventional scientists and citizens will scoff at and think completely impractical and useless.
3. When great scientific discoveries are made, they wont be appreciated until long afterward and by that time will become party of the machinery that obstructs further scientific progress. (Microsoft is an example of this.)
Fortunately, this is not France or the EU. They have a permanet elite which are far left socialist. We will, in time, vote ourself back to a real "moderate" place. They will never do that and they will never grow like the United States.
Viva free markets!
> One makes money by following the trend or turning contrarian when the trend has gone too far on popular but false beliefs. All systems have a direction and all go too far.
The trouble is that the market can stay irrational longer than you can stay in a job...or resist buying a house.
Here goes:
"
Despite the bleak set of options presented by GM, Chrysler and the Democrats, of either: A) bailouts and job cuts or B) total bankruptcy, there is actually a third option: nationalization of the auto industry under democratic workers’ control.
The auto industry has become the front line of the bosses’ efforts to make the working class pay for the crisis. If the UAW were to take an independent stand and negotiate independently with the federal government, fighting tooth and nail to defend each and every job, defend every penny for wages and benefits and fight to keep all the plants open, auto workers would readily gain the support of workers in the steel, airline and other industries, who are also under attack.
Nationalization under workers’ control would allow for the creation of thousands of quality new jobs, for the expansion of the country’s public transportation infrastructure and lay the foundations for an economy based on society’s needs, not corporate profits. If the UAW, along with the whole of the labor movement, mobilized the membership to reject cuts, concessions, and to demand for nationalization of the industry under workers’ democratic control, they could mobilize the support of the working class as a whole.
"
That my fellow capitalist is the answer to the problems of the auto makers, a real SOCIALIST solution. Anything else is, like I said, merely the response of two right wings, Republicans and Democrats, of the one party, the Capitalist party. Hava a good day.