Why Doesn't the Market Listen?

You've probably seen the Disney film, Fantasia. In the segment called The Sorcerer's Apprentice, Mickey Mouse is the apprentice, and he decides to use some of the sorcerer's magic while the boss is away. The experience is glorious, until he realizes that he can't control it any more and he finds himself drowning in a self-created flood.

Jean-Claude Trichet, the European Central Bank president, must see the market as a kind of sorcerer who is on his way home to save the day. As the Financial Times tells us (here and here), Mr. Trichet has called on financial markets to "help policymakers rebuild the levels of confidence in the banking system required to kick-start economic growth around the world." He "gave a stark warning to financial markets yesterday [Friday] to stop putting pressure on banks to hold more capital."

But the market is not the sorcerer. It is the water--neither good nor bad, just flowing, or flooding, or drying up, doing what water does.

Trichet's jawboning reveals that politicians and their appointees, the quasi-government officials, are not part of the solution; they're part of the problem. They are Mickey.

It should be no surprise, then, that Mickey decided in 1913 to take over the powers of the sorcerer by turning a market-suggested financial-market-system convenience--the Federal Reserve clearing house set-up--into a powerful and politically expedient government-like macromanager of our money supply. Nor should it be a surprise when he ends up destroying our economy in the process. (See my article on the Fed, Page 1, Page 2, and Page 3 for more.) He's got the broom now, and things are getting out of hand. Mickey can call on every power he possesses, the water will never heed him.

We shouldn't be disappointed when ordinary humans fail at sorcery. It's not really their fault. Our government agents are themselves part of a bigger "market," in a sense. When we go to the polls and vote for more government intervention in our life, we are expressing our political "market" preference for government sorcery.

In our current crisis, here's an example that shows the pickle they're in. This article in the FT says:

Amid the recrimination and hand-wringing over the causes and consequences of the financial crisis, bankers and policymakers at the World Economic Forum in Davis have identified a new threat to global prosperity: the rise of financial protectionism. The huge state-backed bank bail-outs in Europe and the US, while necessary to prevent a collapse of confidence in the financial system, have forced banks to withdraw from overseas markets in order to concentrate their limited resources at home. ... The sharp reversal of capital flows appears at least partly due to political pressure on banks, especially those that have received large doses of state support, to sacrifice international operations in favour of maintaining lending to domestic consumers and companies. For governments attempting to explain their decision to commit hundreds of billions of taxpayers' money, this is an understandable response.

Likewise, when our factory workers start to hurt, the government becomes protectionist on that front as well. In 1930, Roosevelt's Congress, in response to public pressure to "do something," forced the market to "buy American" by passing the Smoot-Hawley Tariff Act. This Tariff turned out to be one of the main reasons the country didn't recover from the Great Depression until a decade later.

Here's more evidence of the public's growing protectionist spirit in the form of restrictions on purchases of steel with the stimulus package. (At press time, Obama seems to be rethinking this, but he will have to disappoint his base to do anything about it.)

Another example of forthcoming problems for the Sorcerer's Apprentice: The stimulus package won't work the way it's intended. You can't force banks to lend by throwing money at them, because as one banker put it, paraphrased by the Financial Times, "it is difficult to make loans to companies and individuals as most new lending would be loss-making and end up burdening their balance sheets with further writedowns." (FT Article.)

You can't buck the market. Nor can you force home buyers to buy when they know darn well prices will go down even more. Furthermore, when the government borrows money to spend on its own projects, it takes it away from the very people it is trying to help: capital-starved small businesses.

If we step back for a better perspective, clearly we are confronted with a culturo-political phenomenon: People have turned to government to cure a problem of government's own making. That's like asking Apprentice Mickey to solve the water problem.

There is one natural market phenomenon that will get Mickey back onto dry land in the longer run. It is a return to some form of a gold standard. This standard evolved in the marketplaces of the world over the centuries, and it would exist today if government agents had not decided to force their citizens to abandon it by declaring paper money to be our only legitimate legal tender.

Comments

[Sentinel:]

"When we go to the polls and vote for more government intervention in our life, we are expressing our political "market" preference for government sorcery."

Now that is a wonderful line!

The only problem....that's the natural tendency of the masses once they have been cosmically screwed by rapacious, amoral, capitalist thugs.

Don't get me wrong....I am a free market capitalist through and through. I mourn every day that I have to live in Obamanation.

But human evil is inescapable. Let loose the regulations that kept Wall Street in check...well, relatively speaking anyway....and the logical outcome is the largest financial Ponzi Scheme in human history.

Yet we are now permanently on the road to socialism in this country....no turning back. It started in 1913 with the formation of the Federal Reserve Cabal and the Federal Income Tax along with the I.R.S.

It accelerated with the New Deal.

The infrastructure secured with the Great Society.

And now, Obamanation.

But almost each time, these implementations of "Government Sorcery" came about after years of Republican administrations turning a blind eye to abuses of our capitalist system by the captains of capitalism itself.

And the obvious outcome was the people voting for "Government Sorcery" each and every time.

Happy times ahead for us all in "Magic Land"!

God help us.

Feb 02 08:33 AM

[Marcap:]

"Why Doesn't the Market Listen?"

The answer to that is a very simple one. The "Market" is not a entity with the ability to listen. It is merely a reflection of current activities.

The Market is simply a casino type entity designed to facilitate the buying and selling of various stocks, bonds, commodities, etc. among its players. Players have the ability to bid up, or bid down products based solely on their level of desire to own them or to sell them. When the accumulated desire to buy or sell outweighs the other, the result will be immediately reflected by a move in the markets, either up or down accordingly. The result however is not based on reality, or on values, but rather simply on the beliefs of players, using the information they have at the time of playing, whether accurate or inaccurate. Often, there is no real logic in why players bet on or bet against the stocks they buy or sell, but rather their decisions are based solely on what they think will happen at some time in the future.

What many players lose sight of, is the fact that there is no bank like a regular casino has. When a Market player win or loses, he is NOT winning or losing from the bank, but like in a Poker game, he is either winning from, or losing to other players. In order to win in the Market, other players must lose. One's success is based solely on the tragedy of others. And that is why the entire market system is so severely flawed.

And finally, and perhaps the saddest of all, is the fact that the vast majority of players fail to realize that past performance is no guarantee of future results, yet it is on past performance that most of their decisions are made.

Feb 02 10:01 AM

[Jason Rines...:]

Excellent metaphor and article Ms. Delay.

Feb 02 11:50 AM

[Roland Cycan:]

Gold standard. Good God. There's not enough gold in the world for it to be a reasonable basis for major currencies.

Feb 03 10:06 AM

[danmcl:]

This is, perhaps, the best metaphor for the tinkerers in washington that I have ever heard. They conjure up the flood and are helpless against it with their magical powers. The only problem with it is that it must assume that there is a wizard with the right magic to solve the crisis.

There is no wizard, only tinkerers, trying this and that, all in a vain effort to make central planning work. As has been convincingly proven over and over, it can't work in any society and only hurts the people they purport to help.

Feb 03 02:24 PM

[ngwun:]

Why not? Just a matter of price.


On Feb 03 10:06 AM Roland Cycan wrote:

> Gold standard. Good God. There's not enough gold in the world for
> it to be a reasonable basis for major currencies.

Feb 03 06:06 PM

[speculari:]

Excellent article Katy! Thanks again for another of your refreshing looks at our political "wizards" in action. Mickey is getting to be a very very old mouse... and yet, he still has'nt learned a great deal... has he?!

Feb 03 08:25 PM

[derryl:]

Marcap wrote,
"What many players lose sight of, is the fact that there is no bank like a regular casino has. When a Market player win or loses, he is NOT winning or losing from the bank, but like in a Poker game, he is either winning from, or losing to other players. In order to win in the Market, other players must lose. One's success is based solely on the tragedy of others. And that is why the entire market system is so severely flawed."

This is true re capital gains realized by selling stocks/securities higher than you bought them; or buying stocks from someone for less than he paid then later selling them to someone else for more. Warren Buffett would call this 'speculating', as opposed to 'investing' which involves buying stock to finance a company's capital needs then reaping dividends when that company earns profits. The market is most people's point of access to investing in their economy and earning a share of its profits.

Admittedly, the past decade of 401k mutual fund annual double digit gains has fostered a speculator mentality among market players big and small, but just because a lot of people use the market as a casino doesn't negate its underlying beneficial function as a capital conduit between investors and the companies who need access to capital.

Feb 04 02:56 AM