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Re:
Thanks for your comment. I should have clarified that it is the speculative bubble that needs to be avoided. Specifically, speculating with other people's money, e.g. through leverage, keeps market discipline from imposing the control necessary to prevent bubbles and their resultant crashes.
Another mechanism that produces speculative bubbles is the refusal of many companies, like Microsoft, to pay dividends at all or anywhere near a reasonable return on the price of their stock. This restricts realizing returns, in whole or in large part, to selling the stock, so that investment in the stock is forced to become speculation. That is, once speculative gains are realized, the investor no longer participates in the stock they have sold. Conversely, the purchasers of the stock are then speculating on further increases in the price of the stock. Since the price of the stock is, in these cases, largely determined by speculative demand and thus expected increases in the price, we have a self-feeding cycle of price increases, i.e. a speculative bubble.
posted by
cpklapper
on January 4, 2009 at 12:03 PM
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Very relevant post. Regulation and speculation are two key issues which are by and large misused. Speculators detest regulation and regulators distrust speculators. However, without speculation markets would be colourless and dull.
posted by
hardilaziz
on January 4, 2009 at 5:24 AM
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Re:
Thanks for your thoughtful reply.
Actually, this was a bit of fine-tuning of Galbraith's economic history of the 1929 crash, with relevance to the 2008 crash he did not live to see. My points, or at least those I managed to set down at around the time of the New Year in New York, were pointing out that:
1. The "cycle of regulation" which Galbraith describes in his book is usually perversely timed. This is for the same reasons he brings forth for his argument about speculative sentiment. Memories of past abuses grow dim and any controls available are not put to use until disaster strikes. Then the barn door closes.
2. The aforementioned "speculative sentiment" is not needed for speculation to occur. Actually, it always exists in that, to paraphrase the views of P. T. Barnum, there are always people looking to make easy money. The point should be to eliminate the avenue to do so through any legally supported contract. This can be done through a Third Bank of the United States, but formed as part of the court system. It would also allow the disbanding of quasi-governmental entities such as Freddie, Fannie and the Fed.
As you pointed out in your note, and I have also elsewhere, the current crash is rife with political corruption. Therein lies the answer to your last question. These are the same folks who bought the Congress and the President-elect, so of course their slaves will put their masters in charge.
posted by
cpklapper
on January 1, 2009 at 10:16 AM
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Thanks for Econom 1--tho I didn't quite follow (but this is a poem...right?). While there should be some interaction between free markets and gov reg (Fed Reserve, Securities Comm) it is gov't, the people in it, that created the prob.
Fanny was a product of the New Deal--and actually worked pretty well to help folks own a home. Under Carter, Freddie was created. Let's understand that these are quasi-gov't oganizations, and don't have to run themseles as a business (oh, the root of the problem?).
As I see it, going back 30 yrs, is wheel in motion, tho one step just led to another: Under Cltinton--Janet Reno pressures banks...hey, no more redlining! Not a bad idea if someone can actually qualify. And then Nutmeg gets involved, and not lending to everyone is racism.
Now here's the turning point of no return: Freddie says it's going to back all these mortgages, so it seems Fed is doing this (but it's a separate corporation). And this is where the gates open.
Other factors contribute, namely spiraling real estate (but is not the spiraling cost directly related to qualifying for a mortgage?). So now we have a bubble, and there are packages of mortages resold. This is where things get a little convoluted. Take the case of AGI.
AGI is an Insurance Co. After frm Gov Spitzler (NY, who resigned for his penchant for prositutes, and then atty general, forced out the CEO, who would not have let pass his desk AGI's fateful decision: Hey, we're in the insurance biz, so let's insure these loans.
More corrupt than this is Freddie, itself. As the corp bought more bad loans (the packages which it now encouraged) the gross went up and those within Freddie made nice commissions. Reigns, the director, 9 million over 6 years. What makes this story even stanger is that it becomes one of the srongest lobbying entity in Wahington.
The fact is that Freddie was using the same accouting practices as Ennron, and though they surfaced at the same time, but who got all the press?
To make my long story short, I think that free markets (if you don't like the return on MS, don't buy it)and Fed regulation is open to discussion.
I'm just wondering why i'd be asking the very people who invented the problem to fix it. I rest my case.
posted by
jfm32
on January 1, 2009 at 9:27 AM
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Happy New Year. That was really great writting, I'll read more.
I' not going to post I am going to read. I like to share Secert Admirer last poem on 4th page.
posted by
Mystereo
on January 1, 2009 at 6:34 AM
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posted by
__Purple_Mermaid11__
on January 1, 2009 at 5:30 AM
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