Stock Market Meltdowns - Why they will happen again and again and again(blogmaverick.com)
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Stock Market Meltdowns - Why they will happen again and again and again
http://www.blogmaverick.com/2008/09/15/stock-market-meltdowns-why-they-will-happen-again-and-again-an/
97 comments
I certainly agree with you about how Washington works, but I'm not sure it means that Mark is naive. Saying "Congress should pass a law that does X" is different from saying "I expect Congress to pass a law that does X". Only the latter is potentially naive.
No, the problem is that Congress does end up intervening, but the intervention is manipulated to favor the perpetrating companies. Read the Kolko book. Or if you want, I could link to a dozen real world examples.
So what's the difference between lobbying and corruption? Are you saying Congress accepts money to keep hush hush?
If you go by the dictionary, there's no difference between lobbying and corruption. Of course, there is also no difference between voting and corruption, which is the inherent problem of electoral democracy. The founders made a huge design flaw by not adopting the Venetian and Athenian system of using lotteries to select office holders. Read Nick Szabo on the subject: http://unenumerated.blogspot.com/2008/03/unpredictable-elect... Also, read the Rauch book I recommended before. Rauch worked for years for the National Journal, which is the magazine that ends up on the desk of every Congressional staffer. His description of how government really works matches my experiences in Washington perfectly.
Lobbying works on two fronts. First, is the appeal to public welfare. In the 1980's the interests in favor of creating Fannie Mae appealed to the dream of home ownership and the idea of making homes more affordable. They convinced Congress that a quasi-public company would make interest rates cheaper and housing more affordable ( in the short run this is true, since with implicit government backing, they could borrow more cheaply). Later in the 1990's Fanne Mae convinced Congress that in the goal of opening up home ownership to more people, they should lower the down payment requirements. Again, there is the appeal to helping the poor achieve the American dream.
Of course, the lobbyists are also looking out for their own self-interest. Lowering the down payment requirements would help them sell more loans and make more money. Perhaps the lobbyists were being cynical about the benefits to the poor. Or perhaps they believed their own marketing and genuinely believed it was win-win. It doesn't matter, the effect is the same.
The second part of lobbying is the campaign contributions and the golf games. This provides the Congressman the personal incentive to support the lobbyists' plan. Most of this happens right out in the open - the days of passing around suit cases full of cash are over (although if you want to read about those times check out Caro's Master of the Senate). The amount of the contributions is not enormous, but in an election every bit helps. It's enough money that the Congressman will try to find away to help the lobbyist if he can.
The end result is disastrous. By having the implicit government backing and by lowering the down payment requirements, Fannie Mae was able to make massive number of irresponsible loans Its managers made tens of millions. Then the whole thing crashed and the taxpayer is now footed with part of the bill. But no Congressman will pay any price for the debacle, so they never learn the lesson. Most voters won't even know who is responsible. And the general voting public has no ability to vote out the members of the banking committee - voters can only vote out the member of their own district. Of course the voters of that particular district don't want to vote their particular Congressman out. If they did, they would lose the earmarks that come from having a senior Congressman. Thus, there ends up being no accountability. Congress ends up with a 98% reelection rate and a 20% approval rating.
For the Congressmen involved, it is just a case of good intentions gone awry. In fact, I actually think Congressmen genuinely believed they were doing the right thing when they created Fannie Mae. Righteousness has an amazing ability to align itself with self-interest.
I find it amusing when people subscribe to the "throw the bums out" theory of politics. If you've every worked in Washington, you realize that the people running the show are generally no worse than anyone else in the country. Most are pretty decent, a few are rotten. The real problem is the incentive structure of our current political system. The only solution to fixing Washington is major Constitutional reform.
Lobbying works on two fronts. First, is the appeal to public welfare. In the 1980's the interests in favor of creating Fannie Mae appealed to the dream of home ownership and the idea of making homes more affordable. They convinced Congress that a quasi-public company would make interest rates cheaper and housing more affordable ( in the short run this is true, since with implicit government backing, they could borrow more cheaply). Later in the 1990's Fanne Mae convinced Congress that in the goal of opening up home ownership to more people, they should lower the down payment requirements. Again, there is the appeal to helping the poor achieve the American dream.
Of course, the lobbyists are also looking out for their own self-interest. Lowering the down payment requirements would help them sell more loans and make more money. Perhaps the lobbyists were being cynical about the benefits to the poor. Or perhaps they believed their own marketing and genuinely believed it was win-win. It doesn't matter, the effect is the same.
The second part of lobbying is the campaign contributions and the golf games. This provides the Congressman the personal incentive to support the lobbyists' plan. Most of this happens right out in the open - the days of passing around suit cases full of cash are over (although if you want to read about those times check out Caro's Master of the Senate). The amount of the contributions is not enormous, but in an election every bit helps. It's enough money that the Congressman will try to find away to help the lobbyist if he can.
The end result is disastrous. By having the implicit government backing and by lowering the down payment requirements, Fannie Mae was able to make massive number of irresponsible loans Its managers made tens of millions. Then the whole thing crashed and the taxpayer is now footed with part of the bill. But no Congressman will pay any price for the debacle, so they never learn the lesson. Most voters won't even know who is responsible. And the general voting public has no ability to vote out the members of the banking committee - voters can only vote out the member of their own district. Of course the voters of that particular district don't want to vote their particular Congressman out. If they did, they would lose the earmarks that come from having a senior Congressman. Thus, there ends up being no accountability. Congress ends up with a 98% reelection rate and a 20% approval rating.
For the Congressmen involved, it is just a case of good intentions gone awry. In fact, I actually think Congressmen genuinely believed they were doing the right thing when they created Fannie Mae. Righteousness has an amazing ability to align itself with self-interest.
I find it amusing when people subscribe to the "throw the bums out" theory of politics. If you've every worked in Washington, you realize that the people running the show are generally no worse than anyone else in the country. Most are pretty decent, a few are rotten. The real problem is the incentive structure of our current political system. The only solution to fixing Washington is major Constitutional reform.
Righteousness has an amazing ability to align itself with self-interest.
Priceless.
Priceless.
The Venetian and Athenian systems were good, but today's modern Swiss style direct democracy is something to think about as well.
Also, great info thanks for the posts.
Also, great info thanks for the posts.
Personally I have a different theory. The supply/demand curve for investments is shifting as the baby boomers retire - instead of investing money they're drawing down their investments. And that means 20 years of boom for Wall St, largely driven by a huge demand for investment products, is turning into 20 years of bust as that demand turns into essentially, negative demand, because behind the comparatively wealthy cohort of baby boomers, comes a smaller, and poorer cohort (Gen-X). Yet there's still pressure to produce reasonable returns for those same baby boomers and the people following behind them. This results in increasingly risky investments being sold to people nearing retirement who are depending on the kinds of returns their parents saw.
I like your theory, but I'm not sure it'll stand up to (future) history. Baby boomers aren't retiring - instead, many plan to work until they drop dead, either because they have no retirement savings (and hence can't withdraw them) or because they have jobs that they enjoy and can remain effective in even until old age. The latter group of people are most likely to have significant retirement savings, so they may just end up passing their assets to their kids.
A lot of predicted demographic time-bombs may not materialize because of this. The social security crisis may be a nonissue - if every retiree worked just 2-3 years more, social security remains solvent for the forseeable future, and many retirees plan to work more than 2-3 years into retirement age.
A lot of predicted demographic time-bombs may not materialize because of this. The social security crisis may be a nonissue - if every retiree worked just 2-3 years more, social security remains solvent for the forseeable future, and many retirees plan to work more than 2-3 years into retirement age.
I like your theory too, though I fear it may be wishful thinking. Those that do continue working are working at lower-paying jobs, and continue drawing down their savings. And if the jobs aren't that much lower status (i.e. McJobs) then they just put more pressure on the income of the generation behind them.
But certainly demographics have failed to predict the future in the past, and personally, I'm amazed at what's happened to my income in the past 5 years or so (I'm in my 40s and saving like mad - though all in cash right now).
But certainly demographics have failed to predict the future in the past, and personally, I'm amazed at what's happened to my income in the past 5 years or so (I'm in my 40s and saving like mad - though all in cash right now).
I'm thinking of my mom, who retired as a teacher and then took another job as a consultant training teachers. Many of her friends and former coworkers have done the same thing. If they were a lawyer, they retired and took a job in a different field of law. If they were a principal, they started a new school. If they were a doctor - well, they're still working. These aren't lower income people - their incomes are often well into 6-figures.
The more interesting trend, as you mention, is what this is doing to the career opportunities of the next generation. Since boomers aren't retiring, the top jobs in many organizations aren't opening up. And so many people my age and slightly older (I'm a very early Millenial) believe there's no possibility for advancement on the corporate ladder. Hence the recent trend towards entrepreneurship among young Gen-Xers and Millenials.
Whether this results in a net inflow or outflow in the capital markets depends on the real economic growth of all these startups. If they really do open new markets, then the economy expands, more money flows into savings, and the stock market keeps going up. If they don't, then the non-retirement of boomers just means a transfer of savings rates from the young to the old. Boomers won't have trouble supporting themselves in old age, but they'll have to support their kids.
The more interesting trend, as you mention, is what this is doing to the career opportunities of the next generation. Since boomers aren't retiring, the top jobs in many organizations aren't opening up. And so many people my age and slightly older (I'm a very early Millenial) believe there's no possibility for advancement on the corporate ladder. Hence the recent trend towards entrepreneurship among young Gen-Xers and Millenials.
Whether this results in a net inflow or outflow in the capital markets depends on the real economic growth of all these startups. If they really do open new markets, then the economy expands, more money flows into savings, and the stock market keeps going up. If they don't, then the non-retirement of boomers just means a transfer of savings rates from the young to the old. Boomers won't have trouble supporting themselves in old age, but they'll have to support their kids.
Personal experiences probably determine our view of things. I think this because my parents are a single-income family. My dad rose to president of his company, which suddenly went bankrupt, and he ended up (in his early sixties) starting his own company to take over the government contracts that the previous company depended on (I helped write the business plan for that company). Most of his retirement fund came from the last few years (president + own company). Now he's moved onto a second career - namely harvesting the discretionary income of the other golfers at his club (some of them 20 years younger). ;-)
He did teach me that entrepreneurship is a lifelong pursuit.
He did teach me that entrepreneurship is a lifelong pursuit.
BTW, it's curious that you're all in cash right now. I am too, as is my sister, as are most of my highly-paid college friends, as were a bunch of former coworkers (one quite wealthy - 3 successful startups) I talked to in late 2007 just as this broke. I think mattmaroon posted here once that he was all in cash, as have a few other folks, as have lots of people on Reddit.
I'm thinking there's actually a large pool of cash sitting on the sidelines, from people that didn't drink the Kool-Aid during the 04-07 boomlet. And once there's a signal that this has bottomed out - maybe it'll be Dow 10K, or S&P 1K, or the bankruptcy of the last of the big-5 investment banks - all that cash is going to come flooding back into the market, and they'll be a big pop in stock prices. I'm waiting a bit - I think there's still more bad news that hasn't been factored into the market. But it may be time to start buying soon.
I'm thinking there's actually a large pool of cash sitting on the sidelines, from people that didn't drink the Kool-Aid during the 04-07 boomlet. And once there's a signal that this has bottomed out - maybe it'll be Dow 10K, or S&P 1K, or the bankruptcy of the last of the big-5 investment banks - all that cash is going to come flooding back into the market, and they'll be a big pop in stock prices. I'm waiting a bit - I think there's still more bad news that hasn't been factored into the market. But it may be time to start buying soon.
It seems to me that for the past six months or so we've been in a period of monetary deflation. As long as that continues, stocks will decline. Since in our system, money is created via credit creation, it seems the thing to watch for is when big banks start to lever up again. It might be a while.
If you believe you can time the market then you might as well go all the way there and start speculating in options.
If you do not believe you can time the market though, then being 100% cash is as bad strategy now as at any other time.
If you do not believe you can time the market though, then being 100% cash is as bad strategy now as at any other time.
Not necessarily. You can't time the bottom. You can sure as hell tell overvalued from undervalued though.
You just piped up as a potential buyer. Which means we haven't hit bottom yet. I'll wait another 6 months, thanks ;-)
I think there is a lot of truth to this. From the early 80's to the present, individuals, pension funds, and endowments moved savings from bonds and savings accounts into the stock market. I believe this reallocation caused a one time run up in stock prices. In the process, people grew so used to price appreciation that dividends disappeared. Since, traditionally most of the value of owning stock comes from dividends, I expect stocks to under perform until dividends return.
Agreed. After a number of thought experiments involving dragons that hoard gold, defunct Buddhist temple construction companies, and irrational exhuberance, I came to the conclusion that owning stock makes no sense if there are no dividends.
I don't understand how the stock market doesn't collapse completely. But, it seems to me that if owning stock makes no sense if there are no dividends Then owning stock makes no sense anyway.
Top technology stocks that pay (eg IBM,MSFT) usually pay <1.5%. Even currently cashed up oil stocks tend to stay under 2%. So either way it seems to me if you were buying to own (isn't that theoretically what you're doing), you'd need to be expecting to earn the majority of your marbles on growth.
I freely admit, I don't understand financial markets. But it always seems like the emperor has no clothes.
Theoretically all those guys holding MSFT should not be willing to pay more then about $9 per share (price is about $25) unless they expect growth & no risk.
Top technology stocks that pay (eg IBM,MSFT) usually pay <1.5%. Even currently cashed up oil stocks tend to stay under 2%. So either way it seems to me if you were buying to own (isn't that theoretically what you're doing), you'd need to be expecting to earn the majority of your marbles on growth.
I freely admit, I don't understand financial markets. But it always seems like the emperor has no clothes.
Theoretically all those guys holding MSFT should not be willing to pay more then about $9 per share (price is about $25) unless they expect growth & no risk.
Its all about growth. Dividend at best helps offset some costs, for sure, but really, its betting on growth, or at least it has been for a long time.
Well then there's the strange thing.
As you say, almost no company is issuing dividends that in themselves justify share prices so it's all just betting on growth. Does that mean that rational people are betting on the growth of virtually all (existing) companies?
As you say, almost no company is issuing dividends that in themselves justify share prices so it's all just betting on growth. Does that mean that rational people are betting on the growth of virtually all (existing) companies?
Some presumably rational people are betting on the growth of any particular company. Most rational investors go with mutual or index funds, which bet on the growth of the majority of a certain list of companies, or type of company. In the history of the stock market, this bet has never failed over any given 20-year period, even the one starting in 1928.
Of course, the stock market's never before been faced with such a huge influx of stock-owning retirees, or plausible peaks in energy and some metals--without which growth as we know it can't exist--so you pay your money and you take your chances.
Of course, the stock market's never before been faced with such a huge influx of stock-owning retirees, or plausible peaks in energy and some metals--without which growth as we know it can't exist--so you pay your money and you take your chances.
yes it is a strange thing. I guess there just has to be One More Sucker to liquidate your stock too...
having said that, a lot of old school companies (at least here) pay good dividends still - so there is a class of "dividend" stock versus growth stock - although some growth is still expected.
having said that, a lot of old school companies (at least here) pay good dividends still - so there is a class of "dividend" stock versus growth stock - although some growth is still expected.
But, it seems to me that if owning stock makes no sense if there are no dividends Then owning stock makes no sense anyway.
you can say the same for dollar bills. what is a dollar's INTRINSIC value? zero. its just a piece of paper
you can say the same for dollar bills. what is a dollar's INTRINSIC value? zero. its just a piece of paper
A share in a gold-hoarding dragon is worthless if the dragon is in control and never intends to pay dividends.
But if the dragon's actions are controlled by a board and the board is elected by the shareholders, then the share is suddenly worth a lot more. Now it's theoretically possible for the shareholders, acting en masse, to redistribute the gold to themselves at some point in the future, and so the share combined with the voting right is worth real money, even if the distribution never happens.
PS. Apologies if I'm missing a reference to something with the gold-hoarding dragon and the defunct Buddhist temple construction company.
But if the dragon's actions are controlled by a board and the board is elected by the shareholders, then the share is suddenly worth a lot more. Now it's theoretically possible for the shareholders, acting en masse, to redistribute the gold to themselves at some point in the future, and so the share combined with the voting right is worth real money, even if the distribution never happens.
PS. Apologies if I'm missing a reference to something with the gold-hoarding dragon and the defunct Buddhist temple construction company.
i am probably more bearish than anyone here, but there is no evidence that dividend-bearing stocks do better over any meaningful timeframe
The question is not one of doing better, but of inevitability; for a company's stock to be worth anything, it has to pay profits out to the stockholder. This can mean dividends or an eventual lump sum when the company winds down. The problem is the latter never happens because companies never want to admit they are dying. On top of that, every company dies; just in 2006 the oldest company in the world, Kongo Gumi, went under after operating continuously since 578. The stock price is, in theory, the net present value of the stream of earnings its bearer will receive. So if no company will ever pay significant monies when it winds down, that leaves dividends (edit: now that I think about it, getting acquired counts too).
I have no evidence to show dividend-bearing stocks outperform their counterparts, but my point is that those counterparts are overvalued. If a company will never be bought, will never pay dividends, and will never wind down operations rather than face bankruptcy, the net present value of its stock is therefore 0.
*http://en.wikipedia.org/wiki/Kong%C5%8D_Gumi
I have no evidence to show dividend-bearing stocks outperform their counterparts, but my point is that those counterparts are overvalued. If a company will never be bought, will never pay dividends, and will never wind down operations rather than face bankruptcy, the net present value of its stock is therefore 0.
*http://en.wikipedia.org/wiki/Kong%C5%8D_Gumi
The question is not one of doing better, but of inevitability; for a company's stock to be worth anything, it has to pay profits out to the stockholder
so google is worthless? the point of owning a share is to make money from your ownership. if that comes through dividends or through sale value, who cares?
I have no evidence to show dividend-bearing stocks outperform their counterparts, but my point is that those counterparts are overvalued
do you know what fair value is? the price the equity is currently trading at. look at MSFT. a total dog but wheee...look, they cut me a check a few times a year and i take the wife to a movie. and why do dividends imply value? maybe microsoft could have taken the dividend cash and used it to buy out google. excess cash is often seen as a LIABILITY, as it shows the firm cannot use the money to effectively grow. MSFT is a classic example...losing market share even though they have a mountain of cash.
The stock price is, in theory, the net present value of the stream of earnings its bearer will receive. So if no company will ever pay significant monies when it winds down, that leaves dividends
no, stocks get delisted before they go under, and you get bupkus. how are your LEH dividends doing?
so google is worthless? the point of owning a share is to make money from your ownership. if that comes through dividends or through sale value, who cares?
I have no evidence to show dividend-bearing stocks outperform their counterparts, but my point is that those counterparts are overvalued
do you know what fair value is? the price the equity is currently trading at. look at MSFT. a total dog but wheee...look, they cut me a check a few times a year and i take the wife to a movie. and why do dividends imply value? maybe microsoft could have taken the dividend cash and used it to buy out google. excess cash is often seen as a LIABILITY, as it shows the firm cannot use the money to effectively grow. MSFT is a classic example...losing market share even though they have a mountain of cash.
The stock price is, in theory, the net present value of the stream of earnings its bearer will receive. So if no company will ever pay significant monies when it winds down, that leaves dividends
no, stocks get delisted before they go under, and you get bupkus. how are your LEH dividends doing?
Can you tell me the difference between owning a share of Google and owning a baseball card? A share in Google currently gives you no claim to Google's profits. Nor does it give you any voting rights or control over management. So then what the heck is it good for?
Now, baseball cards can be quite valuable. The price can fluctuate enormously, You can make money from investing in them. The price correlates with real world events such as batting average. But fundamentally, the value is based purely on fads, perception, herd behavior, and marketing. At any time, the floor can drop out. The price can plummet and never recover ( baseball cards were my first investing experience and I'm still scarred :-) )
A dividend paying stock has fundamental value. As long as the company's business remains strong, you will earn money from owning the stock, even if everybody else in the world believes it is worthless.
Now, baseball cards can be quite valuable. The price can fluctuate enormously, You can make money from investing in them. The price correlates with real world events such as batting average. But fundamentally, the value is based purely on fads, perception, herd behavior, and marketing. At any time, the floor can drop out. The price can plummet and never recover ( baseball cards were my first investing experience and I'm still scarred :-) )
A dividend paying stock has fundamental value. As long as the company's business remains strong, you will earn money from owning the stock, even if everybody else in the world believes it is worthless.
What makes Google stock valuable is the prospect of future dividends. And these are not merely theoretical: once a company's growth slows, they have to start paying dividends, or the market will punish their stock price.
You would think this would be the case. The trouble is, many tech companies have entered their decline phase, don't pay dividends, and still have relatively high P/E ratios (Yahoo, Dell, Sun, Palm, Alcatel, etc.). That doesn't seem right at all.
The ones that die before paying dividends are the bad bets.
What wouldn't seem right would be if there were no bad bets. In something as risky as tech startups, most bets should be bad.
What wouldn't seem right would be if there were no bad bets. In something as risky as tech startups, most bets should be bad.
The companies I mentioned are not startups, nor are they dead. They were among the tiny percentage of startups that were wildly successful. Now they are mature, public companies that have either plateaued or started to slowly decline. But they will still be profitable for many years, and they should return those profits to the shareholders. That they are are not doing so is historically unprecedented.
Other mature tech companies not paying dividends include Adobe, Autodesk, Apple, Cisco, EA, Activision, Intuit, Oracle, Symantec, Amazon, and Ebay. And the few that do pay dividends (IBM, HP, and Microsoft for instance) have a very low dividend yields. It seems to me that there has been a breakdown of corporate governance.
Other mature tech companies not paying dividends include Adobe, Autodesk, Apple, Cisco, EA, Activision, Intuit, Oracle, Symantec, Amazon, and Ebay. And the few that do pay dividends (IBM, HP, and Microsoft for instance) have a very low dividend yields. It seems to me that there has been a breakdown of corporate governance.
I can't find examples of companies going through voluntary liquidation (what Michael Dell recommended Apple do in 1997). It's hard to find tech companies that pay dividends.
Adobe, for instance, is in the perfect position to pay dividends. It is a group of cash cows that might suddenly get destroyed by new market entrants. They're putting the money in a vault [1], but they're not paying dividends [2].
The problem, as I see it, is that companies refuse to admit they're dying. It's the weirdest thing.
[1] http://finance.google.com/finance?q=adbe [2] http://sec.edgar-online.com/2008/04/04/0001047469-08-004108/...
Adobe, for instance, is in the perfect position to pay dividends. It is a group of cash cows that might suddenly get destroyed by new market entrants. They're putting the money in a vault [1], but they're not paying dividends [2].
The problem, as I see it, is that companies refuse to admit they're dying. It's the weirdest thing.
[1] http://finance.google.com/finance?q=adbe [2] http://sec.edgar-online.com/2008/04/04/0001047469-08-004108/...
you are just moving the argument. are the dollars you get paid in dividends intrinsically valuable? no. people could value dollars to zero at any time. you are just replacing one piece of paper with another.
So is google worthless?
Let's see here. Google pays no dividends, is probably to large to be bought, won't be allowed to merge for antitrust reasons, and if it behaves like other Silicon Valley companies that came and went, will spend every last penny before acknowledging defeat (which granted, is a long way off).
Unless Google pays dividends at some point (which Silicon Valley companies usually do not do), then yes, it's stock is worthless. That's exactly what I'm saying. Its stock buys and sells at $441.41 as of my writing this, but is intrinsically worthless.
Let's see here. Google pays no dividends, is probably to large to be bought, won't be allowed to merge for antitrust reasons, and if it behaves like other Silicon Valley companies that came and went, will spend every last penny before acknowledging defeat (which granted, is a long way off).
Unless Google pays dividends at some point (which Silicon Valley companies usually do not do), then yes, it's stock is worthless. That's exactly what I'm saying. Its stock buys and sells at $441.41 as of my writing this, but is intrinsically worthless.
Unless you can find another sucker. By your argument (which I find quite compelling), the only thing that makes stocks valuable is that there is a large market of people willing to buy that stock from you. The stock itself does nothing for you. Thanks for the insight!
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Unless Google pays dividends at some point (which Silicon Valley companies usually do not do), then yes, it's stock is worthless.
as worthless as any other paper currency. indeed google stock has performed well against the US dollar (you could redeem your GOOG into euros).
no fiat currency has intrinsic value. come to grips with this. paper currencies have come and gone, stocks are no different than dollars or euros...its just a piece of paper that people will either value high, low, or not at all
as worthless as any other paper currency. indeed google stock has performed well against the US dollar (you could redeem your GOOG into euros).
no fiat currency has intrinsic value. come to grips with this. paper currencies have come and gone, stocks are no different than dollars or euros...its just a piece of paper that people will either value high, low, or not at all
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Paper currencies are backed by legal tender laws, so the source of their value is apparent. Stocks, not so much.
the point of owning a share is to make money from your ownership.
You need to look at this from a 'whole' perspective. You can make money from buying high selling low, but the market cannot.
You need to look at this from a 'whole' perspective. You can make money from buying high selling low, but the market cannot.
In previous eras, mature companies paid dividends and growth stocks made up for their lack of dividends with growth. When a growth company matured it would start paying dividends. Thus the ROI on investing in mature companies versus growth companies was about equal.
The recent trend is that mature companies are not paying dividends. This trend is new enough that it probably hasn't shown up in performance statistics. But it is very worrisome on a fundamental level. A stock like Yahoo! or Alcatel has little room for its price to grow, thus you can only make a return via dividends. Without dividends, owning it is almost certain to be a losing proposition.
The recent trend is that mature companies are not paying dividends. This trend is new enough that it probably hasn't shown up in performance statistics. But it is very worrisome on a fundamental level. A stock like Yahoo! or Alcatel has little room for its price to grow, thus you can only make a return via dividends. Without dividends, owning it is almost certain to be a losing proposition.
I suspect that if these companies did declare dividends, they would be effectively announcing to the market that they didn't expect to be growing very much. And then investors would dump the stocks, because the high P/E ratios can only be justified by an expectation of future growth.
Without dividends, owning it is almost certain to be a losing proposition.
look up short selling, options. if a stock price is MOVING, you can profit
dividends are the only way to make money if the share price is static
look up short selling, options. if a stock price is MOVING, you can profit
dividends are the only way to make money if the share price is static
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It also depends on how the company reinvests the profits that could be distributed to shareholders. Quality R&D for future growth or frivolous buyouts and expenditures that serve to prolong a company when its core business is no longer growing.
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> The supply/demand curve for investments is shifting as the baby boomers retire
It's well researched that the number of 45 year olds is a major important economic variable. They're at their peak earning, investing, and consuming stage.
Japan's baby boomer 45 year old peak came a bit over ten years before ours, which is passing now. Not a good sign considering what has happened in Japan.
It's well researched that the number of 45 year olds is a major important economic variable. They're at their peak earning, investing, and consuming stage.
Japan's baby boomer 45 year old peak came a bit over ten years before ours, which is passing now. Not a good sign considering what has happened in Japan.
wrong. most boomers are still in fixed retirements. some of those pension fund managers got suckered into subprime, but not many
Over-simplified. There will be bubbles and meltdowns as far as the eye can see, simply because the boom-bust cycle is built into the capitalist model.
And it's fine that way. Far better than the dull, grey unproductivity of all other known alternatives.
That said, I agree with his point, to an extent. One of the things that keep people from declaring bankruptcy is that it would have severe, lasting consequences - destroying their credit record, and preventing them from being a director of a business for quite some time. Some similar system should exist for any corporate leaders. You don't want to go too far in that direction either, though - otherwise, you might stifle the risk-taking that does get us to interesting new places.
And it's fine that way. Far better than the dull, grey unproductivity of all other known alternatives.
That said, I agree with his point, to an extent. One of the things that keep people from declaring bankruptcy is that it would have severe, lasting consequences - destroying their credit record, and preventing them from being a director of a business for quite some time. Some similar system should exist for any corporate leaders. You don't want to go too far in that direction either, though - otherwise, you might stifle the risk-taking that does get us to interesting new places.
the booms and busts have been continually made worse by government intervention. governments try to alleviate the effects of the bust and in the process make it worse.
Actually, since the depression one could argue that they've may each bust since infinitely more bearable for a whole host of people.
Sure, but my point is, they're inevitable.
Don't conflate the business cycle with boom-bust. Business cycle downturns are inevitable, as misallocated resources are redirected. Big busts require government. There really aren't any examples of major boom-busts happening without the hand of government.
Warren Buffett says this far better in his 2005 letter to Berkshire shareholders.
Relevant excerpt from CNN: http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fort...
Original source: http://www.berkshirehathaway.com/letters/2005ltr.pdf (you'll have to wade through to page 17)
Relevant excerpt from CNN: http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fort...
Original source: http://www.berkshirehathaway.com/letters/2005ltr.pdf (you'll have to wade through to page 17)
I see one flaw here: having people pick the best stocks can increase wealth by allocating money to where it is most efficient. For instance, going back in time to 1965 and investing in Toyota instead of GM would not only have been a very lucrative move, but increased Toyota's ability to create wealth by increasing its access to capital.
I'd like to put this in a slightly broader context. Meltdowns such as the credit crunch and the housing crisis are often used by self-styled 'progressives' to attack capitalism itself. But implicit in Mark's argument is the refutation of this accusation: such meltdowns are only possible because of the moral hazard induced by de facto government (i.e., forced taxpayer) bailouts of the guilty parties. In other words, it's precisely the lack of proper capitalist institutions that enables crises of this type.
History doesn't really bear out the "meltdowns are caused by moral hazard" theory, though. They happened like clockwork, every 20 years, during 19th century America, a period where there was no safety net and no significant government intervention in the economy.
I'd attribute bubbles and meltdowns to flaws in humanity itself. They happen because people have to make investment decisions in the absence of perfect information, using thought processes that have evolved to take into account peers' opinions as much as hard factual data. Inevitably, some of those decisions will be wrong, and that wrongness appears as a large number of firms going bust at once.
The way to avoid financial meltdowns is to make every human a God. However, if we did that, they could just snap their fingers and get what they want, so their wouldn't be much need for an economy at all.
I'd attribute bubbles and meltdowns to flaws in humanity itself. They happen because people have to make investment decisions in the absence of perfect information, using thought processes that have evolved to take into account peers' opinions as much as hard factual data. Inevitably, some of those decisions will be wrong, and that wrongness appears as a large number of firms going bust at once.
The way to avoid financial meltdowns is to make every human a God. However, if we did that, they could just snap their fingers and get what they want, so their wouldn't be much need for an economy at all.
Read some DeSoto and Rothbard ( Money, Credit and Economy - http://mises.org/resources/2745, America's Great Depression http://mises.org/rothbard/agd.pdf and History of Money and Banking -http://mises.org/books/historyofmoney.pdf ). They both make a pretty compelling case that government played a major role in the 19th century busts.
Pretty much every single bust since 1870 has been the explosion of a credit bubble. Cheap credit is the heroin of democracies. In the short term, it's like free money. It's cheaper to buy stuff, and it doesn't result in higher taxes. Politicians are always for it. The cheap money will endear them with the population in the next election, and they won't be around for the bust ( or no one will remember who's at fault). In the long run, cheap credit leads to too much debt and people can borrow no more. This leads to two choices. Choice one, the borrowing must stop, and with it consumption. This sends the economy into recession or depression ( this is heroin withdrawal, the Volcker strategy in the 1980's). Or two, the government must make credit even cheaper ( higher doses of heroin - the Alan Greenspan strategy in 2001).
Pretty much every single bust since 1870 has been the explosion of a credit bubble. Cheap credit is the heroin of democracies. In the short term, it's like free money. It's cheaper to buy stuff, and it doesn't result in higher taxes. Politicians are always for it. The cheap money will endear them with the population in the next election, and they won't be around for the bust ( or no one will remember who's at fault). In the long run, cheap credit leads to too much debt and people can borrow no more. This leads to two choices. Choice one, the borrowing must stop, and with it consumption. This sends the economy into recession or depression ( this is heroin withdrawal, the Volcker strategy in the 1980's). Or two, the government must make credit even cheaper ( higher doses of heroin - the Alan Greenspan strategy in 2001).
I agree, and I should have mentioned that easy credit is an even bigger problem than government bailouts.
Cheap credit is the heroin of democracies
amen, it will be only too late that people realize that those who print the currency run the show, and thats the Fed...who by the way are not accountable to voters in any meaningful way
amen, it will be only too late that people realize that those who print the currency run the show, and thats the Fed...who by the way are not accountable to voters in any meaningful way
Actually the problem might be that the Fed is too accountable to the voters. Remember, Volcker was fired by Reagan. And Greenspan is a goldbug at heart who had a lot of political pressure to keep the heroin flowing. Voters do not understand economics, but they do like cheap credit. Democracy breeds short term thinking. Read some Herman Hoppe - http://www.lewrockwell.com/hoppe/hoppe4.html
>The way to avoid financial meltdowns is to make every human a God.
I am a fan of Iain M Banks - in his "Culture" series novels, thats pretty much what happens to the dominant "Culture" - people can get whatever they want when they want, so they turn to art and fashion and fads to occupy themselves (one such one was voluntarily catching cold/flu just to feel what it is like to get better).
I am a fan of Iain M Banks - in his "Culture" series novels, thats pretty much what happens to the dominant "Culture" - people can get whatever they want when they want, so they turn to art and fashion and fads to occupy themselves (one such one was voluntarily catching cold/flu just to feel what it is like to get better).
I think I can agree that CEOs will always take the highest-risk/highest-reward these days because the government continually bails-out this kind of bad behavior. However, I think it is the government itself which is the root cause of all these failures. We have a fractional-reserve banking system propped up by a fiat currency. This means credit is easily created and when the government decides that everyone should own a home (Fannie and Freddie) then we use our fractional-reserve system to lend money which, frankly, does not exist. This leads to the business cycle of endless booms and busts. I think that rich people will take advantage of this system of easy credit. This is exactly what happens when you subsidize something--you get more of it. In this case we are subsidizing risky financial behavior. If the government did not run the banks in this country then Fannie and Freddie would be forced to default on a majority of their loans and a lot of people would be hurt, but we're essentially just making our children and grandchildren inherit our debt because we believe that home ownership in 2008 is more important than long-term financial stability. We should work to end the monopoly the federal government has on the banking industry so that consumers can demand more fiscally responsible credit managers (or riskier ones if they so choose). Right now we all have to put our faith in a currency backed by winks and nods rather than something with implicit scarcity. And beyond that, we put the printing presses under the control of the government, which has most assuredly wasted more money funding a welfare/warfare state than any bailout would ever amount to.
I think this theory is on track but not complete. It's correct that the risk and rewards for CEO are decoupled. However, the people who continue to hire and pay ridiculous amount to these CEOs are no other than the investors and consumers. Yes, that's us. As investors, we irrationally pump money into growth sectors during the boom, into companies that can outperform expectation and increase profit margins, directly voting for 'talented' CEOs who can cut cost and increase revenue by all means. As consumers, we chase the best deals. Would you go with banks who only let you borrow a tiny amount in line with your credits on strict terms? Of course not, not when you can flip for a quick 100% gain within the next 6 months. We go with the most outrageous deal and lenders in turns have to create more outrageous deals to compete. Market behavior reflects the behaviors of its participant (duh). As long as investors and consumers indulge in irrational exuberance like there's no tomorrow CEO will continue to be overpaid and bubble will burst. Robert Reich says it best in his book Supercapitalism.
I agree that personal incentives are part of the problem. I’d also suggest that going public is another significant part of the problem. The public company becomes beholden to its shareholders and is pressured/incentivised to continually deliver growth in the value of the company or dividends, often in mature markets, which in turn can lead to the implementation of riskier strategies for delivering growth.
okay explain to me how a company like google could have been privately funded to its current level. you think a bank is going to write a check for $800 million to buy servers? go ask a C-level exec at wells fargo
It probably couldn't have grown as fast as it did, but it certainly could get to it's current size. Many of the largest companies of the industrial revolution used mostly retained earnings, sometimes supplemented by small bank loans or equity investments from private individuals. American Tobacco, which captured 90% of the tobacco market before being broken up into R.J. Reynolds, Liggett, and others. Almost the entire meatpacking industry. The Mars candybar company, which is still privately owned. Ford Motor Company, still controlled by the original founding family.
It probably couldn't have grown as fast as it did, but it certainly could get to it's current size.
no, because banks don't even do this kind of lending anymore. to grow google organically would have taken decades. in that time they would have been crushed by competitors with access to public funds
American Tobacco
are you aware that american tobacco was one of the first stocks listed on the dow? sorry to blow your theory, and to boot the formation of the company was based on monopoly economics
Ford Motor Company, still controlled by the original founding family.
and larry and sergey own a lot of google. and jerry and david own a lot of yahoo. founders keep lots of stock, this has nothing to do with public/private ownership. the ford family extracts wealth from ford, they do not contribute to it or bankroll it
no, because banks don't even do this kind of lending anymore. to grow google organically would have taken decades. in that time they would have been crushed by competitors with access to public funds
American Tobacco
are you aware that american tobacco was one of the first stocks listed on the dow? sorry to blow your theory, and to boot the formation of the company was based on monopoly economics
Ford Motor Company, still controlled by the original founding family.
and larry and sergey own a lot of google. and jerry and david own a lot of yahoo. founders keep lots of stock, this has nothing to do with public/private ownership. the ford family extracts wealth from ford, they do not contribute to it or bankroll it
Great post - and I would find him to be on the mark here.
Interestingly enough, Cramer (who is not really well liked in this community) was trying to be a whistleblower a year ago on this very issue.
http://www.youtube.com/watch?v=I1eSlYtXiro
I liked the 'I wish I could go tell people to buy Wa-mu' part...check out the one year on that.
http://finance.google.com/finance?chdnp=1&chdd=1&chd...
Interestingly enough, Cramer (who is not really well liked in this community) was trying to be a whistleblower a year ago on this very issue.
http://www.youtube.com/watch?v=I1eSlYtXiro
I liked the 'I wish I could go tell people to buy Wa-mu' part...check out the one year on that.
http://finance.google.com/finance?chdnp=1&chdd=1&chd...
Cramer was saying to cut rates. That would have delayed the problem in exchange for exacerbating it. Lehman would not have been leveraged 30 to 1 if they didn't think the Fed would cut rates in the event of a downturn.
cramer was right that an emergency rate cut was needed, and i say this as someone who thinks low rates created this entire mess. at the time he has his tantrum, the market needed a massive cushion regardless of the consequences. the problem is, the Fed is finding it hard pressed to take away the stimulus. with commodity prices getting killed, the pressure is off for now
what does it all mean? DEFLATION IS HERE. even near-zero real rates can't elevate prices. deflation is here, depression2 cannot be avoided
what does it all mean? DEFLATION IS HERE. even near-zero real rates can't elevate prices. deflation is here, depression2 cannot be avoided
I agree: "The Greater Depression" is coming almost exactly 80 years after the last one.
I think Mark is right that this will happen again and again, but not because we don't have enough legal structures in place. Although that would help for a while, it would soon be undermined. Capital markets are a prisoner's dilemma. If everyone behaves, everyone wins, but there's just too much incentive to misbehave and win spectacularly at the expense of others. With so many people playing, it seems impossible to avoid.
Unfortunately, 80 years, four generations, is just long enough to forget the lessons from last time.
I think Mark is right that this will happen again and again, but not because we don't have enough legal structures in place. Although that would help for a while, it would soon be undermined. Capital markets are a prisoner's dilemma. If everyone behaves, everyone wins, but there's just too much incentive to misbehave and win spectacularly at the expense of others. With so many people playing, it seems impossible to avoid.
Unfortunately, 80 years, four generations, is just long enough to forget the lessons from last time.
There is even a simpler explanation:
'Fear is temporary, greed is permanent'
The 2nd option would be to prevent certain types of companies from being or going public. Law Firms can;t go public. Investment firms like Goldman Sachs used to not be able to go public. They were partnerships. Partners were paid for the most part in cash. If the partnership had money to pay, it got paid. If not, not. I promise you, their tolerance for risk was far lower than it is today for Goldman because there was a direct link between the risk and reward for partners.
we need a rollback to direct incentives.
we need a rollback to direct incentives.
Only a little related, but everyone needs to remember good ol' Mr. Market.
http://www.sandmansplace.com/Mr_Market.html
http://www.sandmansplace.com/Mr_Market.html
Interesting, but only part of the problem. Regulators need to actually do their jobs and enforce transparency of Wall St. balance sheets. Oh, and Congress? No more campaign contributions from corporations. You work for the voters, and if enough of them want you to prop up some company or repeal banking regulations, they'll tell you.
Corporations actually can't give all that much money, something like $3k/candidate/election. However, their people can, which is what you see when you see "Enron contributed $2m to senate Dems". (PACs don't change this - they just bundle.)
There may be special rules for giving to parties, to "got into office" parties, and for Fannie Mae and Freddie Mac.
There may be special rules for giving to parties, to "got into office" parties, and for Fannie Mae and Freddie Mac.
Right. The Seattle Times had an article a while back (http://community.seattletimes.nwsource.com/favorfactory/), which has a database of earmarks and contributions from companies and executives/owners/etc. of companies. Often you will see contributions from high-level company officers. The data isn't good enough to show causality, but some correlation.
Anyway...interesting stuff.
Anyway...interesting stuff.
It's true that there are inevitable conflicts of interest regarding risk tolerance. This is especially true, for example, in hedge funds: the manager takes a 20% cut of the upside, but has no downside. Hence, there's an incentive for hedge funds to be risky. (Excluding a few top performers, hedge funds are not great investments.)
However, I strongly disagree with this article. First of all, bubbles and crashes seem to be an inherent property of market economies. They've existed for at least four centuries (tulip bulb, anyone?) and possibly longer. Overreaching optimism seems to be an inherent human trait. Overpaid CEOs are a relatively new (few decades) phenomenon.
The OP asks: Would you let someone fire and embarass you for a check for $20mm dollars ? So would CEOs.
I'm not sure this is true. The CEO is going to be out of work for a few years, and possibly be unemployable at his current level in the future. Given that he already makes $10 million, a potential five-year setback is not worth that amount of severance.
I agree that large company CEOs are overrated and overpaid, but I can't assign them all the blame for current economic problems, the sources of which are a lot more complex than the OP seems to think.
However, I strongly disagree with this article. First of all, bubbles and crashes seem to be an inherent property of market economies. They've existed for at least four centuries (tulip bulb, anyone?) and possibly longer. Overreaching optimism seems to be an inherent human trait. Overpaid CEOs are a relatively new (few decades) phenomenon.
The OP asks: Would you let someone fire and embarass you for a check for $20mm dollars ? So would CEOs.
I'm not sure this is true. The CEO is going to be out of work for a few years, and possibly be unemployable at his current level in the future. Given that he already makes $10 million, a potential five-year setback is not worth that amount of severance.
I agree that large company CEOs are overrated and overpaid, but I can't assign them all the blame for current economic problems, the sources of which are a lot more complex than the OP seems to think.
It's true that there are inevitable conflicts of interest regarding risk tolerance.
lets ask ourselves WHY the bankers took such risks
because they just wanted to have fun? get real
how do you make money as a banker when the Fed has lowered "real" rates (rates adjusted for inflation) to ZERO???
you have to make riskier loans. you sure as shit can't make money in a low interest rate environment lending to credit worthy people
the Fed prodded bankers to make these risky loans
sorry cuban, any cub reporter for the WSJ could tell you this
First of all, bubbles and crashes seem to be an inherent property of market economies
indeed, but we've had two massive bubbles in ten years. the nasdaq bubble was 10x the size of the 1929 bubble (ref: bob prechter). the housing bubble dwarf the florida bubble of the 20s...you must admit that this is curious
lets ask ourselves WHY the bankers took such risks
because they just wanted to have fun? get real
how do you make money as a banker when the Fed has lowered "real" rates (rates adjusted for inflation) to ZERO???
you have to make riskier loans. you sure as shit can't make money in a low interest rate environment lending to credit worthy people
the Fed prodded bankers to make these risky loans
sorry cuban, any cub reporter for the WSJ could tell you this
First of all, bubbles and crashes seem to be an inherent property of market economies
indeed, but we've had two massive bubbles in ten years. the nasdaq bubble was 10x the size of the 1929 bubble (ref: bob prechter). the housing bubble dwarf the florida bubble of the 20s...you must admit that this is curious
GREENSPAN GREENSPAN GREENSPAN
who do you think put the US on a "low low low rates" regime?
who do you think CREATED THE DOTCOM BUBBLE and the HOUSING BUBBLE?
not CEOs, GREENSPAN
and bernanke is just playing the hand he was dealt
the problem isn't CEOs who are out of control, it is central bankers who blow bubbles without consequence. the Fed has power these CEOs can't even fantasize about
go ask any of the serious financial journalists at thestreet, marketwatch, wsj, nytimes....without hesitation they will all tell you that low rates set by the Fed created this mess.
who do you think put the US on a "low low low rates" regime?
who do you think CREATED THE DOTCOM BUBBLE and the HOUSING BUBBLE?
not CEOs, GREENSPAN
and bernanke is just playing the hand he was dealt
the problem isn't CEOs who are out of control, it is central bankers who blow bubbles without consequence. the Fed has power these CEOs can't even fantasize about
go ask any of the serious financial journalists at thestreet, marketwatch, wsj, nytimes....without hesitation they will all tell you that low rates set by the Fed created this mess.
I swear I remember Alan Greenspan being quoted as saying that he know the low rates would create a housing bubble, I haven't been able to find it though so it may just exist in my memory. Any idea?
Also there's absolutely no need to shout here.
Also there's absolutely no need to shout here.
well what he is also famous for is the prediction years ago (when he was hanging out with the objectivist pseudo-intellectuals) that a kondratieff winter (bad downside in the economy) could be nullified by very low rates. he did his best to prove it
greenspan adored low rates. he set the too low and then was too late in raising them. poor ben bernanke...given a corpse and told to make it ready to run a marathon. not much choice for ben but to lower rates again. once again, he was too late in raising them.
its all in the Feds rate-setting power folks. THEY are the ones who dictate the level of risk in the economy. why do you think so many people call for the abolishment of the Fed?
trivia: did the US economy grow faster and with more stability pre-fed (pre 1913) or post-fed?
greenspan adored low rates. he set the too low and then was too late in raising them. poor ben bernanke...given a corpse and told to make it ready to run a marathon. not much choice for ben but to lower rates again. once again, he was too late in raising them.
its all in the Feds rate-setting power folks. THEY are the ones who dictate the level of risk in the economy. why do you think so many people call for the abolishment of the Fed?
trivia: did the US economy grow faster and with more stability pre-fed (pre 1913) or post-fed?
> did the US economy grow faster and with more stability pre-fed (pre 1913) or post-fed?
Not really a fair comparison - the U.S. economy was smaller pre-fed, and so it was much easier for it to grow at a higher percentage rate. That's like saying that China is growing 3x faster than the U.S, and so a pseudo-communist authoritarian government with all ownership of land is better than a free-market democracy. ;-)
Trivia: Who performed the role of the Fed before there was a Fed? Just because you get rid of it doesn't mean it won't exist. ;-)
Not really a fair comparison - the U.S. economy was smaller pre-fed, and so it was much easier for it to grow at a higher percentage rate. That's like saying that China is growing 3x faster than the U.S, and so a pseudo-communist authoritarian government with all ownership of land is better than a free-market democracy. ;-)
Trivia: Who performed the role of the Fed before there was a Fed? Just because you get rid of it doesn't mean it won't exist. ;-)
Not really a fair comparison - the U.S. economy was smaller pre-fed
its totally valid. the economy has only shrunk temporarily on a small number of occasions. the economy is more or less always growing, so it is always smaller in the past. indeed the US suffered a bad depression in the 1870s but pulled through without the Fed
Trivia: Who performed the role of the Fed before there was a Fed?
there wasn't one source. remember bank and state notes?
in any case, prior to the fed, a dollar held its value for decades. post fed, the dollar lost 99% of its value
its totally valid. the economy has only shrunk temporarily on a small number of occasions. the economy is more or less always growing, so it is always smaller in the past. indeed the US suffered a bad depression in the 1870s but pulled through without the Fed
Trivia: Who performed the role of the Fed before there was a Fed?
there wasn't one source. remember bank and state notes?
in any case, prior to the fed, a dollar held its value for decades. post fed, the dollar lost 99% of its value
> its totally valid
That wasn't my point. It's easier for small economy to grow at a higher rate. If a $50B economy grows by $50B, that's a 100% growth rate. If a $10T economy grows by $50B, that's a 0.5% growth rate. For the $10T economy to grow by 100%, it would need $10T of additional goods and services, which is a significantly harder accomplishment than growing by $50B.
The answer to my trivia question, BTW, is J.P. Morgan. The Fed was created as a reaction to the panic of 1907, when Morgan went over the books of each failing bank and said "Nope, let it fail" or "Okay, the trouble stops here. Let's give them cash" depending on whether they were solvent. Much like Bernanke & Paulson have had to do with Bear Stearns and Lehman Brothers. Congress felt that this was too much power to concentrate in the hands of a private individual, and so they created the Fed as a quasi-government organization responsible to Congress.
Inflation is not unique to the Fed system, either. Remember "not worth a Continental", or the erstwhile Confederate dollar? The 1870-1910 era featured deflation because it coincided with the industrial revolution and a huge flood of cheap new goods onto the market, not because of the absence of the Fed. The 1929-1932 era also featured deflation, yet had an activist Fed that interfered far more than the current one.
That wasn't my point. It's easier for small economy to grow at a higher rate. If a $50B economy grows by $50B, that's a 100% growth rate. If a $10T economy grows by $50B, that's a 0.5% growth rate. For the $10T economy to grow by 100%, it would need $10T of additional goods and services, which is a significantly harder accomplishment than growing by $50B.
The answer to my trivia question, BTW, is J.P. Morgan. The Fed was created as a reaction to the panic of 1907, when Morgan went over the books of each failing bank and said "Nope, let it fail" or "Okay, the trouble stops here. Let's give them cash" depending on whether they were solvent. Much like Bernanke & Paulson have had to do with Bear Stearns and Lehman Brothers. Congress felt that this was too much power to concentrate in the hands of a private individual, and so they created the Fed as a quasi-government organization responsible to Congress.
Inflation is not unique to the Fed system, either. Remember "not worth a Continental", or the erstwhile Confederate dollar? The 1870-1910 era featured deflation because it coincided with the industrial revolution and a huge flood of cheap new goods onto the market, not because of the absence of the Fed. The 1929-1932 era also featured deflation, yet had an activist Fed that interfered far more than the current one.
J.P. Morgan. The Fed was created as a reaction to the panic of 1907, when Morgan went over the books of each failing bank and said "Nope, let it fail" or "Okay, the trouble stops here. Let's give them cash" depending on whether they were solvent. Much like Bernanke & Paulson have had to do with Bear Stearns and Lehman Brothers. Congress felt that this was too much power to concentrate in the hands of a private individual, and so they created the Fed as a quasi-government organization responsible to Congress.
Isn't it much better to have the bankers be responsible for bailing out their own mess, rather than have the taxpayers do it? How is the creation of the Fed a positive development in this case?
And yes, the Fed isn't the only way inflation happens. Good old fashioned printing money to cover the cost of war works too, and it's just as awful.
Isn't it much better to have the bankers be responsible for bailing out their own mess, rather than have the taxpayers do it? How is the creation of the Fed a positive development in this case?
And yes, the Fed isn't the only way inflation happens. Good old fashioned printing money to cover the cost of war works too, and it's just as awful.
I'm speaking mostly of what is, not what should be. I agree that it would be better if bankers cleaned up after themselves and owned up to their own mistakes. However, when you're dealing with something as fundamental to the economy as banking, it's almost always to someone's advantage to bail them out (or worse, to use someone else's money to bail them out). If the Fed didn't exist, one of the other banks would do it, and probably reap huge profits in the process, right up until it miscalculates and loses all its depositors' money too.
Basically, I don't think it's the Fed that's the problem. It's humans.
Basically, I don't think it's the Fed that's the problem. It's humans.
As long as banks that miscalculate go out of business, over time, the survivors will have much more sound financial practices. Also, without the Fed, there is no single point of failure. This makes it much easier to diversify away risks. Further, note that a lot of the bad banking practices of the late 1800's were not the result of a free market, but of federal and state banking laws. The Fed and other government intervention is almost certainly a proximate cause of the problem. Perhaps, though, the ultimate problem of bad government is an inevitable part of the human condition.
That wasn't my point. It's easier for small economy to grow at a higher rate.
i know and i basically agree...my point is that the Fed has not demonstrably proven to grow the economy, manage the currency, or control inflation better than other forces. while we have not lost our currency like the old bank notes, the dollar has lost 99% of its value. relative to pre-1913, the dollar is indeed worthless
The answer to my trivia question, BTW, is J.P. Morgan
he bankrolled the government for, what,. thirteen days, he did not print currency. indeed that event goes back to your "small numbers" arg. he could bankroll the govt because it was small. bill gates could not fund our govt for thirteen days today.
i know and i basically agree...my point is that the Fed has not demonstrably proven to grow the economy, manage the currency, or control inflation better than other forces. while we have not lost our currency like the old bank notes, the dollar has lost 99% of its value. relative to pre-1913, the dollar is indeed worthless
The answer to my trivia question, BTW, is J.P. Morgan
he bankrolled the government for, what,. thirteen days, he did not print currency. indeed that event goes back to your "small numbers" arg. he could bankroll the govt because it was small. bill gates could not fund our govt for thirteen days today.
The real solution is that we need someone like Mark Cuban to start a competing stock market. He could create listing requirements that would include mandatory rules such as 1) requiring that companies only pay dividends (instead of doing stock buybacks 2) CEO's must get paid based on how the company does for the decade after they leave 3) all shareholders must either vote for the board members or hire a proxy voting firm, etc. etc.
I don't know what the exact rules would be, but I'm sure someone could design a set of rules that would be both less obtrusive and more effective than our current regulations. If the rules are designed well, this new well managed market will give investors higher returns. That will force the existing markets to shape up or lose their investors.