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05/29/2011

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ElGreco

Wiser men like Mr. Posner can always short the bubbling financial instruments and wait for the bubble to burst. Mr. Posner does not have to time his purchase. If current valuations of the subject entity are currently overvalued, all he has to do is buy a short position from someone who thinks that either indeed the new era has come or from a series of gamblers who count on NOT being the one holding the joker card when the bubble bursts.

The expectation of making a little profit while the bubble inflates while hoping that you will not be the one who suffers the “big pop” loss is a proposition with zero expected value: Large probability of small profit negated by small probability of big loss, expected value 0. People who fail to comprehend this fact are essentially playing against each other in this zero expected value environment (to be more exact, the expected value is not 0 but rather equal to the underlying residual fundamentals). This gamble is similar to the common method used for winning some money at the casino, say the roulette: Start betting the minimum and if you loose double your bet – sooner or later you win and recoup all your losses plus the initial (minimum) bet. You keep winning, albeit modest amounts, perhaps even day in day out - until that one rare day when a protracted loosing streak forces you into a high enough loosing bet that you loose everything because the next bet is so high that you have no funds to cover it and thus must leave the game at a huge loss. But if you want to make a modest amount of money on a single day, it is a high probability of success method – akin to a reverse lottery i.e. great probability of small gain and very small probability of huge loss. Making small gains while the bubble inflates is exactly the same.

Most people forget the very important fact that the Internet bubble was not all bubble, and thus did not all burst. The new era did come and sustainable long term valuations for internet stocks did skyrocket compared to the early bubble inflated prices. It is just that the end bubble and magnitude of “new era change” was not quite as large and the growth not quite as quick as the dominant market forces thought in 1999. If you bought in 1993-95 when the “new internet era” bubble was already inflated, you were still left with significant gains even post bubble burst. A casual look at the NASDAQ average demonstrates that not all the bubble burst. Part of the bubble, and a significant part at that, was real, the new era did indeed came, spectacular gains were real, sustained and still with us to this day for those longer time investors who correctly predicted that indeed a “new internet era” had come and was here to stay, in the end (at least a big potion of it).

Finally, after repeated bubbles, people and the market, start getting wiser. It is part of the intrinsic self-correcting behavior of the market. As the pace of change worldwide accelerates, people will learn to be wiser when ever more frequent “new era” fads show up. At the same time, as the pace of change worldwide accelerates the real “new era” changes, those that are here to stay, at some intensity or another, will also increase in number.

Just because Kayes explained a bubble burst after the fact (the ’29 crash), does not mean that any market behavior can be tagged as irrational a-priori. It also does not mean that his centrally planned analysis will have a better success ratio at determining what is a bubble, what not, and, more importantly, by how much.

In the end, while markets may not always prove right, they are self-correcting and have a higher ratio of success in predicting the future when compared to central planning – oh, no not those satanic verses again! Someone catch this guy and crucify him!

Gordon Longhouse

Internet stocks are a special case of supply/demand mismatch. Social networks don't need much capital compared to say mining or manufacturing companies, while many investors believe that they must have have at least a few of the latest offerings from the 'net.

Fortunately the internet sector is a small one relative to say real estate and and is not one that encourages margin borrowing or lending.
Bottom line that yes some people will lose some money (and a few make a lot of money) but the likelihood of a GFC style uber-crash is low.

an observer

Again, one has to ask, What reality is Judge Posner describing? He certainly is not talking about our or any other current stock market.

If, and here "If" really is the biggest two letter word, our laws on corporations were designed so that profits actually flowed to shareholders, this essay might make sense. However, they are not and certainly have not been since Fred Schwed wrote, "Where Are The Customer's Yachts?"

In fact, corporate managers and investment bankers have openly used political power to create a rigged Casino. No listed stock ever reflects "the discounted value of its predicted profits," except by accident. All listed stocks are always in some "bubble phase," which is why buy and hold losses money.

Said differently, as every study has proven, if a stock buyer hedges her positions, over times she is assured of losing money due to the commission costs on the hedges, alone. This proves that the market is a game, not a mechanism for returning profits earned by listed companies to shareholders. It shows why the two most successful investors in history, Buffett/Munger, have nothing to do with the market (they instead buy and and hold good companies, often effectively taking them private).

Talking about stock values based on finance theory is madness.

As Keynes understood, public stocks and the stock market are a zero sum game, at best, no different than poker. There really is no public interest in permitting the game to be played.

And, even the smallest of "bubbles" carries huge social costs because the widows and orphans who money is inevitably stolen or lost then become a more public burden.

As airline pilots joke, we "keep investing until we have no more money." That is a casino at work, not investing.

Our society would be far far richer, without a stock market (the IPO market is a different matter).

If brokers were limited to only issuing IPOs, then their reputation risk would be real. Brokers who could find real companies would be rewarded. And, if IPOs were limited to being merely devices for firms raising capital, instead of insiders "cashing out" well what a difference a day would make in management behavior.

It is anticipated that some shrill for the industry will argue, but what about the "liquidity" that a market gives to investors? How many investors need such liquidity and how often? Firms certainly do not need liquidity, they need shareholders committed for the long term, not concerned about next quarter.

Buffett and Munger have made the case that no one individual can see more than 20 good stocks to buy in a lifetime.

Without "the Game" old products would start to have real value, such as universal life insurance with a basket of IPO stocks at its core.

I use this product to point out that, contrary to the free market idiots we have everywhere these days, there are no "free markets." The distribution of income is always a political question. It is a question that can be shaped in the most subtle of ways, by laws whose true intent and effect are very hard to grasp.

As for the social networking stocks, they are merely today's featured table, playing not different role than the final table at the world series of poker. Our psychology draws us to the "action."

As for our first poster who thinks the alternative to today's "stock market" game is central planning, what intellectual dishonesty. In 1985 stock brokers convinced Congress to make it impossible for small investors to invest in real estate. Ending the stock market in its current form would not be central planning, it would just be ending conduct of no redeeming social value.

Jimbino

I take issue with Posner's statement that " The bubble speculator can try to protect himself by moving in and out of the market rapidly, enabling him to lock in gains before deciding whether to try for a further profit." If I perform program trading, whether "buy low, sell high" or "buy high, sell low," regardless of rapidity (per second, minute, hour), both strategies show the same expected return, counter-intuitive as it may seem. So will any other program trading strategy, as far as I can tell.

ElGreco

Exactly as Jimbino suggests. Because markets exhibit a fractal-like behavior that makes them appear chaotic whether looked in the medium term or short term (this is especially true given the immediacy of computer trading). In the end what is left is the fundamentals. It is though difficult to tell how much of a trend, whether a seconds trend, minutes trend, hours trend, days trend or even months trend is part of the fractal behavior or the beginning of some fundamentals that are destined to stay. As time goes by it becomes more and more likely that the fundamentals will show through. However, at the same time it is delusional to think that the fundamentals can be discovered a-priori, something that drives fans of central planning crazy.

If Mr. Posner has found some anomalies in the risk/reward curve, then he can exploit that fact - and if he’s altruistic enough or simply cares about improving overall economic efficiency perhaps he can also share it with the rest of us.

an observer

ElGreco

There are no fundamentals to a stock market that is based on a theory that has no connection with reality. Profits are not paid out to investors, so there is nothing to value. It is a rigged Casino in which the only ones who profit are company managers and investment bankers.

As Munger long ago wrote, "the whole investment management business together gives no value added to all buyers combined."

Coach Purses Outlet

so there is nothing to value.

Xavier L. Simon

I wonder where was Munger when Buffett bought into Goldman Sachs.

CJColucci

You can't just short what you think are bubbles and wait for the profits to roll in without taking an enormous risk. Shorts have deadlines by which they must be covered, and as Keynes once famously said, "the market can stay irrational longer than you can stay solvent."

ElGreco

You can stagger your short positions/sales to eternity. If you had the right intuition you will make a profit. If you are wrong then you will be saddled with the cost of the options or cost of buying the stock to cover the short sale. So yes, there is risk. There is risk in reward, imagine that.

The reward that you get is, in a way, payment for taking risk to promote the more efficient allocation of capital. With your short position, you put downward pressure on the value of the stock which turned out to be overvalued. You helped either keep the bubble smaller or make it pop sooner, or both.

Jack

"The dot-com bubble of the 1990s, when it burst, caused a recession that would have been of little consequence had it not been for the Federal Reserve’s incompetent response (pushing interest rates way down and by doing so setting the stage for the housing bubble, because houses are bought largely with debt and therefore housing prices can soar when interest rates are very low)."

........... I doubt the Fed Reserve move was wrong or "caused the housing bubble".

First, the dot-com collapse, though relatively small in itself put a recessionary chill on the entire stock market, and the economy, as many who'd become used to stock market gains being the "2nd job" that paid for extra purchases pulled back with some being in debt.

The ability to pull out home equity at low rates in the early 80's gave many households the opportunity to muddle through and likely prevented a much deeper recession.

(Here's it "interesting" that our Profs don't fret over $50 billion/year in unaffordable tax breaks refloating the boats of the wealthy to "fight the recession" (yah sure "trickle down?") while condemning the low interest rates likely to benefit those most affected by recession and the drop in value of even conservative portfolios.)

As for low interest rates themselves? Well, they weren't that low to begin with at 7% or so. We had lower rates in the 50's and early 60's, and a bit later, steep home price inflation in much of the nation when interest rates (even inflation adjusted) were high.

The lower mortgage rates themselves were a boon giving sane homeowners a break, or "one more chance" after perhaps a market beating and for many a chance to move up to a newer home or larger home, thus leaving price dampening "starter home" bargains for young families of our increasing population and to replace completely worn out housing to be torn down.

What caused the "bubble" was the complete defection from prudent, even legal, lending practices. Posters here probably remember the days when getting a "home equity loan" was impossible unless it was for making improvements to the property.

That policy was perhaps too tight with homeowners not be able to use home equity at all, w/o bearing the costs of selling one home and buying another. During the peak of the bubble "swinging bankers" were happy to make home equity loans totaling more than the value of the home, and that on corrupt, inflated appraisals.

By now the effect of No Doc, No Income, no Job, no Assets(NINJA) loans is well known.

Economists such as our Profs here should know that low interest, in the range of 7%, honestly lent would not have kicked of such a housing bubble. Sadly the "crisis" has blown by, and while some changes have been effected, the overall system has not been reformed, and as yet none of the criminally intent have been imprisoned with many taking down the same "performance bonuses" for the same acts that created the bubble. Trouble ahead.........

Jack

Observer: While agreeing with much of your stock market cynicism and it's false or inflated values, you perhaps take it too far:

"As Keynes understood, public stocks and the stock market are a zero sum game, at best, no different than poker."

I don't know that Keynes had such a view, but the stock market is hardly a "zero sum game"......... Ha! though today stock salesmen are "putting their clients in" "commodities" as if THEY were investments...... bubbles ahead!

While the stock market certainly has its flaws, among them the over rewarding of the investment advisor sector Buffet rightly assesses at near zero or ha! perhaps a negative sum, even with the hustlers and computer trading schemes those such as Buffet or "grandma" who stay invested, and diversified will do just fine.

As for the model of valuing stocks (that don't pay a dividend) I remember having a tough time with that concept many decades ago, but ultimately came to understand that it may be better to own a railroad that is expanding and has better uses for its ever scarce capital than to pay it out in taxable dividends.

So.. the "problem" in internet or other starts up is that of sorting the ones with no earns, but promise, such as Amazon that COULD have dialed in profits long ago, but at the expense of market share, from "green grocer" and a host of others with silly biz plans, well promo-ed. Assessing the value of Facebook or whether ATT "paid too much for Skype, or is wise in trying to regain its monopoly status? is a tough task. But! directing scarce capital to worthy investments is the very essence of capitalism.

Xavier L. Simon aka Xavier

Jack, I missed that comment about the Fed by Posner and I agree with you that he took it too far. I am surprised as he wrote a couple of books on the subject, one which I partly read. If I had to blame Greenspan, and I do put some blame on him but far from making him the devil that people and even Posner paint, it would for later holding interest rates down but long after the dot com bubble.

I think he missed the boat at two points. In the 1990s he allowed the Fed to relax Regulation X or Y (I forget which right now) that set lending standards for housing, including minimum down payments.

His next mistake was the interest rates but on that I blame economics more generally. As I think I have commented before, one thing that happened in the 2000s was a massive reversal of capital flows from the rest of the world into the US. My long experience with other countries that suffered similar crises was that economic models still have not factored in adequately the so-called external sector. With so much foreign capital coming into the US there was a lot of downward pressure on interest rates and one has to wonder why Greenspan or even Bernanke who was on the Board didn’t pick that up. On this I think they have been left off the hook far too easily.

an observer

Xavier:

Buffett bought Goldman, understanding that he was buying into the Casino, which in his words, has a "moat," protecting it from competition.

Buffett does not buy stocks in companies that face serious competition.

And he did such on terms and conditions that returned cash to him, terms and conditions not available to any other investor, before or since.

In sum, the purchase proves my point. Trading stocks on exchanges is a business we can do without.

Jack, you are so uninformed about the stock market that you are beyond hope. Value investing is the bigger fool theory at its finest. If no dividends are ever paid, how to you get your money out? .... Oh, you sell your stock . . . to a bigger fool?

Beyond that, read Munger. No one should ever listen to any broker, stocks, bonds, commodities: their incentive bias rules them out, entirely, as being reliable.

Jack

Elgreco -- perhaps economists and successful stock investors/traders are two different specialties. I recently found out what D. Stockman, he of the Reagan "supply sider" plan of "starving the beast" (never implemented by Reagan or HW -- or GW, with ironically the closest being the Clinton-Rubin plan to "drive down the 10 year bond" (ie mortgage rates) has been doing since. It's basically that of being on boards of funds making wrong choices or raising funds for his own fund which was also a flop.

Ha! one investor living in Anch, but from NY and the "biz" sez he does better here for the noise of the maddening crowd being filtered out.

Observer: You're right on Buffet being well positioned to buy the hotel when it's empty, often on distress sale terms. And, like Geico, he's already WELL established in re-insurance, so could take this largely unknown company, advertise the hell out of it, not have costly commissions to local brokers, and be very competitive as he takes brunch, lunch and dinner from the older companies to which he's left at least an Egg McMuffin.


Your "bigger fool" theory FAR to limp for you to begin hurling invectives at anyone here. But to answer your question anyway:

"If no dividends are ever paid, how to you get your money out? .... Oh, you sell your stock . . . to a bigger fool?"

............Ans: Well, it's not unlike getting the money out of my house or some other business assets that aren't paying me divvies.

Let's take Google, Ha! since I missed it! Their IPO came out just before I learned what a crank they had on the advertising world, so I thought the hype was due to it being a lonely dot.com play in a post dot.com world. Then I helped a biz to show up on their PAID ad side. It was quite effective as we could draw nationwide attention to a local product of high value. But! we were paying 'em a couple grand a month to "bid" for positioning in the top 5 positions.

I don't think google pay's a dividend, and instead continues buying up competitors and services that enhance their brand. But what is Google's income stream "worth?" Well, very close to what it is trading for which includes having discounted for the threat Facebook may be to their narrow casting advertising franchise. Buy one share/ or buy 'em all and own the entire income stream -- they're all valued at the same price.

Agreed stock brokers means stock salesmen, often front running their own in-house products, funds, and stuff they're pushing for some reason or another. But! still, if someone went to a decent broker as said "Look I'm not looking for a fast buck, or to get rich overnight, just a good mix of stocks such that ten years from now I'll have an edge on sending the kids to college and in 25 years have something put by for retirement", MOST would be better off than going into the dark and dangerous forest unarmed with half-baked "theories" of their own and "tips" from Ha-ha! "insiders".

Jack

Xavier -- thanks, and the whole Gspn Fed Reserve is a messy thing to discuss.

First......... we've the "natural" division between the "I've got mine "conservative" who strongly favor protecting the buying power of his pile, over folks like myself who'd tend to err on the side of risking some inflation in order to, not only keep unemployment down, but to give lower income folks some chance to obtain higher incomes, and catch at least a bit of the "rising tide" we'd hoped would "lift all the boats"

Also........ I see other gains to be had in running a "hotter" economy. Much like when we had war time labor shortages, and some shortages in the late 60's, as companies react to scarce and more costly labor, they invest in labor saving devices that increase productivity, with those capital intensive devices often finding markets beyond our shores, such as, early on, paper tape reading milling machines, to computers and computerized machinery to virtually everything built by Caterpillar.

We DO know from the Japanese experiment that a zero rate of interest funds silly projects, but even with inflation we were not near zero, and apparently any risk of wage inflation was staunched by the infinite sink of labor around the world -- out-sourcing, H1B's and just plain sneaking into the US by the millions.

No, again, what screwed up the works was the utter corruption of the banking, mortgage and commercial lending industry and "securitizing" hrsht as gold leaf.

The dollars drawn here? or to London? and elsewhere? Well, take a look..... if some non-bank-bank (doncha just luv the terms?) is lending money at 7% (retail) at 30 times assets, that's a (theoretically) awesome rate of return for hustlers and scammers to share with their prospective marks! And BTW get a lot of "atta-boys" from the bossman (mafia don?) along with "performance bonuses" large enough to pay off a Long Island estate in a year or two. A game of 200% interest is not likely to be slowed by the Fed raising rates a dab here and there.

Ha! one can probably spot market anomalies as easily by going to cocktail parties, with one's ears tuned up, and having a good time as laboring over the stock sheets. In the 90's you'd have to excuse yourself for a lot more drinks than one should have, not to be bored stiff by hrsht about "hot stocks" while a decade later, it was about how someone bought some post WWII pink bungalow, knocked out a wall, stuffed a granite counter top in the thing and doubled their investment.

Well.......... Ha! here we are speaking of the return of "dotcom" mini-bubbles with $100 oil and gold at astronomical prices. Ha! anyone remember seeing bus boys and all standing in line outside a bank to "get in" (far too late) on the action when the Hunt Bros tried to corner silver and create their own currency>

cheap sunglasses

What a pity I miss seeing all those gorgeous knits! Thanks for sharing the photos.

an observer

Jack writes:

Agreed stock brokers means stock salesmen, often front running their own in-house products, funds, and stuff they're pushing for some reason or another. But! still, if someone went to a decent broker as said "Look I'm not looking for a fast buck, or to get rich overnight, just a good mix of stocks such that ten years from now I'll have an edge on sending the kids to college and in 25 years have something put by for retirement", MOST would be better off than going into the dark and dangerous forest unarmed with half-baked "theories" of their own and "tips" from Ha-ha! "insiders".

Jack:

You just don't get it. There is no natural law that says people have god given right to sell shares of stock. There is no law of economics that says such is a good idea, none, nada.

think for once in your life, man

If company owners and brokers could only sell stock through IPOS, and the only way investors could get back there money is through dividends, the way corporate america operates would be radically changed.

If Goldman Sachs sold one or two bad stocks, stocks that didn't pay dividends, the reputational damage would be huge. Such an approach would wring speculation out of the market. All this bs on quarterly "earnings" forecasts, blah blah blah. There would be nothing to manipulate. Management would have to make the money the old fashioned way---real cash profits, paid out as dividends---instead of manipulating the stock, looking to exercise options and get out.

IOW I and others are advocating a fundamental change for the better to our markets.

You just confuse the familiar with the necessary.You think that because we have exchanges were stocks are trade that is a good thing. There is no economic evidence showing that is the case. All Wall Street is a Casino, rationalized by finance professors.

But don't take my word---Listen to Michael Lewis,especially about the lessons he thought people would draw from Liar's Poker

Jack

Observer: These are very strange theories that don't appear to very rational solutions to non-problems.

Indeed their is no "natural law" to have the "right" to sell shares of one's enterprises. but! it's worked out quite well since swapping 'em on the steps down on Wall Street, and before, when investors "underwrote" the risks to cargoes and ships in the little coffee house where Lloyd's of London was spawned.

I'm not sure why you appear to be so hung up on divvies, as many promising start-ups be they private or public don't have the immediate earnings to pay dividends. And, if you really WANT divvies, there are mature utilities and other businesses that do lure their investors with dividends rather than the expectation of future growth.

As I'm sure you know, many of our policies have been rigged by and for the wealthy who can hold growth stocks and other assets for long periods, paying no taxes, and then if they do need sell off a few to put Jr through Yale or for a down on mansion, they'll only pay the 15% long term cap gains rate, rather than the onerous income taxes born us wage earners. Better yet! would be borrowing against the box so they can continue to accrue value with the interest on the borrowings made less burdensome by the deductibility of the interest. If you are in a high tax bracket, the taxes on the divvies can certainly erode the face amount, but then we are short of public revenue, so there would be that element of patriotism to consider.

I did read Liar's Poker some years back, but thought the lessons went more to transparency and MORE not less, oversight of those who will sneak into the henhouse if the fences are not maintained carefully, rather than that of throwing out the entire system in favor of ............. what?

baishi


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Xavier L. Simon aka Xavier

Jack, I have no agenda for or against Greenspan; I just try to understand the problems and their source, and despite many fancy degrees I remain humbled by the complexity of societies and their economies. You put your finger on THE problem, THE BIG ONE, when you write that “folks like myself who'd tend to err on the side of risking some inflation in order to, not only keep unemployment down, but to give lower income folks some chance to obtain higher incomes, and catch at least a bit of the ‘rising tide’ we'd hoped would ‘lift all the boats.’”

Everything revolves around that and, much like surfing, macroeconomics is about how to ride the wave without falling. To do that economics has very fancy theories and models, most of which I agree with. Yet, any model is a simplified representation of reality and therein two of the large problems. First, reality keeps changing. Second, the simplifications leave out variables that are difficult to handle and in past have not been a major factor. One such is the external sector, i.e. the flows of capital in and out of a country and its economy. In the US these had not been of major significance until the last decade.

About two years ago I was horrified to hear Gene Sperling on C-Span talk of closed economies and I was even more concerned when he replaced Larry Summers as chief economic advisor to Obama. At the time I asked my economist friends if they were still working with closed models as they were when I first entered the field some 35 years ago. As I’ve noted before, for some 10 years my team was responsible for bringing together at least once a year, often twice or more, the ministers and governors of central banks of emerging economies, most of them with MIT, Harvard, Chicago PhDs, to discuss how to avoid yet another crisis. The central problem was always how to ride the wave, and particularly how to manage the external sector, without falling.

The problem got confused by politics. It was hard enough to come up with economic policies to ride the wave yet politicians always made promises that required even larger waves. The problem seemed relatively simple to solve by borrowing even more from the developed countries and printing a little extra money. Still, invariably they overpromised, borrowed and printed too much, and fell. Central banks were not independent and couldn’t even control monetary policy by the “book”—even the Bank of England was not independent until 1997. Worse, even if they had wanted to and could, there were no good economic models to help understand how much borrowing from abroad was enough.

Eventually those countries stopped trying to ride the wave as dangerously and after the 1997/98 crises opted for a more conservative model where they saved for a rainy day. Those savings, which by 2007 had reached trillions, found their way into advanced economies. The tables had turned and it was now the US and Europe that began spending the large amounts of imported savings. They throttled their economies a bit closer to a larger wave. Our politicians also promise as much as they think they can get away with, but our economists, from the same schools, still didn’t have the models with which to manage the ride even in the best of circumstances. The result was the 2008 crisis.

Just to name one of the many problems I have with current economic policy, even under pure theory what is full capacity? US consumers throttled down after the 2008 crisis and in good Keynesian fashion the government made up the difference with fiscal policy. The amount is calculated to fill the gap between actual and full capacity based on the most recent top of the wave. But wait, that top was reached in late 2007 or early 2008 when consumers were spending all of those foreign savings. Was that a reasonable “full capacity” or, as I suspect, was it a fluke difficult to reach again in the near term? So how much is reasonable to spend or should we throttle back a little more?

And then there are other parameters that changed in the last 10 to 20 years, the uncertainties about the monetary side of the equation, and politics and the expectations of consumers. Some inflation is okay and even desirable if it doesn’t lead to a wage-price spiral. Yet reality has changed but not our models, and these had weaknesses to begin with. In the circumstances I hope you appreciate how very difficult the whole thing is. Given the size of the economy, the impact of another fall, and the fact that there is no one out there to save us, no IMF or other big country, how much risk do you want to take? I’ll grant you that I am more conservative and have even advocated a further belt tightening, but then I’ve seen first hand the utter devastation of repeated crises.

To keep this on topic, the danger with bubbles, including a crisis in one of the euro PIGS, is that they stir the waters and when you are already on the leading edge of what may be an unusually large wave that can be very dangerous. To appreciate how times have changed, watch on Charlie Rose’s website his interview yesterday with Fareed Zakaria. He just returned from Asia and his report is very telling. Just fifteen years ago if the US caught a cold the rest of the world would catch pneumonia. Today, because of the change in policy of the emerging economies, Zakaria tells how the 2008 crisis caused only a very minor blip or nothing at all in China, India and Brazil. He mentioned those but others have also fared very well. By contrast if any of them, or the PIGS catch a cold they can make major waves for the US. And don’t be misled if the initial effect is positive when euros flee to the safe haven of the US. All that does is give us a little extra time before the final reckoning.

VoterDelusion

The only tide that lifts any boats is production. It is the only thing that can be exchanged for other goods and services from other people and other nations (i.e. exchanged for a higher standard of living).

Without incentives to produce (and consequences for failing to do so) there is no prosperity no matter how you try to manipulate things macroeconomically. Macroeconomic manipulation, at best, only optimizes underlying productivity. It is delusionally asinine to think that macroeconomic manipulation can provide goods and services based on the inferior work of a population that has fewer and fewer incentives to produce, especially produce goods and services of high value, stuff that few people in the world can produce, invent, commercialize at a competitive price.

Jack

Voter -- Indeed! "productivity, incentives and rising tides!"

But when virtually all of the "tide" goes to the top few percent, where goes the incentives for working folks to go the extra mile?


http://webcache.googleusercontent.com/search?q=cache:bB64joVfJsYJ:lanekenworthy.net/2008/03/09/the-best-inequality-graph/+best+inequality+graph&cd=1&hl=en&ct=clnk&gl=us&source=www.google.com

Gawd! These ALL FOR THE RICH Repubs and tax bennies to boot, would have us believing that CEO's and the uppermost tiers badly need even MORE incentives to roll out of bed and "lead" the working folk than 400 time worker pay........ up from 30 times in 1980.

Ha! almost reminiscent of the USSR's "They pretend to pay us so we pretend to work".

Jack

Xavier -- good post, though with the US being 24% of the $59 trillion world GDP, most economies are going to experience some sniffles when we're ailing.

China -- might, in the short run be the exception, as A. they produce a diverse range of cheap goods always in demand B. they can and should divert more of there production to their domestic market.

But I largely agree. As our meltdown is largely that of the decimation of the housing and commercial construction industry that is A. US labor intensive B. Is heavily dependent on things MFG here from heavy equipment, light cars/trucks, appliances, tools, lumber, cement, furniture it is WE who are feeling the brunt of this mess.

Today..... someone announced, median home prices having fallen to $170 (from the peak of over $250k) with perhaps another $5k to go?? (As with any "falling knife" market, momentum is likely to bring prices below the theoretical, and ha! ever elusive "equilibrium". After stalling there for a while, like a ball thrown in the air, perhaps buyer confidence will return with homes selling and prices rising a bit.

http://webcache.googleusercontent.com/search?q=cache:sxs5WPDK0mMJ:www.jparsons.net/housingbubble/+housing+bubble+graph&cd=1&hl=en&ct=clnk&gl=us&source=www.google.com

THAT is a LOT of lost equity/wealth that will tend to pin down consumer spending for a good while.

Those "worrying" about the Fed ginning up inflation are simply confused by the effect of oil price gouging and soaring H/C costs -- items that will NOT be tempered by Fed "inflation fighting" measures.

an observer

Jack,

Seriously dude, learn to start questioning your basic assumptions. You are so conservative in your world view you are not a liberal. You defend the status quo without ever considering that it was created by people who had specific intent to tilt the field to their favor.

You are so intent on defending the status quo that you will say anything. Every observer agrees that a big problem in our economy is the short term focus on earnings, all done to manipulate stock prices.

I am going to give you a link to a paper on the SSRN. Read it for a week, then get back to us.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=561305

look at the graph/chart on page 95, study for a week, and then let us know if there is a problem.

Michael Jensen

Remuneration: Where We've Been, How We Got to Here, What are the Problems, and How to Fix Them


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