Wednesday, August 11, 2010

The way we look at markets - part 2

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The last essay was about how individuals look at markets. In this article I want to examine how a journalist looks at the markets. This article was in the NZ Herald "Capitalism 'still the only game in town" by David Teather, Larry Elliott and Jill Treano, 11th August 2010. I will read through the article and comment on sections of it:
"It is related to the end of ideology. Capitalism is still the only game in town".
The notion that capitalism is not based on an ideology is fundamentally wrong. Any action points to a value system, even if you were to be motivated by random actions. I might argue that there must be some underlying content to your ideas, even if 'be random' is all that you could come up with. The ideology of capitalism is controversial. There are many rationalisations. Among these are utilitarianism. i.e. The notion that capitalism is justified by its positive consequences. Another is that capitalism is consonant with religious beliefs, and finally the notion that capitalism is consistent with our nature as human beings.
Neither could markets be considered the only game in town. It is but an element in the 'game', and the game is based on political power plays rather than any respect for rational discourse.
"It is a way of life that we all enjoy. We are still locked into the mindset that rising house prices are a good thing. It will be a good sign that we are moving to a more constructive way of thinking when we don't cheer every time house prices go up".
This strikes me as a biased opinion. There are of course people who have missed out on buying a property, who will lament the unfairness of current property prices, or the unattainability of owning a home. Consider how unfair we might consider government zoning regulations which artificially raise property prices in a country with one of the lowest population densities in the world.
The credit crisis had been brewing for a number of years, as rising interest rates in the US led an increasing number of low-income homeowners on so-called sub-prime mortgages to default. But the pivotal moment arrived when a French bank issued a statement that most would consider arcane - but which would have profound consequences.
BNP Paribas told investors in two of its funds that they would not be able to withdraw money because it was no longer able to value the assets in them, due to a "complete evaporation of liquidity" in the market. Money markets became petrified. Banks refused to lend to each other".
Such stories of course highlight the artificial distortion of markets by governments. Government artificially pushed credit too low, resulting in a stretched 'rubber rebound' in credit terms, asset prices and thus economic demand. We have known that this was going to happen for a decade, yet people talk about being surprised by it.
"For a time it seemed as if some commentators were right to predict a radical overhaul of the old world order that had existed for the 30 years since Ronald Reagan and Margaret Thatcher had encouraged a laissez-faire approach".
Still we are left with the idea that this is laissez faire capitalism. Nonsense, we live in a world where governments account for anything between 25 to 60% of GDP. Surprisingly the freest countries are the developing world are countries like Nigeria and the Philippines when it comes to government impositions, but the political assassinations and lack of law in these areas is obviously the counter-argument. Government accounts for 16% of GDP in the Philippines, and that is with a lot of corruption.
"Heads rolled. Three years later, the politicians who steered Britain through the crisis, and arguably helped to cause it, have lost their jobs and many bankers moved on. The banks have since become more conservative - so much so that politicians are now attacking them for not lending enough".
This is nonsense. There was a complete lack of accountability for the way money and politician was managed in this period. There have been slight improvements, but rest assured it was probably more perceptions and soft markets which have curtailed corrupt or abusive practices.
"Gieve says the broad package of measures agreed between the G20 and in Basel, requiring banks to hold more capital, increase transparency and defer bonuses, has broadly addressed some of the problems that led to the credit crunch".
The banks were scarcely the problem. It was the government and Federal Reserve who created the distortive market conditions. Failure to realise these points means nothing was learnt.
Andrew Sheldon

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