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Author Topic: The Destructive Power of the Financial Markets
philnotfil
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Too dense to do justice to in just a couple of paragraphs, but an educational read about the power of the financial markets.

spiegel.de

The short version is that the financial markets are in business to make money. They used to make money by providing capital for growth in the economy. Now they just make money. They have become powerful enough to move the markets whose movements they profit from.

I thought that this was particularly interesting:
quote:
According to economic theory, the invisible hand of the market always leads to equilibrium, as Adam Smith wrote in his classic 1776 work "The Wealth of Nations," which Vogl refers to as the "Bible of economists." The same theory is still taught in universities today.

But the theory also tells us that today's excesses in the financial markets should never have occurred. This leads Vogl to conjecture that "by no means does the capitalist economy behave the way it's supposed to."

While the theory tends to be based on the economics of a village market, completely different circumstances apply in the financial markets, where both goods and expectations are being traded, and where speculative transactions are used to hedge against other speculative transactions. Vogl describes the principle as follows: "Someone who doesn't have a product, and neither expects to have it nor will have it, sells this product to someone who also neither expects nor wants to have it, and in reality does not receive it."

Another important section:
quote:
In fact, the United States and Europe did attempt to constrain the monster that was the financial market. Governments can hardly be accused of not having made a serious effort in this direction, but the project they face is exceedingly difficult.

Solo efforts by individual countries are pointless, because the industry is globally interconnected. On the other hand, internationally coordinated solutions are difficult. As a result, the regulations remain nothing more than piecemeal.

For the financial industry, new regulations are often little more than a sportsmanlike challenge to search for new tricks with which to circumvent the rules. In their conflict with politicians and regulatory agencies, banks and hedge funds have a clear competitive advantage: They hire the brightest minds in the financial world and pay them millions. The public-sector regulators can hardly compete.

My favorite line from the piece is from George Soros:
quote:
"Financial markets have a very safe way of predicting the future. They cause it."


[ August 23, 2011, 03:40 PM: Message edited by: philnotfil ]

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Pyrtolin
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quote:
According to economic theory, the invisible hand of the market always leads to equilibrium, as Adam Smith wrote in his classic 1776 work "The Wealth of Nations," which Vogl refers to as the "Bible of economists." The same theory is still taught in universities today.
Except that's outright wrong. Adam Smith didn't say or suggest a thing about equilibrium. He used the invisible hand metaphor to show how the risk involved with foreign investment encouraged a large number of merchants to make domestic investments instead of chasing after the higher potential profits of foreign trade, and in doing so, they incidentally helped to better contribute to increasing overall domestic wealth. (And, in general we was challenging the mercantilist assertion that money and precious metals were wealth rather than domestic production capacity and goods)

Smith would actually have decently well predicted what happens if you lower the perceived risk on finance to the point where there's more profit there than in production- it's the later corruption of his work to try to create the idea of market equilibrium and a return to trying to think of money itself as wealth rather than just a conduit for it that ends up blinding itself to what would otherwise be a pretty obvious result.

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