Ideology, Paving the Road to Financial Ruin

"A fool and his money are soon elected" – Will Rogers

An Emergent Crisis

In Ending the Divine Right of Bankers we looked at the way in which democratic governments have become subject to the whims of markets: and how markets may soon find themselves bowing to the dictats of voters. However, this is only half the story because it would be a mistake to see this as an orchestrated outcome by a cabal of shadowy figures. Instead it’s just happened, an emergent property of the interaction of democracy and capitalism.

Of course the road to ruin is littered with good intentions and what we’re now seeing is the natural tendency of trends to overshoot. It’s the result of a nasty combination of free market ideology taken to extremes and the self-interest of corporations, exploiting any opportunity to enhance profitability and bonuses. It is, as ever, an outcome of combinatorial human behavioral errors rather than a set of deliberate policies.

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Blood on the Street

“The time to buy is when there’s blood in the streets”, Nathan Rothschild (attributed).

Micro or Macro?

Normally stock picking investors are interested in the microeconomics of firms; their earnings power, competitive advantage and so on. These factors will, over lengthy periods, determine whether companies outperform their peers or not. In recent years, though, a curious thing has happened: these self-same investors have become more concerned with macroeconomics; the trends and decision making processes within the overall economy.

It appears that investors no longer worry much about the fundamentals of investments or even the wiggly predictions of charts, because they have a much more basic way of assessing the likely trajectory of stocks: political analysis. And the result of this may be that we will have blood running in the streets. Again.

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To Predict the Next Bust, Ask An Austrian

Revising The Mantra

It’s long been the mantra of the Psy-Fi Blog that no one can successfully predict anything about anything to do with finance; or anything much else, to be honest. To this, though, we probably ought to add a corollary – no one can successfully predict anything about anything to do with finance except when they do, but when they do everyone will ignore them. Tough business, this crystal ball gazing lark.

Although the history of the recent crash is too close to analyse, it is possible to look at what happened in the turn of the century debacle. It turns out that there are two groups of people who successfully predicted the market collapse – a bunch of value based investors and an obscure group of economists hailing originally from central Europe. In difficult times we must take our heroes where we can find them.

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