Tuesday, October 7, 2008

Watching the markets swoop and plunge.

   A poem, fashionable in the United States, anticipates the time “when suddenly I am old, and start to wear purple.”  Do the Dutch, equivalently, start to ride purple?


As the financial crisis continues to grind forward through the world’s markets, I’ve been keeping up through podcasts of Bob Brinker’s MoneyTalk radio show from the US.  (Disclosure: I subscribe to his “MarketTimer” newsletter, and to his “On-Demand” service that streams his weekend program.)  Over the years, I’ve adopted his investment philosophies, using diversified no-load mutual funds to build a nest egg able to support eventual (preferably early) retirement.  He’s recently had very clear explanations of the current problems in the global economy, and thoughtful guests from the NY Times, the Economist, and leading universities to give perspective.

He had two good observations on the bailout / rescue package last week.  First, from a political standpoint, it’s noteworthy that the House balked at a 700 billion dollar package, but when 150 billion more in tax breaks was added, it became acceptable.  Second, from an economic perspective, the package has an inherent contradiction that it needs to buy mortgages cheaply for taxpayers (for perhaps 30 cents on the dollar), while also supporting a price that keeps the financial system liquid (perhaps 60 cents on the dollar).  Together, these are likely to mean that the plan may cost more, and yield much less, than people are presently expecting.  (His guest, an MIT economist, also noted that the package does not satisfy people’s desire to see someone held accountable for the mess: unless there is some element of revenge, then it doesn’t have the teeth to deter future excesses).

It’s a bit distressing to see how negatively the markets have reacted to the legislation: it may look similarly contradictory to them.

A Slate Explainer podcast, trying to explain how large 700 billion dollars is, noted (tongue in cheek) that it could be paid by acquiring the Netherlands, whose GDP (ranked around 20th in the world) is approximately that size. (They went on to note that the US has a dismal record for invasions recently: it might be better to acquire the aggregate private savings accounts in Germany, also about 700 billion dollars.)

We used to joke that a characteristic trait of academics and researchers is to be both arrogant and clueless.  I’m starting to get the same feeling about the wisdom of crowds.  There seems to be a lot of irrationality mixed in with the perfect information attributed to the free markets.

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