Padraic P. McGuinness, The Australian, March 8, 1994, p. 47.
It would be funny if it were not so stupid, the way in which the mounting evidence of total confusion and ignorance of how the economy and the financial markets actually work is being adduced as a reason for more regulation of them.
But is always the way of the fearful and the ignorant to attempt to suppress any activity that makes them feel insecure and which they do not understand. The fact that the regulatory reflex is often expressed in terms of ancient economic theories or ideologies, all long since discredited or refined into something quite different, does not make it any the less absurd that we should propose to regulate something we do not comprehend.
It may simply be a version of the old religious response to the world: when in ignorance of how the world works, and impotent before its brute strength, pray to a higher power or perform magical rituals. For this is all most efforts at government regulation amount to: as with religion the only material benefits of such activities flow to the priesthood. To the extent that the faithful believe them, there is some comfort to be derived from the incantations and dancing around.
Among the priesthood of the modern financial world it is necessary to include the host of forecasters, economists, chartists, expert dealers, spokespeople, bureaucratic analysts in government and the central bank, economic commentators, tipsters, and the whole parasitic structure that exists on top of markets without actually participating in them.
It is perfectly clear from the behaviour of the markets over the past couple of weeks that nobody here, in the United States, or anywhere else has the slightest idea of what is happening to bond prices, interest rates, exchange rates, or economic growth rates, and why. We are getting the usual wise analyses from people who, if anyone took commentators and analysts seriously at all, would have long since been on the dole. But like priests they have perfected the technique of always sounding as if they know what is happening while explaining away what they got wrong last time.
The truth of the matter is that no one gets it right continually, or even often enough to make them rich. Or if anyone does, we will never know since they are certainly not going to be stupid enough to tell anyone else the secret.
This is not to say that there are no successful gamblers in the international financial casino. Of course there are, and they are the ones who astutely play the odds, gaining fine margins here and there, and doing better occasionally, like professional punters, when they get inside information, manage to nobble the favourite, or bribe enough jockeys enough to stay bought. Gambling is irresistible to most. But the real winners are those who never gamble with their own money, but simply charge the mug punters a commission for winning or losing on their behalf. This is what happens with regard to managed funds.
This is pretty much what the famous George Soros has done on a larger scale than most. The billion dollars he won on the collapse of the ERM has been counterbalanced in part by the $US600 million he has lost on the yen. (Whether these are American, Australian or Monopoly dollars hardly matters at this stage.)
In Australia, there is simply no highly reputed tipster or commentator (especially not the Reserve Bank) who has got the markets continually right. It is not enough to have been forecasting for the past 18 months to two years that there will be a market correction: a forecast this is wrong 364 days of the year and right on one day is worthless, unless you are able to name the day or the week when it will be right.
The casino element in the international financial markets is undeniable. But this in itself does not establish a case for regulation. If you cannot abolish the casino, and anyone who thinks it is possible to abolish world financial markets is truly in cloud cuckoo land, why regulate it? Are we in any case sure that casinos are a bad thing? True, again, when one observes the ever more refined derivatives markets, it is difficult not to feel that traders are doing the equivalent of betting on anything, including two flies crawling up a wall. But if there is a market for such a market, why not?
What is clear is that no one understands financial, commodity, or hedge markets. There has been an enormous amount of effort put into the subject by the rocket scientists, with their PhDs in pure maths or nuclear physics, and by the economists who think they ought to understand markets even though they are not much good at mathematics.
But there is fair chance that neither sophisticated analysis of derivatives and the fine distinctions made between aspects and types of risk, with each ever more refined aspect developing its own market, nor economic analysis has much to do with the behaviour of markets in the short term at all. In the long run, as is being painfully rediscovered, the markets tend to conform to “fundamentals”. This is not because the theorists are necessarily right about the fundamentals, but because of the simple fact of the Budget constraint, which causes markets to converge eventually, whether the operators are money market jocks or computer programs.
The day-to-day behaviour of markets in ordinary times, and even more in extraordinary times, is clearly a matter of mass psychology and hysteria. Economics and technical analysis can tell us nothing about the causes of the Dutch tulip mania of 1636; mathematics through innovations like chaos and complexity theory might be able to tell us something; but ultimately it is a matter of human psychology.
When, if ever, we can explain the causes of outbreaks of social discontent we will also be able to explain the causes of market bubbles.
Virtually the only good advice that an experienced economist can give to an operator in the financial market will be that it is likely to be just as profitable in the long run to make decisions to churn the funds every quarter, or year, as every day. But such advice will not generate a handsome income either for an economist, a commentator, or a trader. They all have to pretend that they are useful on a daily basis. Like priests, it is to their advantage to propitiate the gods all the time.
There are many occasions on which the only sensible advice is to sit tight. But it is almost impossible for any business to make such decisions, especially when all about them are losing their heads. Perhaps it is therefore useful to have a host of competing analysts and commentators contributing a cacophony of advice, since then a decision can be made to take a particular piece of advice which enables you to do what you wanted to do anyway.
However, the incentive system for dealers and traders is based not on their long-term performance but on short-term performance. It is in their interest, also, to pretend that decisions must be made hourly or daily if disaster is to be averted.
And the whole performance has to be monitored by regulators on the one hand, and economic and financial journalists on the other, who in the main do not understand what is going on any better than the participants, and know less about the details.
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