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Nederlog
  Mar 14, 2012                  
     

Crisis: Wall Street highest since 2008

 

  "... it is surely laughable when the highest awards are showered on those who promote the most gimcrack schemes to make themselves rich, at least for a while. The geniuses who invented the pyramid of derivatives at Long-Term Capital Management were awarded the Nobel Prize for their cleverness, not long before the whole edifice came crashing down with the financial community digging deep into its pockets to prevent too much collateral damage. To every excess, there comes a reaction."
 -- Chris Patten, Baron Patten of Barnes

Previous crisis

It's time to follow up on the ongoing economic crisis, and there is a bit of good news, at least for those who do not want to see the Western world collapse, and it is in the title: Wall Street highest since 2008.

I'll come to that in a moment, after having given some clarifications about my opening quote, by an English conservative politician, with the lemma in Wikipedia about him linked at the bottom.

The lemma is also the source of the quote, which I gave because I found it yesterday (related to another major problem: The collapse of the university and school education in the West over the past 40 years), and I like it while it also provides some information I did not know:

The supposed "geniuses" are not the whiz-kids with physics and mathematics degrees "from the best universities" that even "quality papers" (such as the eager and willing vehicle for Rolex, BMW and Louis Vuitton that is the Dutch once fairly decent but now morally and intellectually totally defunct Dutch daily the NRC-Handelsblad) kept telling their readers again and again that had invented the derivatives scheme. Not so: That was all bullshit, astroturf, misinformation, media-babble and unchecked or lied about non-facts.

In fact, it the crazy derivatives scheme was invented by two or three middle-aged men, notably Myron Scholes and Robert C. Merton, the latter - in case you noticed the last name - the son of the late sociologist Robert K. Merton, all decidedly not "geniuses" in my opinion, and it was a really crazy schema from the very start, involving all manner of unverified and unverifiable assumptions, and making all of the economy depend on rotten shares, since by the derivatives scheme that the said "geniuses" invented, all risks on such shares were  indirectly linked to all shares of any kind, as sort of collateral to support the losses on rotten shares.

So that's why the Western economy collapsed and nearly went completely to pieces: Derivatives plus deregulation, that combined to make the risks traders took to get filthy rich - see Crisis: Corporate psychopaths - part A - the risks of all citizens who do not get a chance to enrich themselves by speculating with other people's money in crazy investment schemes.

The brief of the "genius" scheme is this: The bankers and traders get filthy rich in a very few years, by crazy speculations in derivatives, and if their get-rich-fast schemes fail, everybody who is not a banker or trader pays the losses, while also keeping up the yearly bonuses of millions for those who robbed them. If it is "genius", it is the kind of genius involved in Ponzi- and Maddoff schemes.

The current news is, as I said, that the indexes of Wall Street have crept up to a level they haven't been on since 2007: Dow Jones is above 13,000, while the Standard & Poor's index is at the highest point since 2008.

Other economic indices, such as US consumer spending, also have gone up, but then there still is 8,3% of the US working population without a job, while the Federal Reserve Bank intends to keep interests rates for short term loans still at almost 0% till 2014, "to stimulate the economy".

What do I think? I am not an economist, but then I've seen most economists get it wrong the past decades. In fact, it does seem to me fairly good news, if only on the level of general indices, speculations, and expectations, and  namely because very much of the economy is driven by human expectations and beliefs about the economy, which means that much of economical development is intertwined with what have been called, somewhat misleadingly, self-fulfilling prophecies. I quote the father of the above-mentioned supposed genius from the Wikipedia article in the last link, because this is an interesting concept (and I added the link):

The self-fulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behaviour which makes the original false conception come 'true'. This specious validity of the self-fulfilling prophecy perpetuates a reign of error. For the prophet will cite the actual course of events as proof that he was right from the very beginning

Here is more about it from the same article, also to the effect that it has less to do with prophecies or predictions, though these may be involved, that with beliefs, expectations, ignorance and wishful thinking:

Merton's concept of the self-fulfilling prophecy stems from the Thomas theorem, which states that "If men define situations as real, they are real in their consequences." According to Thomas, people react not only to the situations they are in, but also, and often primarily, to the way they perceive the situations and to the meaning they assign to these perceptions. Therefore, their behavior is determined in part by their perception and the meaning they ascribe to the situations they are in, rather than by the situations themselves. Once people convince themselves that a situation really has a certain meaning, regardless of whether it actually does, they will take very real actions in consequence.

Merton (the father, not the derivative "genius") also is quoted to this effect:

The parable tells us that public definitions of a situation (prophecies or predictions) become an integral part of the situation and thus affect subsequent developments. This is peculiar to human affairs.

Actually, it is not, though it is probably peculiar to living things: Both plants and animals show very many schemes to mislead or manipulate other living things, from pollination to camouflage to trying to look like another kind of animal.

In any case ... it may be that a majority of investors, speculators and traders believe that the economic situation is turning better, which is supported by the economical indices, which in turn make investors believe the economic situation is improving.

Will it work? That's anybody's guess, and the European governments have decided, for some totally silly, arbitrary and conventional reason, that European governments should show a deficit of no more than 3%, and that if it is more, extra cuts in spending, and extra increases in taxes on the middle and lower class are "necessary". So it may all be brought down again, namely for lack of money of those who are supposed to buy the goods the recovering economy produces, which lack then arises for the lack of intelligence and knowledge of their democratically elected political leaders.

But the good news is that the economic situation in the West seems to be better than it was since 2008, which is why I wrote this Nederlog, in the crisis series, that certainly has not finished, for even if things do continue to improve economically, it will take years if not decades to undo the damages done by deregulation, derivatives and by Wall Street bankers who seem thoroughly psychopathic to anyone not in their class of people, though they also seem to be wildly admired by their few mega-rich peers, and by journalists who sing their "genius" and praise their "excellence"  in the media, for pay. (*)

In fact, that is one of the major shortcomings of Western democratic societies: That it has become very easy for fairly evident psychopaths, nuts, incompetent careerist, and political liars to get positions of power and trust that men of their outlook and kind never should get, mostly because they are voted in by democratic majorities who lack the wherewithal to see through their lies and pretensions.

More about this in a later Nederlog and in the last link.

Previous crisis


(*) Interestingly, investors like Buffett and Soros, who by their great riches show they do understand markets and investments, were early critics of the derivatives scheme. From the article on derivatives in Wikipedia:

Derivatives typically have a large notional value. As such, there is the danger that their use could result in losses for which the investor would be unable to compensate. The possibility that this could lead to a chain reaction ensuing in an economic crisis was pointed out by famed investor Warren Buffett in Berkshire Hathaway's 2002 annual report. Buffett called them 'financial weapons of mass destruction.'


P.S.
Corrections, if any are necessary, have to be made later.

 

As to ME/CFS (that I prefer to call ME):
1.  Anthony Komaroff Ten discoveries about the biology of CFS (pdf)
2.  Malcolm Hooper THE MENTAL HEALTH MOVEMENT: 
PERSECUTION OF PATIENTS?
3.  Hillary Johnson The Why
4.  Consensus of M.D.s Canadian Consensus Government Report on ME (pdf)
5.  Eleanor Stein Clinical Guidelines for Psychiatrists (pdf)
6.  William Clifford The Ethics of Belief
7.  Paul Lutus

Is Psychology a Science?

8.  Malcolm Hooper Magical Medicine (pdf)
9.
 Maarten Maartensz
ME in Amsterdam - surviving in Amsterdam with ME (Dutch)
10.
 Maarten Maartensz Myalgic Encephalomyelitis

Short descriptions of the above:                

1. Ten reasons why ME/CFS is a real disease by a professor of medicine of Harvard.
2. Long essay by a professor emeritus of medical chemistry about maltreatment of ME.
3. Explanation of what's happening around ME by an investigative journalist.
4. Report to Canadian Government on ME, by many medical experts.
5. Advice to psychiatrist by a psychiatrist who understa, but nds ME is an organic disease
6. English mathematical genius on one's responsibilities in the matter of one's beliefs:

7. A space- and computer-scientist takes a look at psychology.
8. Malcolm Hooper puts things together status 2010.
9. I tell my story of surviving (so far) in Amsterdam/ with ME.
10. The directory on my site about ME.



See also: ME -Documentation and ME - Resources
The last has many files, all on my site to keep them accessible.
 


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