Had Enough?

Over the weekend, the world’s finance ministers decided to inject essentially infinite liquidity into the banking system.  The market seems to like it…this morning…

Let’s hope it works.  If you’ve checked your 401(k) and other investments recently, things look pretty sour.  I don’t know about you, but even my professional investment guy’s portfolio is down 35% for the year.  I tend to get real real cranky about portfolios that lose $10K in a month.

Don’t you think it’s time we shot the idea of the “self-correcting market” in the head?  This idea works fine in micro-economics, where supply meets demand.  But self-correction is ridiculous in the macro-economics of politics and the stock market, where fear meets greed.

The Republicans scream the neo-classical idea that markets are smarter than government, but recent events show how the self-correcting market is a childish illusion.  Markets feed on excesses, not rational self correction.

The way you make money in the stock market is to get to an investment before the “bulls” get there and drive the price to the sky.  Or you sell a put on a different investment, before the “bears” drive the price through the floor.  The way you really make money on the stock market is to identify and ride price swings and excesses that are irrational.  Sure, over a decade markets self-correct…but it’s hard to make money on rational correction.

Over the last 8 years, the miracle of the unregulated “financial innovation” brought us collateralized debt obligations and credit-default swaps (CDOs and CDS, to the tune of $62 trillion) that the market bought up.  The investment banks that made markets in these securities were miracles of leveraged profitability, and practically every Wall Street analyst said, “buy more of those profitable investment banks!”

The market didn’t correct, even though many smart people like Warren Buffett were saying, “this stuff is poison.”  The information was out there…but many powerful people in the government (and of course the investment banks) were saying, “it’ll be just fine.”  Read last week’s New York Times for a great article about the work Greenspan and Cox and Paulson and Graham did to make sure CDOs and CDSs were totally unregulated.  These guys, Republicans all, were the big boosters of the most expensive “greater fool” investment the world has ever seen.

The final irony is seeing the governments of the world — and you, the taxpayer — now  rescuing these unregulated financial geniuses.  Now that this self correcting market has imploded, don’t forget who’s idea it was.

WiseUP!  Markets are efficient, they are good, and they bring us most of the wonders of modern life.  But they need to be monitored, sometimes policed, and every few decades…rescued.  By government. That is competent.