“The market can remain irrational longer than you can remain solvent.”
— John Maynard Keynes
“The market can remain irrational longer than you can remain solvent.”
— John Maynard Keynes
What a barb, but painfully true. JMK didn’t get it all right, but some of his analysis is very incisive. Economic Consequences of the Peace (in the wake of WW1 and the treaty of Versailles) was nigh-on prophetic.
The market is NEVER irrational. The market is simply a set of individuals responding to economic conditions. The market is very rationally responding to some very irrational actions that politicians, bankers and stupid consumers have made over the last few years. Really people, what is irrational about the market response to the incredibly foolish behavior of the government and credit lending insititutions over the last few years?
[blockquote]The market is NEVER irrational…. Really people, what is irrational about the market response to the incredibly foolish behavior of the government and credit lending insititutions over the last few years?[/blockquote]
The “set of individuals” is a set of people. While it may be arguable that greed and panic are or are not “rational,” even Adam Smith had some rules of engagement the people in the market themselves should follow. The market we have doesn’t exist in a vacuum, nor do people set aside their desire for advantage just so the market will function perfectly. So, was it rational or irrational the the market had faith in the real estate bubble? You may blame the government and lending institutions all you want, but the market got what it asked for – something irrational to begin with.
“The market can remain irrational longer than you can remain solvent”
Great line from a great writer.
_ _ _ _ _ _ _ _ _
“The market is NEVER irrational. The market is simply a set of individuals responding to economic conditions. The market is very rationally responding to . . . .”
In this context, the “market” is simply a shorthand way of describing the collective behavior of market participants. Those participants have the same vulnerability to panic, irrational exuberance, and self-deception as all other human beings. Market participants’ collective behavior can, at least in the short run, be markedly irrational. Think of bank runs and panics. Think of the Tulip Mania. http://en.wikipedia.org/wiki/Tulip_mania
Bank runs happen when banks allow multiple claims to the same set of funds. When street cons do it, it’s called a shell game. When people with bank accounts do it, it’s called check kiting and the banks get them thrown in jail. Bank runs are a rational response to malfeasance by the banks.
How was the Dutch Tulip Bulb crisis solved? Did the Dutch government step in as the buyer of last resort for tulip bulbs?
BlueOntario,
Without artificially low interest rates set by the Fed and political pressure from the government, the market would have determined early on that 1,000 sq ft homes in Compton aren’t worth $300K. Or even $100K.
If the market has a brain to be rational with, then that brain consists of some system of the (rational or not) brains of its participants. It might be just as accurate to say that the market is NEVER rational, especially as much as one is a classicist and views economic processes as like unto the laws of Newtonian physics. If you want to look at it that way, then Keynes’s observation still holds true: you can’t always economically withstand the consequences of the stupidity/whatever of others.
Byzantine, banks cannot lend money at all without having less on hand then they need to cover all deposits.
#6, is that an actual example – $300K on a 1000 sq. ft. in Compton?
http://www.doctorhousingbubble.com/real-homes-of-genius-today-we-salute-you-compton-once-twice-three-times-a-short-sale/
Oh. My. Goodness. $310K for an 828 sq. ft. house in one of the most crime ridden cities of America – that’s $374 a sq. ft!!! Tangible fruits of the Community Reinvestment Act……
I have a client facing foreclosure on a 50-year old 900 sq ft home on which $435k is owed. In a small town, not L.A. You would have thought that the local credit union would have known better.
“Bank runs happen when banks allow multiple claims to the same set of funds” —Byzantine [#5]
Nonsense. No bank keeps enough cash on hand to pay off all depositors at once. Banks hold enough cash to meet customers’ anticipated demand for cash (which normally amounts to only a small percentage of banks’ total deposits). There is nothing abnormal about this practice; it is the heart of banking.
If banks kept all deposits as cash in the vault, they could not pay you interest. One the contrary, they would have to charge you fees for keeping your money—since they would have no investment income but would still have expenses (e.g., employees’ salaries).
“Tangible fruits of the Community Reinvestment Act” —Chris [#11]
More nonsense. The Community Reinvestment Act has never applied to credit unions. In any event, Chris and some others have repeatedly mischaracterized that Act. http://new.kendallharmon.net/wp-content/uploads/index.php/t19/article/16800/#286920
Irenaeus,
I have no problem with banks lending out deposits on interest bearing accounts, but in that sense they are acting as mere intermediaries between me and loan applicants. Demand deposits are a different creature, and this is why a more successful business model in a world of hard currency would be a distinction between loan agencies and depositary institutions. But my basic point remains: bank runs happen when banks allow multiple claims to the same funds and, to add from your post, when they don’t maintain prudent reserves and/or take on too much risk. Now we see that having a lender of last resort to prevent bank runs only increases the moral hazard, and in the end even this vaunted lender of last resort must resort to the printing press and manipulation of the market rate of interest. The malinvestments will remain frozen in the system, further delaying the recovery. The new money and artificially cheap credit will set in motion their own distortions that, sooner or later, will need to be liquidated.
As the Austrians are putting it, “Stabilization Is Chaos.”