The American political system was, as the saying goes, “designed by geniuses so it could be run by idiots.” But a cocktail of political and technological trends have converged in the last decade that are making it possible for the idiots of all political stripes to overwhelm and paralyze the genius of our system. [...]
I would argue that together these changes add up to a difference of degree that is a difference in kind — a different kind of American political scene that makes me wonder whether we can seriously discuss serious issues any longer and make decisions on the basis of the national interest.
We can’t change this overnight, but what we can change, and must change, is people crossing the line between criticizing the president and tacitly encouraging the unthinkable and the unforgivable.
Wall Street is about speculation, and Wall Street blogs are no different. At this point, Zero Hedge has staked everything on a doomsday scenario, a takedown of the old order, “a deleveraging at every level of modern society.” Even as the market has improved, the economy has shown glimmers of stability, and many of his fellow bears have capitulated, Ivandjiiski has clung ever more tightly to his convictions. The manipulation of the market will eventually fail, he believes, and the pyramid scheme will be exposed for all to see. But it better happen soon or Zero Hedge may lose its mojo. The higher the Dow Jones climbs, the more righteous he necessarily becomes: Every hopeful data point a fraud, every bull a conspirator. There’s an old Wall Street term for this, for when you hold firm to your belief in defiance of the market—fighting the tape. It’s considered inadvisable, but that’s what Ivandjiiski is doing, convinced that he is destined to win.
People in general don't like cutting their losses. They're willing to gamble on in the hope of recovering their losses, and that is a very well known characteristic of individual decision making, and in national decision making it's exacerbated because the national leaders who have led the country close to defeat, for them there is really nothing further to be lost by putting more at risk. There is a real divergence of interest between national leaders and their communities when the time to cut losses arises, because cutting losses is rarely beneficial to the decision maker.
To paraphrase Isaac Newton, macroeconomists can calculate the motions of a lonely rational agent but not the madness of the crowds. Yet if macroeconomics wants to become relevant again, its practitioners will have to start calculating this madness. It is going to be difficult, but that is no excuse not to try.
Dr Heller, who likes to sail, says there may be other mechanisms at work too, including an interference effect that causes different ocean swells, travelling at different speeds, to add up to produce a rogue, and a non-linear effect in which a small change in something like wind direction or speed causes a disproportionately large wave.
If Mr Rogoff is right and more failures were inevitable, then Lehman’s collapse, though painful, may have been necessary. History suggests that systemic banking crises are usually resolved with large injections of public capital. Lehman’s failure galvanised policymakers. Only when faced with the post-Lehman, post-AIG chaos did Congress pass the $700 billion Troubled Asset Relief Programme (and even then, after an initial rejection). Other rich-country governments also moved to guarantee bank debts, raise deposit insurance and inject capital into their banks.
I think this period we’re going through is kind of a curative process; it’s a purgative. There is something to the old view that you have to have a recession once in a while to deal with the excesses of a boom. And I think we had excesses in this boom, for sure, and we’ve got a really difficult recession. You want to relieve the sharp edges, without any question, but I don’t think it’s been possible to pump it up so there’s no recession at all.
In my career, I have never witnessed a situation like the one that exists now, when views about inflation risks have coalesced into two diametrically opposed camps. On the one hand, one group worries about the long-term inflationary implications of a seemingly endless procession of massive federal budget deficits. At the same time, others fear that economic slack and downward wage pressure are pushing inflation below rates that are considered consistent with price stability and even raising the specter of outright deflation.
The fear of higher long-term inflation reflects, to a large degree, worries about Fed monetary policy. Our array of new programs to spur the economy have pumped up our balance sheet and created a huge quantity of bank reserves in the process. Some worry that we won’t be able to shrink our balance sheet because of political pressures, and in the process we will end up monetizing the government debt. This fear is real, growing, and disruptive. That’s why it’s so important for me to say the following loud and clear: We at the Fed are and will remain fiercely independent from politics. We have the means—and we certainly have the will—to tighten policy when the time is right. In fact, by raising the interest rate that we pay on excess reserves we can tighten monetary policy even before our balance sheet shrinks. And we are, as always, steadfast in our determination to achieve both of our statutory goals of full employment and price stability.
You see, our predecessors understood that government could not, and should not, solve every problem. They understood that there are instances when the gains in security from government action are not worth the added constraints on our freedom. But they also understood that the danger of too much government is matched by the perils of too little; that without the leavening hand of wise policy, markets can crash, monopolies can stifle competition, and the vulnerable can be exploited.
And they knew that when any government measure, no matter how carefully crafted or beneficial, is subject to scorn; when any efforts to help people in need are attacked as un-American; when facts and reason are thrown overboard and only timidity passes for wisdom, and we can no longer even engage in a civil conversation with each other over the things that truly matter – that at that point we don’t merely lose our capacity to solve big challenges. We lose something essential about ourselves.
My contention is that if you are trying to predict the mass action of thousands of investors, most of whom are investing on a rational or logical basis, you won’t be able to do this by taking the same logical approach as everyone else.As the stock market can’t be predicted by logic alone, I believe investors have to use two conflicting approaches. First, they need their own views of the correct value to be placed on a company, worked out through fundamental analysis and by making predictions about future prospects etc.But investors also need to listen to what the market is telling them and see what they can learn from the behaviour of other investors. It is one of the reasons why I use technical analysis to complement my fundamental analysis; technical analysis is good at showing the mass action of investors.
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