Monday, Mar 08, 2010
Sense v conspiracy theory
Pragmatic capitalist: Does the government manipulate stock prices
Apologies 2 in a row but another excellent post from same blog. Would highly recommend.
Posted by bellwether @ 11:24 AM (971 views) Add Comment
23 Comments
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1. chrisa said...
Yes.
It's all manipulated.
2. estrader said...
The pretty coloured line people should pay close attention to this article. Strong hands, weak hands, the public.
3. icarus said...
It's not a question of conspiracy theory, it's explicit government policy to support equities and other assets.
This is what Larry Summers wrote in a WSJ article
http://blogs.wsj.com/economics/2009/03/13/summers-on-how-to-deal-with-a-rarer-kind-of-recession/
"Declining asset prices lead to margin calls and de-leveraging, which leads to further declines in prices.
Lower asset prices means banks hold less capital. Less capital means less lending. Less lending means lower asset prices.
Falling home prices lead to foreclosures, which lead home prices to fall even further.
A weakened financial system leads to less borrowing and spending which leads to a weakened economy, which leads to a weakened financial system.
Lower incomes lead to less spending, which leads to less employment, which leads to lower incomes".
Governments are locked into the idea that prices of assets already in place must be supported at all costs. This is code for supporting the banks and landlords at the expense of the real economy. It really is back to supporting land prices so that landlords' incomes can trickle down to the peasantry.
4. Mucker said...
Ask Peston who was briefed by HM Govt and managed to get the banks share prices down even futher to reduce the cost of the bailout!
5. bellwether said...
Icarus did you read the article? Point is simply that the government intevention is not direct but comes via recapitalising the banks by buying toxic for $. The suggestion is that there is no invisble hand, that the hand that fed the banks the capital was very visible.
I agree the us government are very interested in seeing asset values hold, the Obama admins slightly facile interest in Schillers slighyly facile "animal spirits" notions signal that, but the intervention does not have to be direct via eg Plunge Protection.
6. flashman said...
I’ve often said that it would be odd if the government(s) didn’t arrange for a bout of buying in extraordinary times. However it would only work when something like 9/11 happens. 9/11 caused the markets to plummet but ultimately it was no big deal (apologies to the families of the dead). In this instance the government could take the patriotic and strategic view that “we are not going to let our enemies depress our markets”. However, they could only take this gamble if they were absolutely sure that the market was only artificially /temporarily depressed. Even then, they would not be able to sleep while it was going on
If they thought that the markets were depressed for a serious or real reason then there is no way that they could do it, long term. The big boys would cotton on to the government activity in a millisecond and the game of skinning the government alive would begin.
Another consideration is where would the governments and their representatives get the money? It would cost trillions to pervert all markets and that can't be hidden or disguised for long. Even if they asked private companies to do their bidding they would be too scared to do anything other than a concerted short-term effort
Maybe they secretly print trillions of Dollars and buy stocks? Now there’s a conspiracy
7. flashman said...
bellwether: I acknowledge the "buying toxic for $" angle but I don't see how that could make all the worlds equity markets rise for a year (it's far too indirect). It could arguably even cause them to fall because the necessity of stimulus and the possibility that it will one day be removed can make people nervous. I think we might have to look elsewhere for the reason for the rising markets. My money is on worldwide optimism, crazy as that might seem to some
8. Crunchy said...
YES
9. bellwether said...
Flash I think it is a mix, of big money chasing gains, and genuine optimism and they infect each other. Of what the optimism is a function of is difficult to say - bullishness always begets bullishness, but the stats also show an improving economy for now, whether is this sustainable over any sort of period ,or the result of stimulus that has lille by way of multiplier only time will tell.
My view remains that until the excess debt is down to manageable levels and income supports asset prices there are problems to overcome.
Actually if one thing worries me more than anthing else it is the general lack of stoism being shown by our leaders, who seem fixated only in the popularity that comes from constant growth and seem to afriad to go through a period of retrenching to get back on a sounder footing. We even prescribe tablets for grief nowadays.
10. Passingthru said...
@Flashman,
Hasn't the ability of investment banks to borrow money at close to 0% been in some part responsible for a recovery in asset prices (I've read a lot of articles on "carry trade" and "hot money" invested in the Asian markets)?
11. Crunchy said...
Not so much governments but central banks and 'influential' investors. Too much money in the markets before 911 for my liking.
Sorry flash you are so naive, or is it surreptitiously knowledgeable about these workings. Have you never heard of the term insider trading?
tut, tut. I think I know you better than that.
12. icarus said...
bellwether 4. Yes, I read it and understand that point. The only reason I mentioned 'conspiracy' was that it was in your title (which suggested no conspiracy - agreed). I mentioned it simply to swerve that word and point out that asset-price support, whether effected directly or indirectly, is central to government policy. The question is what extent this is to support governments' banking buddies (is the invisible hand invisible because it's in the till?) and to what extent it's to support the economy. Judged solely in terms of results you'd to have to put more weight on the former.
Hello Flashman - regarding the 'big boys' @5 I'd guess Bill Gross, quoted in the article speaks for them. As for supporting stockmarkets @6, all governments are doing similar things to what the Fed's doing. As the article puts it they're "herding investors out of cash". To paraphrase Keynes, governments are big enough to make the markets irrational for longer than you might think.
13. flashman said...
bellwether: I probably agree with the bulk of your post @ 8. The market is up because of a bit of everything.
My parents are both born and bred Calvinistic Jocks and I am eerily familiar with your desire for a more brooding stoicism and a recognition of our debt. You have to understand that all these feckless English basta*ds don't grow up defying the wind and rain to walk through a town filled with glowering granite buildings. Much to my Fathers disgust, I have fully adopted the fecklessness of the English (born abroad and never lived in Scotland)
14. icarus said...
@9 (2.50pm) - References to posts 4,5,6 are now to posts 5,6,7 (1.34pm, 1.35pm, 1.48pm).
15. icarus said...
Regarding artificial support by the Fed for asset prices, people talk of low IRs and the purchase of impaired assets (TALP, TARF, mortgage relief, and the Capital Relief Program (public-private partnerships to buy assets at prices that reflect "longer-term value")), but also very important are changes in accounting standards that move away from mark-to-market and toward mark-to-make-believe. It's worth a look at
http://creditwritedowns.com/2009/04/a-few-comments-about-mark-to-market.html
especially the "Level 3" stuff.
16. tyrellcorporation said...
'feckless English basta*ds'...lol, nice!
Flash had a pint or two at lunchtime!
17. bystander said...
Wasn't it a couple of feckless scottish basta*ds who helped to create this mess in the first place?
18. tyrellcorporation said...
...ding, round two.
Can't argue with that Flash,
19. estrader said...
@6 "However, they could only take this gamble if they were absolutely sure that the market was only artificially /temporarily depressed."
Flashman, maybe I have misunderstood what you are actually saying, but manipulation is creating the perception that is the very opposite to what is true. If the market is artificially depressed it's more than likely due to manipulation, an act of terrorism probably just assisted the operation. The market took around 2 years to get back to pre 9/11 levels and we are barely above that level now.
"If they thought that the markets were depressed for a serious or real reason then there is no way that they could do it, long term."
By this time the smart manipulators have long since sold the majority of their stocks to the weak, fearful and clueless public at a much higher price and are now starting to buy them back at a much cheaper price.
20. flashman said...
tyrellcorporation and bystander: "Can't argue with that Flash"
Yes I can, you maypole dancing sons of bitches. It was clearly William the Conqueror and his English lap dogs that got us into this mess. Never forget Bannockburn. It could happen again.
estrader: Yes I think you have misunderstood what I am saying. I haven't the time to explain now. Got to get ready for tennis
21. rumble said...
"...general lack of stoism being shown by our leaders, who seem fixated only in the popularity ..."
How else is a government's success measured? The finances can be a mess while the government remains popular, and therefore in office, by pulling the wool over the majority who lack economic awareness. Economics is of secondary concern as long as you can lie about it. Prime objective is popularity.
22. estrader said...
@17, Enjoy your tennis Flashman, no need to explain for my benefit. If I have misunderstood you that's fine. I understand manipulation and that is what matters.
23. tyrellcorporation said...
Enjoy your tennis Flash, hope your opponent severly whips your sorry jock a*se! LOL. ;)