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Oct 6 / Jonathan

Explaining the market

As I write (Monday morning), the Dow is down some 450+ points, following the international stock markets.

Does anyone doubt that if this had happened in the wake of a defeat of the bailout, the accepted explanation would have been the bailout’s failure?

Update: for the record, the DJIA finished the day at 9955.50, down 369.88, recovering somewhat from below 9600 earlier in the day.

One Comment

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  1. jonathan briggs / Oct 7 2008

    1) The credit crunch has nothing to do with your ATM not working. The company you work for can no longer finance its day to day operations and will close down. All, or almost all, companies have a mismatch between the duration of their liabilities (read your salary) and their income (read sales); they borrow money over short periods of time to fill the gap. The banks are not lending the money for this which means no paycheck. Once a business closes, even if it has a solid business model, it closes for good.

    2) Why won’t the banks lend money? Because the balance between what they have as assets and what they can lend is too low to legally allow them to lend. The value of their assets is being priced by global panic – not a true representation of the price. And, they can’t borrow money from knowledgeable investors to improve their balance sheets. No one believes that they are going to be around long enough to see an interest payment because global panic is mispricing the banks assets.

    3) How did their assets come to be priced so low? Because Americans defaulted on their home loans and no one knows when they are going to stop. Period, end of story. You can argue until you are blue in the face about why they defaulted, but it doesn’t change where the problem came from. There was nothing in the history of human behavior over the past 50 years that would account for massive default other than greed of the average Joe six-pack or fraud of the average Joe six-pack. Save that for another argument.

    4) The stock market is not about making the rich richer. Its about setting price and is subject to all the intricacies of human behavior. Which of course means all sorts of interesting results. Governments, the Catholic Church, the Mormons, unions (some of the biggest players), pension funds, your favorite charity, all have money in hedgefunds and probably in the same one! Anyone can own an index or an ETF. Buffet made a million dollar bet that an index would outperform a fund of hedgefunds. Just for the rich? Not at all! The market is the last Robin Hood. Its the only place you can legally take from the rich.

    5) Bailout? No. home owners bailed on their obligations because they have the option to do so. Most countries do not let you walk away from your debt. Even if you walk you are responsible, legally, for repaying it. Not in the US. Moral hazard – look it up. The reality is that if a company can hold on to the loans for long enough, most people will still pay them. No company has the ability to hold debt that long – remember your paycheck comes every two weeks or so. The government can. And if it does, it will make a profit just as it did in the depression. That’s right, the US government made the tax payers a ton of money off helping out the banks in the depression. Its stabilizing the markets, not bailing them out. The US taxpayer made monumental gambles and is now having to pay the cost.

    6) Banks are not Wall Street. History over the past 1000 years (that’s right) has had many banking crises that all end badly. nothing there about free markets. People have been mispricing things forever (no Wall Street, Communism etc), and banks have been doing their job for longer. A failed banking system is worse than a failed market system!

    Jonathan – you know enough to be dangerous.

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