Invulnerable zombies – the EMH

My book is due for publication in the US Fall, so work on my added sections on reanimation is starting to feel like one of those games where you have to kill all the zombies to get to the antidote before you fall victim yourself. Here’s another one – more on the way


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The ultimate zombie is one that is completely invulnerable. Neither special bullets nor hammer blows nor even decapitation can finally lay this undead being to rest. But dramatic logic requires that a zombie invulnerable to external threats must be subject to a subtle, but ultimately terminal, flaw that ends in its own destruction.

Ultimate zombies arise quite commonly in science and economics in the form of ideas that are immune from refutation. The classic examples arise from the popularised versions of Freudian psychology, centred on the Oedipus complex, named for the Greek tragic hero who unknowingly killed his father and married his mother. If a son hates his father, this is, obviously, evidence of the Oedipus complex. But, if he loves his father, this is explained as a repressed Oedipus complex. With rules like this, Freudian psychology can never be refuted.

But as a string of philosophers of science, being with the late Karl Popper, have shown, a theory that can’t be refuted by any conceivable evidence isn’t really a theory at all. All it says, in the end, is ‘anything can happen, and probably will’.

The global financial crisis, along with the earlier dotcom crisis has shown that, on any ordinary understanding of its terms, the efficient markets hypothesis can’t be right. Despite reaching a scale and sophistication unparalleled in history, global financial markets have shown themselves subject to the same manias, bubbles and busts that were seen in the Dutch tulip craze of the 17th century.

So supporters of the efficient markets hypothesis have sought a redefinition that would make it invulnerable to refutation. Their central argument is one that has already been discussed – if it is possible to diagnose the existence of a bubble, then it is possible to make arbitrarily large profits betting against it. And if someone like Warren Buffett has in fact done this, that can be put down to luck. Only if everybody can make money betting against the market can the EMH be wrong. But of course, it’s impossible for everyone to bet against the market – the market is just the aggregate of bets.

This argument in one form or another has been put forward by all the leading defenders of the EMH, notably including Eugene Fama and John Cochrane of Chicago and Scott Sumner of Bentley University

This set of observations from Scott Sumner in a blog post aptly titled ‘Defending the indefensible’ at least recognises the difficulties of the position

But why is Fama’s theory now in such disrepute? Because in the past ten years the world economy has seen two very important bubble-like patterns, indeed arguably the only two such market cycles in the US during my lifetime with macro significance. And they were both predicted by lots of experts because they violated popular theories of fundamentals. So start with the cognitive illusion that people have that makes them see bubbles even where there don’t exist. People think they have made accurate predictions because an upswing is always EVENTUALLY followed by a downturn. Then add in the fact that The Economist really did make accurate predictions in two of the most important events in modern history. Do you think it will be possible to convince them that they just got lucky? About as likely as a husband convincing an already suspicious wife that he is innocent after twice being caught in bed with two separate women. So I feel sorry for Fama. He’s probably right, but I don’t see how he could ever convince anyone in this environment. It would be like trying to convince someone that neoliberalism was the right policy in 1933.

As a well known blogger would say, ‘Indeed’. Looking at the evidence of the two gigantic bubbles of the last decade, it’s hard to see how Sumner maintains his own faith, and he never really gives an explanation, except to say that it’s easy to misperceive bubbles. As far as macroeconomics is concerned, the experience of the Great Depression and of the current Global Financial Crisis (which as Sumner implies, really began with the 2001 recessions) is pretty strong evidence that neoliberalism is not the right policy, at least not for all occasions and not in the forms that prevailed in the 1920s or the 1990s.

But the ultimate response to this invulnerable zombie must be the same as Popper on Freudian psychology. If the Great Depression, the dotcom boom and bust and the current Global Financial Crisis are all consistent with the efficient markets hypothesis, the hypothesis can’t tell us much of interest about anything. At most, it says that even when markets are way out of line with economic reality, it is hard to exploit this fact to make a profit. Most of us (me and Krugman at any rate) already knew that, and confined ourselves to getting out of stocks when they seemed absurdly overvalued.

87 thoughts on “Invulnerable zombies – the EMH

  1. So the people who could see it coming got out of stocks…when taxi drivers were still investing in stocks. Makes sense to me JQ – sell when others are buying madly but in any economic sense – its hard to see the prescient outweighing those who are late to evacuate a bubble and who are left crying later.

    Maybe we shouldnt worry so much about those who didnt listen…?? Shame it happens to affect my money that I have no control over… like my council rates…when local governments here in Australia got overweight in CDOs, went bust and are now trying to sue the Commonwealth bank because they “pushed” these investments on them and it wasnt fair because “C”wealth bank relied on long standing relationships” to mislead local governments. Good luck in court is all I can say and ratepayers pay the costs. Needless to say the only ones making any money out of our speculatively allocated local government rates is lawyers.

    The public is left with the sinking feeling they paid rates to a bunch of naive immature gamblers in local government, and the gamblers will now up the impost in charges, fines or fees on unsuspecting local residents… to make up the shortfall in accounts (when in reality they all should all be summarily sacked).

  2. Buffet made a lot money because economic professors taught the BS EMH to a whole generation of funds managers.

    Buffet having an acute understanding of ‘ value’ which is the future earning power of a business; picked up phenomenal businesses with massive future earning power capacity at huge discounts. These discounts occurred because EMH proponents mistakenly thought the markets dictated the ‘value’ so they sold these businesses at any price level with a negligent disregarded to the real value of a business, which is its future earning capacity.

    Warren Buffet;

    “Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.”

  3. I seem to remember one economic theoretician claiming that the tulip mania in the 17th Century was perfectly rational and therefore not a mania or evidence against EMH etc. I think it was Peter C Fishburn. Whoever it was, they would provide a good quote.

  4. So the markets: efficient, rational and apparently all-foreseeing – did so love the World that they did send their only begotten Son to die for the sins of Man. But the dead lad has returned from Hades, and as a zombie, is attempting to eat the branez of the worl. Last seen heading for the Reserve Bank….

  5. Andrew c,
    Just a slight correction. No one (sensible at least) has ever claimed that a market mechanism is “…efficient, rational and apparently all-foreseeing…” It does not have to be to make it the most useful allocation mechanism – it just has to be better than any other mechanism.
    A challenge to you would be for you to suggest a worthwhile improvement, rather than being a poor satirist.
    If you cannot meet that challenge you are no better than any other unthinking critic.

  6. @Andrew Reynolds

    Can’t take the blasphemy? But then by your own criteria “you are no better than any other unthinking critic”.

    I thought the satire was just fine. However, as a nonbeliever, I did not suffer the sting.

  7. Aren’t the arguments coming from different viewpoints? The Scott Sumner piece says to me that the EMH is like a philandering husband where the outcomes may not be great and trust is unlikely but that the partners will move on. There is a lot of collateral damage but if the aim is to have lots of partners the husband can achieve that. If the aim is trust it is obviously not going to work.

    Isn’t this the problem with EMH – that the theory doesn’t recognise or care about the collateral damage that is caused which is why the zombies live on. We have a market in education for instance which is growing, even though for many of those who only get the one chance, it will be a disaster. So areas which were once seen as for the social good of the community have been downgraded because the view, that they are being better managed through market processes despite the fallout to individuals, is so entrenched. So all of those individuals who aim to rise to the top whatever the circumstances will not be concerned that their good fortune rests on others misfortune.

  8. Freelander,
    If I am a believer in anything to do with the market it is that people are capable of dealing with each other. You do not seem to have this belief.
    All of that aside, though, I am not standing in the role of a critic of the freedom of the people to interact as they choose to do so. You, apparently, are. Perhaps you could pass on your wisdom as to why you would seek to greatly restrict the freedom to interact. Perhaps you see the people as too stupid to sort things out for themselves?

  9. What I really can’t work out is the fixation on markets as the preferred method of allocation when we plainly agree as a society that they are not.

    The ABS, OECD, economists like Butlin in Australia and (as far as I can see) anyone else who has looked at the issue agree that household production is around a third of total production. Government (national, state, local) is usually around another third. Households and governments go to the market for some proportion of their output, but likewise firms produce many outputs internally, off the market. And then there is the non-profit sector (charities, associations, clubs etc). So by any reasonable measure, we allocate less than a third of output through markets.

    Then think that markets are of many kinds, and that prices very often have a social as well as a money component.

    We seem to be having endless arguments about what shape of tail is best, while ignoring the dog.

  10. @Andrew Reynolds

    But then by your own criteria “you are no better than any other unthinking critic”. All these opinions you have ascribed to me without the tiniest inkling of evidence. You do have a vivid imagination. Chemically induced perhaps?

  11. Freelander,
    I ascribed no such beliefs, using, as I did, the words “seems” and “perhaps”. I am, as always, happy to be corrected.
    I have many times suggested worthwhile improvements, but I cannot recall you doing so. In that, as well, I am happy to be corrected.

  12. Andrew, #8, you think wishfully and I do so wish you were right.
    But if what you said was true, would the world not be an unrecognisably different place to what it is now?
    Very little of what goes on in the world seems at all “rational”or evidence of the elusive rational individual you describe. Whether it is exhibited in violence in a refugee camp, or the Nigerian delta, in Israel/Palestine and dozens of other places, or in the conference rooms of trans national corporations or superpower governments, very little happens that seems related to “rationality”, except of the most callous and most self seeking sort.
    No, we all look nice in a superficial way, like so many Andrew Bolts or Glen Milnes turning up in sports jackets without ties on Sunday mornings for “Backsiders”, but its largely contrived and the underlying mentality is not rational, but bloody-minded, utterly unself reflexive, and fearful.

  13. Paul,
    So you do believe people are too stupid to be trusted to run their own lives? If so, I cannot decide if that is depressing or arrogant.
    I look at the world and see around 6,000,000,000 people interacting and the vast majority of that interaction is peaceful and, in many cases, not selfish.
    Even if what you say above is correct and that we are “bloody-minded, utterly unself reflexive, and fearful” then how is a system that we endow with the ability to force us to do things likely to improve on what we do ourselves? Are not the people who we trust with that power likely to be even more “bloody-minded, utterly unself reflexive, and fearful”?
    To me, if we accept your point of view then there is no point to anything we do. I loo at 6 billion people interacting largely peacefully and see the potential for that “largely” to be improved upon. I would think it very sad if you were correct. Fortunately, I see little evidence of it.

  14. Andrew Reynolds, #8
    ” … you beleive people are too stupid to be trusted to run their own lives?”.
    Please mate, spare me the hyperbole and false reversals, because I claim, on the evidence I see, that people are not always the rational, genial souls you see through through your rose coloured glasses.
    Do you think that billions of these supposedly happy people you speak of really enjoy living in urban or rural squalor, while the wealthy squander trillions on “defence” (of the corrupt global status quo)?
    Will your model to “trust” for “rational” government be the slyness, exploitation, brutality and duplicity of Cheney/Bush and the self seeking neocons and neolibs?
    And what’s “rational” about bailing out Wall St Bankers, who take bonuses of up to half a $billion a year, in one case, for running a bank into the ground through greed driven speculation, in the process of ruining thelives of thousands of workers, shareholders and customers, while elsewhere billions live like dogs?
    The real problem is getting people past their egos for a moment, that they might pause for long enough to consider the harm they do others in pursuit of their self driven; actually usually subjective, “choices”.
    Let’s propose that the truth lies somewhere between the two poles of your optimism and my scepticism.
    Its still long a bow to suggest that end product rationality is divorced from the mental processes that drive it, most of all ego and desire, and the little about ourselves that we often allow ourselves to know, for often irrational reasons.
    If your rational individual also unerringly takes into account the consequences for others of her decisons and behaviours, your project has some hope. But if its predicated on the notion that the species is somehow, finally, in the firm grasp of rationality, then please allow me my scepticism, for my daily experience of humanity is both good and bad.
    Anndrew , I fear you disregard what I can see as a subjective streak in human nature that also has to be taken into account. Abstracted academic notions of theoretical rationality often seem to come undone in the unfolding world of praxis and event.

  15. “Just a slight correction. No one (sensible at least) has ever claimed that a market mechanism is “…efficient, rational and apparently all-foreseeing…” It does not have to be to make it the most useful allocation mechanism – it just has to be better than any other mechanism.”

    Come off it Andrew. You aren’t seriously suggesting that the industry you work in, is any kind of free enterprise industry? Will you stop this pretense. Your industry is the most cartelised, subsidised, regulated, wrapped in cotton wool industry there is.

    Wait a minute. Perhaps the medical services industry can compete with your industry on the above grounds. Who is the most subsidised, cartelised, regulated and wrapped in cotton wool group in society? The bankers? Or the doctors? I would say the bankers but its a tough one to judge.

    In addition to that, you appear to be claiming that your industry does some sort of acceptable job at resource allocation. But this is not true. Your industry is busily destroying wealth, hand over fist.

    “A challenge to you would be for you to suggest a worthwhile improvement, rather than being a poor satirist….”

    You are not the least bit interested in improving matters Andrew. Improving matters in this industry used to be my main topic. If you wanted to know how to improve the situation you would have listened a bit more carefully, instead of turning every monetary policy thread into a thread of doom, over the last three years or so. I have seen few people less interested in improving the situation than yourself.

  16. Andrew Reynolds :
    So you do believe people are too stupid to be trusted to run their own lives?

    I see your imagination has not yet flagged. In the above case, you have not used any weasel words – “perhaps”, “seems” – therefore, you do not even have implausible deniability. Nowhere has Paul made the statement you ascribe. I note this not to “correct” you. There being little point in leading a ‘horse’ (or be it a ‘donkey’) to water. Rather than hold debates with phantoms of your own imagining. I would be interested in seeing you engaging with what others say, but I do not have any expectation of that happening.
    Interesting species, the ‘delusionatti’.

  17. The test of disbelief in the efficient market hypothesis is to ask whether the critic follows its portfolio investment implications for their retirement and other savings.

    These are, for example, diversify to reduce risk; and reduce fees by buying and holding units in index-linked passive investment funds whose portfolios have the same weightings as the share market as a whole. The reason is attempting to beat the market does not pay-off in the long-run. The future cannot be predicated. Passive index-linked funds did not exist prior to 1971 and now manage hundreds of billions.

    Critics of the efficient market hypothesis should instead be trying to beat the market, investing heavily in hedge funds and other actively traded funds with their higher fees and running costs. In the long-run, this should lead to a wealthy retirement.

    It is misleading to describe events leading to 2008 as a bubble. This implies new causes against a monetary and regulatory background that was unchanged. In particular, monetary policies were the same as followed, in principle, as in the 1990s and 1980s.

    Monetary and other policy errors rather than any inherent instability of the private economy first caused the crisis and then made it worse. These monetary policy excesses were reinforced by regulator and bank prudential policies in many countries that mandated, underwrote and guaranteed home loans to people who could not pay as soon as interest rates moved up in response to the emergence of inflationary pressures.

    This has been the pattern for well over a century. Financial crises are due to monetary excesses and government favours which lead to a huge boom, especially in housing and shares, followed by a bust with defaults and failed financial institutions.

  18. There is the statement, “I believe”. There are the words “credo” and “hypothesis”, both of which contain the statement “I believe”. Many people use the word “credo” to refer to metaphysical beliefs and the word “hypothesis” for a belief that is capable of quantitative empirical falsification.

    What does one get if some people, wittingly or unwittingly, substitute the word hypothesis for credo and produces numbers? Specifically, can one ever get ‘dead ideas’ from this method?

  19. I suspect at this point there is a high correlation between those who defend EMH type theories of markets and those who make a living either promoting them (some academics) or acting in them (financiers). Neither group is credible outside their own circle. EMH is just what they tell themselves as a justification so as not to have a guilty conscience. They must realise the rest of us know it is garbage. It is a circular argument, impossible to disprove, but proving nothing. Belief in EMH is as credible as belief in the flying sphagetti monster, though less benign.

    The finance industry has grown into an out of control cancer; the new robber barrons of our age. At the height of the bubble the US finance industry encompassed 30% of all public company profits in the USA. Yet there is no good or service a normal person consumes from them that impacts on their quality of life. Finance is just a cost for an allocation mechanism. When the allocation mechanism consumes 30% of the resources, we need to find a new allocation mechanism, and indeed new allocators.

    Of course the finance industry will object to that – where else will the financiers be so over paid? Having grown used to such inflated incomes, they delude themselves they are worth it. They simply buy influence from governments to keep the rules of the game from changing. Shame on any sophists who try to defend them.

  20. Freelander,
    Check out the question mark.
    I am fascinated that every single example of irrationality in your comment stem from government action. Do you therefore believe that there should be less or more of the “irrationality” you have observed – i.e. less government action?

  21. What do you mean by government action Andrew? Getting rid of central banks? Lax monetary policy was the major cause of the financial crisis in my opinion. Having said that I quite like the transparency cash rate targeting gives us, I kind of like the certainty of knowing what the price of money is.

  22. Andrew Reynolds, I will answer your abusive query , when you have adressed Freelander’s question re misrepresentation, #15.
    Can I suggest you have a look at the transcript between George Negus and French finance minister Lagard on Dateline tonight, in the meantime?
    If you can’t work it out from there, I, too will give up on you.

  23. Paul,
    On the first point – in what way was it abusive? I clearly placed a question mark there as that was the inference I thought logical from your comment. I asked if the people were too stupid to be allowed to make their own minds up and you responded with examples of irrationality in comment 12. Again, if I am wrong show me how the people are intelligent enough to make their own minds up as I contend they are.
    As for the second, your comment 14, every example of irrationality you gave was an example of government irrationality. Ergo, I would have thought that the correct cure to that irrationality was less government action.
    I’m sorry – I thought both of them seemed the logical extensions of your comments. I asked if the people were too stupid to be allowed to make their own minds up and you responded with examples of irrationality. When pressed on this you gave further examples of irrationality – this time government irrationality.
    If my logic is faulty, please correct me.
    It may well be that a lax monetary policy was a cause of the problems and that the abolition of central banks would help. I am not so convinced in this instance, but I would be interested in your thoughts on this. How does the existence of a central bank contribute to the stability in the price of money to a retail, or even wholesale, customer?

  24. @Andrew Reynolds

    So weasel words and odd punctuation. Usually the “?” is put at the end of a question not a statement. The question mark doesn’t really convert a statement to a question, or was that just a sly way of disowning your own words? Implausible deniability? Interesting specimen.

  25. OK Andrew, I did slightly misread a comment of yours. As I’ve said before, when democratic government is captured by vested interests, as in our society, can it really still be regard as “government”, in the sense that we can talk of mistakes made in good faith by elected people dedicated firstly to the welfare of the citizens who voted them in.
    Hence you’ll blame the democratic “government”, where as I would see the situation as a corruption of, democratic government, by a class. What you call “government”, I see as class tyranny and only a shopfront for that. Hence I attack the class irrationality underlying what ever government irrationality is also operative in our time, because we do not have democracy or democratic government in any meaningful sense, in operation throughout the world.
    We have “Pax Americana”, that’s all.

  26. @andrewreynolds
    Sorry about the late reply. Last thread had the markets crashing because they foresaw Obama being elected and they apparently could not stand against the powet of the Workers United.
    Hence the satire, while mild (I’ll gracefully accede to ‘weak’) did have a twig to hang its flimsy robe on.

  27. @Andrew c
    LOL Andrew “they apparently could not stand against the powet of the Workers United”.

    Seems to me the only unification of workers in the US must be happening in the jobless queues. Its the deunification of workers from their work that is the real worry.

  28. Paul,
    The problem, as I see it, is fairly simple – after a while, no matter the form of government, it will always be captured by a group (or group) of people if there is a strong enough incentive to do so.
    Whether that is the bankers, the nomenklatura, the industrialists, the military or whatever, if there is a strong enough incentive, it will happen.
    The incentive is easy to see – power. Government is meant to have a monopoly of the coercive power (whether to tax, imprison or send off to war) and this will always attract, or create, the corrupt. As Lord Acton put it – “all power tends to corrupt and absolute power corrupts absolutely”. Therefore the more power that any government has the more likely it is to be corrupt. The stronger the State, no matter if that power is declared to be for socialism, democracy or the dictatorship of the proletariat, the more likely it is to be corrupt.
    I see the solution as also fairly simple (to state at least). Reduce the power of government. Limit its ability to act. Disperse that power as far as possible, with as much as possible held by each individual.
    Under this scenario corruption will still occur but it will be minimised and the people more able to make their own mistakes, rather than having the mistakes of others forced on them.

  29. @Andrew Reynolds

    I don’t understand your argument clearly.

    Are you saying that reducing government activity down to your preferred set will produce the best outcome (obviously hard to define, but a potentially empirical statement) or that it is inherently correct – or ethical or psychologically satisfying, or something – even if it happens to screw up big time. As far as I can see you guys seems to vacillate between the two positions, or maybe they even appear to be the same for you.

    The problem for me is that it’s easy to come up with a believable narrative explanation for just about anything – especially social and political systems that are driven by emotions, myth and fantasy.

  30. Jim,
    There is plenty of evidence (up the thread in Paul’s comments, for example) that the current big government model has “…screw[ed] up big time…”. I would contend that this is, as Paul would put it, because it has been (at least in part) captured by vested interests.
    To me, the best way to reduce the incentive for those vested interests to capture and use the coercive power of the State is to reduce the scope of that power and disperse it as far as feasible.
    If it is “…driven by emotions, myth and fantasy…”, at least let it be each individual’s “…emotions, myth and fantasy…” that drives what affects each individual, rather than it being the “…emotions, myth and fantasy…” of a coercive State that has been “…captured by vested interests”.

  31. Andrew says (at #13) that
    “So you do believe people are too stupid to be trusted to run their own lives? …. I look at the world and see around 6,000,000,000 people interacting and the vast majority of that interaction is peaceful and, in many cases, not selfish…. how is a system that we endow with the ability to force us to do things likely to improve on what we do ourselves?”
    To a first approximation, 0 of that 6 billion ‘run their own lives’ free of the societal constraints of a ‘system that force[s] [them] to do things.’ Speaking as number 4,329,546,188 of that six billion, I can run my own life up to the point that I want to murder someone, buy shares in contravention of the companies act, or build a gazebo without council permission, and about a hundred thousand etceteras, and the same is going to be true even in a libertarian paradise like Somalia. If I trespass against these prohibitions someone is eventually going to come round and hit me with a truncheon. People interact within rule-based systems. Some of these are probably better than others, but none are evidence for the benevolence of unfettered humanity.

  32. Andrew, on the basis of your last post , we are by no means so far apart as an observer might have first thought. Your last post contextualises much of what you write subsequently. Your precepts are, unfortunately, almost identical to mine, altho better expressed.
    I suppose it’s summed up in two old old aphorism;
    “the price of freedom is eternal vigilance” and
    “play up, play up,
    and play the game”.
    Alice’s last comment added a little, we’ve lived thru an era of great change, yet no change at all.

  33. Andrew Reynolds 31

    I strongly disagree with your claims there – that stronger government always leads to corruption. That is a gross oversimplificaiton and empirically, there are many instances where it has been proven wrong. Historically, corruption has often been associated with weak governments. Conversely, we can think of many governments (eg Singapore, Victorian England) that were strong but not corrupt. Of course there are examples the other way too but the point is there is no causal link.

  34. Paul,
    I would agree that the price of freedom is eternal vigilance and also with the old Ben Franklin quote that those who would trade freedom for security deserve neither. I do not see there as being a great revolution out there, after which government will be small, money strong and the individual sovereign. I see it as a process – first we need to accept that the governmetn very rarely has the ability to solve our problems for us and then we (through democratic processes) start working out where to make the first cuts. This process can then continue until we have made enough cuts.
    I just have a fundamental disagreement with those who claim we need more government, as many here seem to.

    Just out of interest, do you know what the total tax take was in Victorian England? Do you know what the total tax take is in Singapore? How much regulation did / do both have?
    On that basis, were they big and powerful governments?
    I would agree that they both enforced the law fairly well (although in the case of Singapore and some of the Victorian legislation I have my doubts as to its correctness) but I would say that neither of them was particularly big.
    OTOH, the PAP in Singapore has a sorry record when it comes to any form of opposition to it, but I would see this as evidence that power does tend to corrupt, not that power does not corrupt.

  35. so let me get this straight andrew reynolds,
    the state – as embodied by openly elected parliamentarians who form goverment – is making decisions in the public interest which are scrutinised by an opposition, a judiciary and the media,
    the system within which they work is designed to be as transparent as possible,
    now this state has been captured by vested interests,
    private organisations which operate in secrecy as much as possible, who’s aim is only to increase financial returns to a tiny number of managers and owners and, who not only have no responsibilities or loyalties to the states within which they operate, but have shown a pattern of externalizing onto the state the maximum amount of collateral damage possible in a way that has been fairly described as sociopathic

    your solution to this state capture, is to scale back and weaken the democratic, open and constructive part of this equation,
    exactly how do you think the powerful, private interests would respond to this inexplicable strategy?

  36. Socrates,
    Perhaps I should rephrase. I am not a fan of weak government. In the areas that the government is acting, it should act without fear or favour – i.e. strongly. In enforcing the law, for example, it should do so well and efficiently – and with maximum transparency. In protecting our borders (again, for example) it should do so with real strength.
    What I am in favour of is strictly limiting the areas where it does operate.
    Whether or not you believe that markets comply with the EMH, for example, to me the presumption should be made that the free interactions of the citizens and others should not be interfered with unless and until some clear harm can be demonstrated to others. the same principles should apply in social interaction. Why, for example, does the government need to regulate marriage?

  37. smiths,
    I think they would oppose it with everything they have got. Those powerful private interests have been, in the main, benefitting from the over-regulated position we have ourselves in – witness the examples in paul’s comment 14, above.
    The thing you seem to miss is that regulation tends to help the regulated at the expense of the rest of us. Besides, I am not opposing democracy – as I thought I had made plain above – but I believe that democracy is best expressed not once every three years in a choice that is largely between two parties, but in the choices we make many times each day. If, for example, I believe that there should be more help given to people overseas, what is more democratic (and also more helpful) – waiting until the next election and then voting for a party that has, as a part of its platform, a marginal increase in overseas aid or sending a cheque off to (say) Oxfam today? I can also speak with my neighbours and encourage them to do the same.
    I see the second as a much more effective response than the first.

  38. regulation tends to help the regulated

    in my opinion, the greatest damage in the recent period was done by effectively unregulated massive banks and hedge funds,
    i think tremendous damage is being done by giant agribusiness firms which are again effectively unregulated

    I believe that democracy is best expressed not once every three years in a choice that is largely between two parties, but in the choices we make many times each day

    i see this as a naive, flawed and menacing vision,
    all choice relies on information, if your information comes to you from commercial media and corporations you are screwed
    if i want to choose sunscreen without nano-particles how can i rely on sunscreen makers to tell the truth to me,
    the giant food conglomerates have done everything they can to stop meaningful food labeling, why?
    how will you know about an overseas catastrophe that you might like to donate to,
    if hypothetically Rupert Murdochs major shareholders run nuclear plants that poison people in Chile do you think you will be reading about it in australia if he owns your only daily paper?

  39. smiths,
    As I have pointed out to you in the past, and do so again, the banks are the most heavily regulated of all businesses in our society, and on this your analysis falls down.
    The hedge funds are less regulated, yet they have sailed through the current turmoil largely unaffected. There is a reason the less regulated have survived well.
    As for the rest (and please, learn some punctuation – it does serve a purpose) – food and other labelling laws are set by the government. The “special interests” then influence the government to make sure those standards are set to their advantage and all then have to comply with those laws. This is not a market mechanism, it is regulation. As you put it “the giant food conglomerates have done everything they can to stop meaningful food labeling” – and the means they have used to do it is food labelling laws.
    As for your hypothetical – without the internet I might agree. With it I cannot. In any case, most Australians now get their news from the TV, not the newspapers (a point you seem to blithely ignore) and the reason why we only have a few major companies supplying us with news is simple – the government has artificially restricted the number of broadcast licences to the three major networks and to itself.

  40. As i have countered in the past, and do so again, i dont agree about the banks.
    Specifically i refer to the US, UK and European banks when i say they are effectively unregulated. Why do you think that people refer to the shadow banking system?
    Why was Barclays registered in the channel islands?
    Why is UBS fighting the american government?
    Why was it the irish office of AIG that did all the risky dubious trading?
    Why is the EU upset with Goldman?
    Why is so much of the buying of US government bonds coming from the carribean?

    regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer

    And Andrew, i was confused when reading you post by a piece of rogue punctuation that seemed to be occupying a line by itself.
    Please try and get the hang of paragraph structure for the benefit of all the readers.

  41. i forgot to mention in my haste, that a long dash opened up inside brackets really ought to be closed inside those same brackets.
    its great that we can use these posts to converse and also to extend our grammatical education isn’t it?

  42. Staff monitoring Britain’s banks paid little attention to Northern Rock in the two years before its collapse, kept few records of meetings and failed to act on signals that it was acting recklessly, according to the main City regulator, the Financial Services Authority.

    Plans to nationalise Northern Rock were thrown into confusion last night when it emerged that ministers are leaving £40bn of the bank’s best mortgages in a private offshore trust.
    As the government moved to push emergency legislation through parliament, it was revealed that the offshore firm Granite, which holds half of the bank’s best secured mortgages, is not being nationalised as part of the rescue package.
    Treasury officials and ministers spent yesterday battling to explain the contractual relationship between Granite and Northern Rock. Granite has been used as a vehicle to raise billions from the international capital markets, deploying the Rock’s mortgage book as collateral.

  43. smiths,
    Effectively unregulated? Questionable at best. As a rhetorical question, how many industries have a specific oversight body (or, in the US, over 54 bodies) just for that industry that regulates capital ratios, liquidity ratios, sales conduct, board policy, risk management policy, treasury policy, credit quality, large exposure limits, outsourcing, related entity policy, audit, increases the minimum disclosures beyond the extensive ones already required under the accounting standards, and can order people onto or off the Board and can shut them down at a moment’s notice, effectively without the chance of appeal?
    If that is “unregulated” I would hate to see your idea of a regulated industry.
    As for the specifics – my guess would be that Barclays (if you are correct) is registered there due to the rather odd way the UK taxes banks and non-residents. Its operations in the UK are fully FSA regulated, as they are for any non-domiciled banks.
    I am not sure why UBS is fighting the US government. My guess would be that the US government is having a go at them over the sales of CDOs to some of their clients, but I do not know any specifics.
    AIG had plenty of CDS trading in its NY office to bring it down, it was not all in Ireland or even, AFAIK, much of it.
    The EU is probably upset with Goldman’s for helping the Greek government do what the Greek government wanted it to do. It is always easier to blame a bank than a fellow government. If Goldman’s has done something wrong, though, I am sure they will be prosecuted for it. I am less sure the Greek government will.
    As for the Carribean, my guess would be that the large number of insurance companies headquartered there are buying bonds. Why is this interesting to you?
    As for the punctuation – it is good to see some improvement. The use of standards does generally serve to improve communication. If I do make errors (as I am sure I do) please feel free to correct me. I do not like to get too picky about it, though. I am often guilty of ending a sentence with a preposition.

  44. saying there is regulation is not doing regulation,
    you can pass a law, put it on the books and then give no money and no staff,
    or you can staff it with people that have just worked at the banks that are being regulated.
    this is basic stuff
    when hitler captured the german state he did so within a legal framework,
    the laws in themselves mean nothing
    massive banks locate themselves in tax havens to avoid regulation, transparency and tax,
    a local law in a US state does not affect how a trans-national bank is regulated.

    Delaware in the US is officially the world’s most secret financial location. The finding will embarrass President Barack Obama as the Stop Tax Haven Abuse Bill he supports comes before Congress this week.
    In the first ever detailed ranking of 60 of the world’s financial hubs, published today, Delaware was found wanting in 11 out of 12 secrecy indicators. London was also ranked in the top five most secretive jurisdictions.

    here is a comment from yves smith recently on this peice below from the WSJ

    There is nothing improper about hedge funds jumping on the same trade unless it is deemed by regulators to be collusion. Regulators haven’t suggested that any trading has been improper. – WSJ

    Yves again. The first paragraph gives the mistaken impression that foreign exchange markets are regulated. They aren’t. Spot and forward markets in foreign exchange in the major currencies are close to unsupervised (for instance, there is no mechanism for collecting transaction activity, which would be a critical way to look for odd transaction patterns and volumes), so the notion that there are growups that are supervising that trading or prepared to intervene is oversold.

  45. Cassano, who ran AIG’s financial-products division in London, “almost single-handedly is responsible for bringing AIG down and by reference the economy of this country”

    it was london, not ireland, sorry,
    the point is, he was allowed operate in the way he did because he was outside regulation,
    one man, one department, and a global cascade …
    some regulatory system

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