$300 million

Continuing on silly claims about the Whitehaven hoax, the figure of $300 million is being bandied about as the cost to Australia’s Mums and Dads. I haven’t checked, but I assume that this is the change in market capitalization of Whitehaven from the opening to the point at which the hoax was exposed. That is, it’s the amount that would have been lost if all the shares in the company had been sold at the bottom, assuming this was feasible, which it isn’t. Of course, an equal amount would have been gained by the buyers.

But, ever vigilant on behalf of Australia’s Mums and Dads (I’d like extra bonus sympathy as a Grandad!), I thought I would check to see if any such outrages are continuing. It turns out that the All Ordinaries index has fallen 16 points, or about 0.4 per cent, since 10am. Assuming a market capitalization of 1.2 trillion, that’s nearly $5 billion ripped from our parental pockets in the course of a single morning. Almost certainly, some of this due to spurious rumors, some of which may have been deliberately spread.

Can’t something be done about this? Won’t somebody think of the children?

PS: I see in comments that Alison Parkes has made a similar point

28 thoughts on “$300 million

  1. Katz, central to an efficient share market is no one knows what will happen next.
    • Foreseeing a recession or an economic collapse next week or year would bring forward the share price collapse to right otherwise there are arbitrage gains.
    • News is compounding into share prices in minutes so there are large share price rises and falls when there is news.

    Do you invest your retirement savings in an active fund to beat the market or do you buy and hold a diversified portfolio of shares and bonds as per the efficient markets hypothesis?

    BART HOBIJN AND BOYAN JOVANOVIC showed that the IT revolution led to a share price collapse in the 1970s because the share market anticipated that much of existing capital is now obsolete so dividends will fall. The new capital destroys the old capital but with a decade-long lag. The prospect of this creative destruction causes the value of the old capital to fall right away.

    See also http://www.econlib.org/library/Enc/EfficientCapitalMarkets.html

    p.s. the actual cause of Lerhman’s collapse was it invest on a too-big-to-fail basis.

    In the Kareken and Wallace model of banking, deposit insurance and lender-of-last-resort are purely a social bad because moral hazard encourages risk taking unless there is regulation of the insured portfolios or there is proper surveillance and pricing of the insurance.

    Government actions and interventions caused, prolonged, and worsened the global financial crisis.

  2. i have to agree with Jim Rose here. The destruction of capital in the GFC is proof of market efficiency, not the opposite. The problems originated in lilliquid and over-the-counter derivative markets where pricing was opaque. When the equity market contemplated the virtual insolvency of the banking system, the judgement was swift. That’s efficient.

    People mistake the idea of market efficiency as orderliness. It is anything but. It just means markets are unpredictable and it is hard to profit comsistently from mistakes, or perceived mistakes, in prices.

    Misinformation, rumour and outright manipulation move prices everyday – investment bankers routinely ramp IPOs for short-term gains – which is why the degree of outrage from the corporate media over Moylan’s meagre stunt is hard to swallow.

    But prices never stay ‘wrong’ for long and equilibrium always reasserts itself. And that’s why you are better off holding a diversified portfolio, not taking stock-specific or sector-specific bets and changing hour asset mix only according to your own initially stated risk appetites and goals.

    In short, while Moylan’s actions were illegal, people who trade off short term noise are taking unnecessary risk and really are speculating, not investing. This is a world away from mum, dad and their suoer. To portray it otherwise is just a cheap shot by those more angry at the identity of the hoaxer than the hoax itself.

  3. Ootz, Many of the issues raised in your the presentation are also discussed at http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4526 An Interview with Thomas Sargent nearly two years ago, where he says that:

    1. It is just wrong to say that this financial crisis caught modern macroeconomists by surprise: Allen and Gale’s 2007 book Understanding Financial Crises collects many of the dynamic models of the causes of financial crises and government policies that can arrest them or ignite them.

    2. Stern and Feldman’s Too Big to Fail doesn’t have an equation in it, but wisely uses insights gleaned from the formal literature to frame warnings in 2004 about the time bomb for a financial crisis set by regulations and government promises.

    3. Two polar models of bank crises and what government lender-of-last-resort and deposit insurance do to arrest them or promote them. In the Diamond-Dybvig and Bryant model, deposit insurance is purely a good thing; in the Kareken and Wallace model, it is purely bad.

    4. Bryant-Diamond-Dybvig model has been very influential generally, and in particular that it was very influential in 2008 among policymakers. Many policy authorities correctly noticed that a Bryant-Diamond-Dybvig bank is not just something that has “B A N K” written on its front door. It’s any institution that executes liquidity transformation and maturity transformation.

    5. Policy makers saw Bryant-Diamond-Dybvig bank runs all over the place. The logic of the Bryant-Diamond-Dybvig model persuaded them that if they could arrest runs by effectively convincing creditors that their loans to these “banks” were insured, that could be done at little or no eventual cost to the taxpayers.

    6. The Kareken and Wallace model’s prediction is that if a government sets up deposit insurance and doesn’t regulate bank portfolios to prevent them from taking too much risk, the government is setting the stage for a financial crisis.

    7. The Kareken-Wallace model makes you very cautious about lender-of-last-resort facilities and very sensitive to the risk-taking activities of banks.

    8. The Diamond-Dybvig and Bryant model makes you very sensitive to runs and very optimistic about the ability of insurance to cure them.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s