Sunday, 17 May 2009

Why we can't use the System Reset button to restore confidence in markets

You have probably experienced something like the following situation while working at a computing device (trying to be politically correct here). You have many applications running as you multi-task through several kinds of work and play. Checking and writing e-mails, following the market, surfing the web etc. You open a document and suddenly the operating system freezes and error messages such as Program Not Responding begin to appear. In certain cases all can be rescued with the appropriate mouse clicks and shutting down those apps which have gone into vicious loops or corrupted their own footprint in your system's memory.

Sometimes the system just has to be shut down and the computer has to be re-booted.

Silly Question:

Why can't we do the same with the financial system which clearly is dysfunctional and has its own and more reprehensible type of corruption at the root of the problem?

Sketchy Answer:

The financial system is populated by human beings with emotions who are immersed in a culture of memes, aspirations, fears and illogicality. There is no cultural equivalent to a System Reset button.

Why is this important?

The important elements of market liquidity are not susceptible to quantification and are not in fact part of the domain of financial economics. At its core market liquidity is deeply cultural and qualitative. After a major loss of confidence such as was seen in 2008 - systemic liquidity becomes almost non-existent. Markets have to be "tricked" into believing that there is liquidity and through this sleight of hand hopefully the adversarial and fractious nature of human economic activity - what Keynes called the animal spirits - will re-appear leading to trading and investing based on enduring differences in value perceptions by different market constituencies. Only when this genuinely manifests itself will asset destruction and income disappearance be arrested.

The 1930's failed to deliver such a re-generation and the adversarial and fractious mindset required to lift the world from a Depression (far more a psychological and cultural term than an economic one) shifted to a different arena - ideological conflict and the loss of millions of lives.

Why is it very important that a genuine belief in the integrity of markets and widespread participation within them returns?

Doctor Johnson wrote a man is seldom so innocently employed as in the making of money

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