'...cause and effect...'_'...faith-and-hope-based-investing' - Depression

Posted by ProjectC 
'...a quantitative relationship.' ... 'this type of relationship has a fundamentally different nature than do the relationships implied by human action.'

<blockquote>"...the Austrians recognize that the relationship between cause and effect is not a quantitative relationship."

– Roger Garrison, A Rejoinder to Brad DeLong, 5/19/2009

"Mises is saying that this type of relationship has a fundamentally different nature than do the relationships implied by human action."
- Gene Callahan, Models: What Are They Good For?, 9/19/2002</blockquote>

'...an economic depression.'

<blockquote>"There is no official definition of depression. Here is mine: When the U-6 unemployment rate rises above 12.5 in conjunction with a stock market that is down close to 50%, the CPI is negative, and nominal wages are stagnant, it's an economic depression. We are in one."

- Mish, Jobs Contract 12th Straight Month; Unemployment Rate Soars to 7.2%, January 09, 2009</blockquote>


<blockquote>"Capitalist unreality takes numerous forms. Starting in the 1980s, it took the form of excessive reliance on mathematical models that did not work, such as the Black-Scholes options valuation model and the empire built on portfolio insurance before 1987. This caused a record-breaking one-day market meltdown, which itself was so far outside the predictions from the models as to render them obviously wrong. Yet the market continued to use them, preferring to wallow in computer-generated fantasy than to face up to reality.

In the 1990s, we had the phenomenon of Long-term Capital Management. These people were thought by the market to be geniuses – the Nobel prizes of two of its directors were frequently cited – and so they were allowed by the market to leverage as much as they liked, in the belief that their arbitrage trades "had" to come right. In the event, the relationships that LTCM relied upon turned out to be short-term or spurious, and so LTCM became insolvent.

Following the failure of LTCM, the Fed arranged a bailout by the major New York banks and investment banks. Rather than taking this bailout as evidence that there was something seriously wrong with both the U.S. capitalist system and Wall Street's risk management, investors continued to operate for another decade as though the LTCM collapse had never happened. As we have since discovered, that rescue led to practices that produced a much bigger crash a decade later.

Needless to say, the ultimate triumph of faith-and-hope-based-investing was the dot.com bubble. Not only did valuations reach levels that could never be justified, but IPOs were carried out for companies that never should have existed. The central premise of Pets.com, that money could be made by express shipping cat food around the United States, was so foolish that a moment's reality therapy should have exposed it. In that market, no such reality therapy was possible.


A reality-based market seems almost like Nirvana. A market that punishes dodgy accounting rather than rewarding it. A financial system that rewards savers adequately. A capital market that selects only sound borrowers and rational projects. A banking system that imposes no costs on taxpayers, and treats even its retail customers with respect and integrity.

It's a goal well worth striving for, and may well begin restoring U.S. prosperity when it arrives. But it will very likely require a horrendous period of downturn and destruction before it can be attained, as the costs of fantasy manifest themselves."
- Martin Hutchinson, Towards a Reality-based Capitalism, September 28, 2009</blockquote>