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Samizdata quote of the day

Next time you hear someone talking about the triumph of ‘neo-liberalism’, or the prevalence of free markets, remind them that the financial markets have been explicitly state-dependent for a decade. And this is not some unintended policy side-effect. The central banks got what they wanted. They hoped to push up financial asset prices, both to keep borrowing costs down – financial prices and interest rates generally move in inverse directions – as well as to make people and institutions feel wealthier in the hope they would spend more. It’s proved much easier to stimulate financial wealth than it is to help bring about real new wealth creation through producing more goods and services efficiently.

Phil Mullan

14 comments to Samizdata quote of the day

  • Alisa

    the financial markets have been explicitly state-dependent for a decade

    A decade? More like a century, no?

  • Shirley Knott

    Indeed. Only a decade? How so?

  • Mr Ed


    It became ‘explicit‘ in 2008, undeniably in the open, like with ‘WARP“, the ‘Worthless Assets Relief Program’ as it ought to have been called.

    Prior to that, you needed to have a little understanding to see what was going on.

    Here it goes back to coin-clipping by the Crown and rather more obviously with the Bank of England forming in 1694, the honey pot around which the greedy clustered, to an extent driving out the true entrepreneurs and merchants or their spirits.

  • staghounds

    I believe you meant SIMULATE, not stimulate.

    As when you run an electrical current through dead flesh, stimulating it to simulate life.

  • Alisa

    Yes Ed, I see it now 😐

  • Black Monday 1987. Reagan forced a bailout rather than letting the bad actors go under. So bad actors have had perverse incentives since 1987, and the government only seems to reward them more over time.

  • Laird

    All true, August. But as Perry suggests, steroids were pumped into the system through Quantitative Easing and the bank bailouts of 2008, so I agree with the “decade” description. Personally, at the time I would have counselled allowing the insolvent ones to go under, but a lot of people (including the financial regulators) feared that would have caused a worldwide financial collapse. (Obviously I disagree, but there you are.) But it is indisputable that the Fed pumping all that money into the giant banks has been a key driver of the irrational equity price levels we see today. It’s why I am completely out of the market.

    Another element, not mentioned here and admittedly of smaller import, is the artificially low interest rates we’ve endured for well over a decade. That helps banks to some extent (although it’s a mixed blessing even for them), and it mostly helps overly-indebted governments, but a side effect is that it has driven people farther out on the risk curve in search of yield. Some people moved into lower-rated bonds (“junk” bonds are trading at irrational yields as a consequence), and some have moved out of bonds altogether and into equities which has helped push up stock prices. People are going to be badly burned when the inevitable correction occurs. The retrenchment we saw last week was likely just the start.

  • Mr Ed

    Another element, not mentioned here and admittedly of smaller import, is the artificially low interest rates we’ve endured for well over a decade

    Indeed, in the UK, our Building Societies, mutual savings bodies (IIRC, like ‘Thrifts’ in the USA), seem to have almost given up on taking in savings, yet continue to offer mortgages. When I went to open an account I was looked at with genuine surprise, and almost an ‘Are you sure?‘, as if I’d gone to an electrical shop and asked for a VHS recorder. The zombification of the financial sector 10 years on is now all but complete. The money just runs in from the Central Bank, no ‘need’ for savings (they think).

  • Philip Scott Thomas

    …a side effect is that it has driven people farther out on the risk curve in search of yield.

    No, that was not a side effect. That, and the need to prevent deflation, was the whole damn point of QE. Timmy Worstall explains the how and why of QE here.

  • Paul Marks

    It is very important that the myth of a free market in 2008 be explicitly refuted – far from being “deregulated” the financial markets and banking in Britain and other countries (including the United States) were saturated with thousands of pages of regulations and (even then) totally corrupted by the fiat money of the government controlled Central Banks (people who think that the Federal Reserve is private are idiots).

    I am no friend of the Credit Bubble bankers – but the 2008 was NOT their doing (it was the result of government monetary policy) and the next major crash will also be the direct fault of the government monetary policy.

    The American crash of 1907 can be blamed on bankers lending out “money” that did not exist (“credit money expansion” – i.e. bubble blowing, leading to a boom-bust), but since 1913 government has dominated things in the “financial sector” – boom-busts since then are the work of government policy, specifically the political desire for LOW INTEREST RATES – lending out money that does not really exist, bubble blowing, leading to a boom-bust.

  • Thailover

    There is no such thing as a legitimately free market as long as you have government price fixing, and the Fed and central banks manipulating the price of money can’t be legitimately called anything other than price fixing the price of money.

    Also, remember that more than half our money supply is not circulating federal reserve notes, the rest is based on “assets” which could just as easily be called liabilities in many cases, (M3). And “Fractional Reserve Banking” is really leveraging yourself based on people’s impression of you (the country). If people lose faith in you (that is, the banking system) that “multiplier” will revert to zero. Then people will “grasp” for hard assets and then panic when they realize that half of any nation’s solvency is based on “good will” and faith, and the assets just aren’t there as they assumed. (I’m not predicting a money system collaps, just sayin’…)

    The next big economic gripe will be, in my opinion, TV talking heads complaining that Trump’s economy is growing too fast, i.e. “running too hot” and causing inflation. No, it will just expose the current inflation that’s now being hidden and lied about by the banking system.

  • Cesare

    What he says is true, although I would argue for a longer time line and that this is merely a symptom of a larger systemic issue. In America the Congress has to approve the GAAP. Somewhere along the line they came to moronic conclusion that the market goes up 7.5% annually. After all if you chart the rise since they were trading under the tree by Fraunces’ Tavern and divide it by the total years Voila! Worse yet they broadened the scope of organizations who could self fund with equities. Long story short, they aren’t inflating equities for the sport of it all, they no longer have any choice. Everybody is on the dole to some degree or other, Universities? Pension Funds? Insurance? the somewhat slimey virtu-ocracy? You bet. Next time somebody chimes in on such a conversation that it is of no consequence to them as they own no equities, it must be admitted he is right…they own him unless he is one of the poor souls living in a hut on roots and berries at the farthest extent of cable channels.

  • Allen

    My friends and I work in finance and have been warning about this for some time, including the recent turbulence which we wrote about here (https://weposthere.blog/shirley-macoleary/2018/2/3/the-trump-slump)

    The short version of that blog post is that QE did a great job of enriching the financiers it was given to, but otherwise not much good. The fact of it lasting so long kept it out the markets for real goods and services because it was more sensible to keep the money in inflated assets (note inflation in stocks is thought to be better than inflation in milk, even they are the same thing when entirely artificial) and now that QE is tapering off and rates likely to go up, that money will start to leave assets where it no longer getting a fake return, and flood into goods. Markets down, staples up, everybody sad.

    Don’t forget though, the people who were skimming the fake money the whole time have made out like bandits.

  • Paul Marks

    Government backed Central Banking was sold as a way of limiting banker Credit Bubbles – the Boom-busts of lending out “money” that DOES NOT REALLY EXIST. Lending out “money” that is not from Real Savings – contrary to the late Lord Keynes Credit Expansion is NOT “saving as real as any other form”.

    However, in practice government Central Banking makes the Credit Bubbles vastly BIGGER. I repeat that I am no friend of the Credit Bubble bankers, basically they are bunch of crooks, but government intervention over the last century and more has made the Credit Expansion (the Bubble Blowing) vastly WORSE.