Tuesday, March 16, 2010

Keynes and the Chinese (government) speculator

Keynes quite convincingly describes the horror of speculation (although he did not write about their own actions in the currency markets). He is right, but the current attacks on speculators are driven by the French and the Greeks, and suggest that the movement of the markets in the state, will be good. However, it is not.
We reached the third level, where we spend the intellectual resources of the assumption regarding the average expectations of the average outcome of events. However, I believe that there are those who are in the fourth, fifth, etc. stages.
Today, trading in the third stage is carried out computers with the help of specialists at exchange analysis, which calculates the average expectation. Traders engaged in credit default swaps - an excellent example of Keynes' point of view: they traded swaps and put on the bonds, based on its assessment of the average expectations of the average outcome of events. Only the bank, in effect, acts as a market maker CDS, while at one stage away from the "socially useful" trade, so beloved regulators.
The arguments of Keynes, as usual, are still valid today, and stand for the majority of attacks on markets:
Common assessment, which came as the result of the mass psychology of a large number of ignorant, heavily dependent on the swings of public opinion with regard to factors which do not really play a big role for future profits. In hard times, particularly when the assumption that the current situation will remain the same as the least likely, the market will be subject to waves of optimism and pessimism, even though such sentiments are unreasonable and do not have a sound basis for a reasonable calculation.
And:
A professional investor and speculator, in fact, not at all interested beyond the reach of long-term projections of likely returns on investment during the whole period of their existence, and in anticipation of changes in the basal short-evaluate the behavior of the masses.
Finally:
Among the principles of orthodox finance no more antisocial than the fetish of liquidity. This principle makes one forget that there is no such determination, as the liquidity of investment for society as a whole. The actual, private goal for most investors today is "premature start," as Americans like to say, in order to outwit the crowd, and give the wicked, the depreciation of half a crown to his companion.
Thus, short-term speculation subordinates all short-term circumstances, and focuses on the general opinion, instead of common approaches to value, because the general opinion, and moves the market.
In general, he's right. Market fundamentalists are wrong, that has already been proven many times. But this does not mean that there is a better system. Keynes concludes his chapter on the assumption that the state, "which is able to calculate the marginal productivity of capital assets over the long term and based on the fundamental social benefits will play a much more significant role.
Extremes that could be a disaster, we saw in Soviet Russia. Central planning does not work. I do not think that Keynes believed these extremes, but China, which is now so admired its mix of state planning and capitalism, shows the danger of a strong government hand in the allocation of capital.
LA Times tells of one example of excessive investment, notably the airport for $ 57 million with 50 employees, through which passed 151 people over the past few years (yes, they all could fit in a Boeing 737). For such examples do not need to go far, the most famous of them: Ordos, "empty Chinese city" - video, you can see on YouTube.
My view is simple: the government can not better than the markets to assess long-term investments, at least, it might be tempted to misuse and wasteful allocation of capital. Markets can not be right all the time, but in most cases it is. When from time to time, they become ineffective, the government should intervene, but remember: it can be as trying to move up, and down. Five years ago there was no financial ministers, who have complained that speculators erroneously allowed the country to take such risks at almost the same level as Germany.
We hope to extricate himself: pay attention to warning speculators error excessive influence of "animal instincts" market crowd in altering our system, particularly banking, so that the systemic errors in the allocation of capital are minimized.

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