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Real Estate 4 Ran$om: Role of Speculation in the Financial Collapse - Patience and Finance

Housing-Market / US Housing Mar 15, 2012 - 08:19 AM GMT

By: Jesse

Housing-Market

Best Financial Markets Analysis ArticleThis is an Australian produced film, but the principles carry.

I would not focus on land to the exclusion of financial assets like stocks, and other vehicles for producing income and capital gains, that allow speculators to game the system.



The US internet bubble for example, had nothing to do with land per se. And the Florida land boom in the US preceded by several years the stock market boom that led to the Crash of 1929.

And it was financialization, the application of fraudulent valuation and securitization leverage, that gave the US credit bubble its kick.

Financialization permits the transmission of the speculation to a broader audience, in the most recent collapse a global audience, and widens the scope and duration of the Ponzi scheme through its interlocking web of counter party risks.

The most common thread in destructive bubbles is official complicity, often seen in regulatory capture, and the almost willful suspension of disbelief achieved through influence in the media and the steady application of messaging, often so intense that it borders on overt propaganda.

Certainly it does involve the silencing of whistleblowers and critics through access denial, ridicule, and other forms of soft censorship. And if it is followed by the obstruction of justice so that the perpetrators may go forward unimpeded, they will work their cons and carny magic on something else again.

If this simple explanation of speculation does not have a sufficient pedigree, perhaps this more refined and weighty pronouncement from the Bank of England may serve to persuade.

"Under one equilibrium, patience wins the day. When long-term investors start in the ascendancy, prices tend to correct towards fundamentals. The performance of untested investors pursuing momentum strategies falters, while those pursuing longterm strategies flourish. The fraction of long-term investors rises. The self-correcting tendencies of market prices are thus reinforced, further supporting long-term investors. The patience gene thrives, the impatience gene dies. Natural selection results in a self-improving cycle, as with dieting, happiness and exercise.

But there is a second equilibrium where this cycle operates in reverse gear. With a large fraction of momentum traders, prices deviate persistently from fundamentals. Among untested investors, momentum strategies now flourish while long-term fundamentalists fail. The speculative balance of investors rises, increasing the degree of misalignment in prices. The patience gene falls into terminal decline. Natural selection results in a self-destructive cycle, as with drug, alcohol and food addiction."


Andrew G. Haldane, Patience and Finance


And it is the government and the regulators, the Federal Reserve and the Bank of England, the FSA, SEC and CFTC for example, whose sworn duty it is to protect the financial markets from the ravages of rampant speculation and fraud. And such a condition cannot occur unless they do not honor their oaths, for whatever reasons they may wish to provide.

The reliability of self-regulation is a fairy tale for dreamers and fools.

The bottom line is that when speculation is allowed to flourish unchecked, whether through laxity or complicity or both, there is the inevitable and corrosive mispricing of risk that leads to disparity of fortune between the perpetrators and their marks, and the inevitable economic collapse as rude reality intrudes once again.

While greed and gullibility act in partnership, it never gets old.

Didn't quite catch their trick that last two times? Watch as they do it again.

Real Estate 4 Ransom from Real Estate 4 Ransom on Vimeo.

“The commercial world is very frequently put into confusion by the bankruptcy of merchants, that assumed the splendour of wealth only to obtain the privilege of trading with the stock of other men, and of contracting debts which nothing but lucky casualties could enable them to pay; till after having supported their appearance a while by tumultuary magnificence of boundless traffic, they sink at once, and drag down into poverty those whom their equipages had induced to trust them."

Samuel Johnson, The Rambler, January 7, 1752

By Jesse

http://jessescrossroadscafe.blogspot.com

Welcome to Jesse's Café Américain - These are personal observations about the economy and the markets. In providing information, we hope this allows you to make your own decisions in an informed manner, even if it is from learning by our mistakes, which are many.

© 2012 Copyright  Jesse's Café Américain - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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