Friday, March 26, 2010

Why do we hate efficient markets?

I am an economist and an accountant and I love thinking about efficient markets. I also hate thinking about politics. I know very little about politics because I purposely avoid talking about politics and I try to avoid reading about the subject. My wife tells me who to vote for most of the time. Normally it is a woman or a minority candidate or a democrat or a green party candidate. I know she would never vote for a white male republican if there was a decent alternative. I don't really care and it makes my wife happy when I vote for the same candidate as she does.

Most people would probably consider me politically incompetent and I would tend to agree with them.

It appears that everyone else in our country is the opposite of me. Most of our citizens hate efficient markets and love politics. People are constantly talking about what elected officials are doing and saying. It is all over the media. The media would never have a story about efficient markets. No one wants to hear about stuff like that.

Everyone wants our politicians to lower taxes and raise government services.

I would actually like to pay higher taxes and receive less government services. I would pay much higher taxes to get the government out of the investment markets. Of course you would not understand. Everyone in our society is attached to the golden government teet either directly or indirectly.

How can everyone benefit at the same time? Because we are robbing resources from future generations. In the past two generations we have created $15 trillion of government debt and the possibility of $100 trillion in unfunded liabilities that will have to be dealt with by our children. This was caused by the federal, state and local governments wildly overspending and then kicking the can down the road. Your life is much easier because of it but there is a cost. The cost is inefficient investment markets and a lower standard of living in the future for our children.

It is strange that in three generations our citizens have gone from a populace of 3 dimensional financial thinkers working toward a "middle class" society, to the present rabble of linear thinking automatons that are only capable of following the advice of highly paid Wall Street salespeople and depending on the government for handouts. I am not talking about transfer payments to the unfortunate. I am talking about the government spending trillions of dollars of direct involvement in manipulating the financial markets. The only benefit of this mammoth spending program is to make our financial sector bigger and less efficient.

Wall Street and the big banks are taking a larger and larger portion of investment profits as they cause more and more problems in our economy. Our grandparents understood that the financial sector is not a productive segment of our society. It is a simple service to hold money and transfer it from one location to another. In theory the financial sector should be a very small part of the GDP of a country. They should produce nothing. If the financial sector of a country gets to large it becomes a drag on the economy. Presently our financial sector is robbing a large portion of productive capacity that could be used for something else, perhaps education or health care.

But of course we are financially incompetent and need to have our hands held as we are being sold very complex, expensive and risky products that will under perform the stock market. We are happy to pay these salespeople five times the salary of a doctor. They make buying a stock or a home much, much more expensive than it would cost in an efficient market. I have stated before that if you use a money manager to buy mutual funds then your profit could be close to half of the earnings a stock investor would receive over the next 10 years.

But salespeople slap us on the back and call us "partner" and "buddy". They explain to us that this is the best time to buy a home or an annuity in the last 30 years. They warn us: "you can't miss out on this deal, someone else will steal it!" They push us into borrowing lots of money. Maybe they deserve to siphon off 30% of our country's national income. Who am I to say. All I know is that it is not efficient.

Anyway our government puts the backslapping salespeople to shame. The financial salespeople are only croupier's in the investment casino. The government is the casino owner.

The government is borrowing ten's of trillions of dollars from hostile foreign nations and funneling most of it into the financial sector. These are the profits from the casino and the taxpayer is paying the bill. Taxpayers are placing a high priced bet that they have no chance of winning. Unless they are a financial salesperson. The financial salespeople have been deemed the only important gamblers in the casino. As the financial sector is sucking 20% more from the economy than in an efficient market the financial sector is being bailed out by the taxpayers. Inefficiency piled on top of inefficiency. And our financially incompetent populace doesn't have a clue because they are listening to the politicians and the salespeople.

The trillions being borrowed by the government is not a redistribution of wealth. I would not have a problem with that. This is a casino game with arbitrary winners and losers chosen by our government.

Presently the winners are: the "too big to fail" banks", Wall Street and speculators.

The losers are: the smaller banks, small businesses, prudent investors, savers and definitely our children.

Large banks are so flush with cash thanks to a tsunami of government bailouts that they have gone on a spending spree. Not only are executives getting large bonuses but all bank employees are getting record pay raises. In a normal world all of this government money that is pouring into the banks would be used to repair their insolvent balance sheets. But our government is allowing the banks to misstate their balance sheets, Enron style. They are the government's best friend and will be rewarded for an "extended period".

Wall Street is raking in massive profits. This makes sense because the Wall Street economists are advising the government on where to spend the money robbed from our children's piggy bank. It's not surprising that the big Wall Street firms that were "to big to fail" are growing much bigger every day. Taking more and more of the resources of our economy. Very inefficient but of course very consistent. Everyone expects the government and Wall Street to magically get us out of the massive debt that our government and Wall Street talked our households into borrowing in the first place.

The government has been able to create another bubble. As stocks and housing go back into overvaluation, incompetent investor's are pouring money back into the overpriced markets thanks to government manipulation and government subsidies. Presently assets are being purchased at above fair value. Speculators are able to sell now and make record profits. But the people that are buying these assets will be holding an overvalued asset. The returns going forward must be lower. The speculators have made a huge windfall as anyone who intends to buy and hold the asset long term will get below average historical gains. It is another inefficiency piled upon our bloated financial system and the fixed government casino.

The fact that our government is choosing arbitrary winners and losers in a casino environment seems unethical to me. Shouldn't it be based more on need than favoritism? But I am politically incompetent so I am a bad person to judge this situation. All I know is that it will create dysfunctional markets in the future. I also know that our nation has never experienced this abject favoritism before. One could argue that this casino environment happened during the Great Depression but I would suggest that government's involvement then was a redistribution of wealth more than a casino game. I am sure that all Wall Street economists would disagree with me. This of course is a big part of the problem today. The Wall Street economists running the country are nothing more than salespeople. They are linear thinkers that are unable to see anything but the casino profits that are driving their salaries.

Presently our economy is contracting so I feel buying overpriced assets now is speculation. It may be hard to tell because the government has created another bubble. As for me, I will wait until our economy stops contracting before considering the purchase of an overpriced asset. For now I choose to back away from the table and let the drunken Herd mortgage their future with hopes of being a winner in the government run casino.

What our country is doing now is very inefficient. Spending trillions of dollars to create bubbles for speculators and then spending trillions to bail out the speculators so they don't lose any money. All of this while a significant number of our citizens are living paycheck to paycheck and are grossly overpaying for housing, financial products, education and medical expenses because of inefficient and in many cases manipulated markets.

It might make sense politically but it sure doesn't make sense from an efficient markets standpoint.

How would I solve the problem. Higher taxes and balanced budgets. This has been the solution for the past 4,000 years of organized government. In the ones that survived that is.

The fact is that our financially illiterate populace is attempting to do something that has never been suggested by any of the financial geniuses of the past is very disturbing to me. Our country has borrowed itself to the point of insolvency and now we are attempting to borrow our way out of insolvency. It makes no sense in any way shape or form except in political economics. Unfortunately this is something that I just don't understand.

The government is running a casino style economy for it's financially incompetent citizens with borrowed money and manipulated markets where the taxpayer can't win and Wall Street can't loose.

Although I know almost nothing about politics, I think Franklin, Jefferson and Hamilton would would agree with me. What do you think?

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