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> "growth" (i.e. inflation) before the inevitable crash What you need to know is this: Financial crashes are an eternal cycle, they will never go away. Unless

> "growth" (i.e. inflation) before the inevitable crash What you need to know is this: Financial crashes are an eternal cycle, they will never go away. Unless there is fundamental societal change. Here's why: Financial crashes are business to a couple of extremely powerful/rich people. After every crash, assets are undervalued. Rich people have the financial cushion to not be impacted in the slightest way by such crashes. Which means they are in a position to purchase these undervalued assets from poorer people. The rich-poor imbalance grows further, as these undervalued assets regain their "real" value. That's the reason why these crashes are manufactured. Which means a couple of powerful/rich people will continually steer society in this direction, for example by removing laws that were put in place as safeguards. Edit: And no, this is not conspiracy, it's pure economics.

mjburgess 9y ago
Ah yes, the Flimflam-Fo Equation with its key parameters, "rich person a" and "rich person b". Conspiracy theories might well be defined just by the application of the fallacy, "if someone benefits, then they intended it". And here we see this fallacy being applied. Sound like a textbook conspiracy to me. The extremely weathly are not interested in increasing their net wealth, only in specific purchases to further their goals -- which are very easy to undermine with crashes. People who are merely wealthy might possibly wish to increase their general wealth and therefore believe a crash will help them do that. That is an incredibly outsized risk for a wealthy person to needlessly take however.
- deleted 9y ago
  [deleted]
- zbentley 9y ago
  > the fallacy, "if someone benefits, then they intended it". Slightly tangential, but neat: that fallacy has a name! It's the "Post hoc ergo propter hoc" fallacy: https://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc https://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc There might be a more specific named fallacy for when post-hoc happens with regard to individuals' intentions and benefits rather than causes and effects in general though.
  - mjburgess 9y ago
    post hoc ergo sher lock
  - mac01021 9y ago
    I don't think "after it, therefore because of it" describes the fallacy identified by the GP.
eru 9y ago
Financial crashes don't have to be bad. The last one wasn't so bad at first, before the central banks in some countries let nominal GDP dip and caused a mild recession to become the Great Recession. See eg http://econlog.econlib.org/archives/2017/11/old_classical_m.html http://econlog.econlib.org/archives/2017/11/old_classical_m.... Some countries like Israel, Australia (or to a lesser extent the UK) had more competent central banks. See https://marketmonetarist.com/2014/04/24/how-stan-fischer-predicted-the-crisis-and-saved-israel-from-it/ https://marketmonetarist.com/2014/04/24/how-stan-fischer-pre... for a piece about the example of Israel.
dsacco 9y ago
> And no, this is not conspiracy, it's pure economics. If everything you’re postulating here is “pure economics”, would you mind placing it in the context of an economic framework for the sake of precision? Something rudimentary like the macro credit-debt cycle is fine. As it stands, your exposition appears fairly politically loaded, and your specific claim that crashes are “manufactured” rather than an emergent side effect of market dynamics is, to me, an extraordinary claim that requires commensurately extraordinary evidence. It’s not at all clear to me how you’re getting from (“there exist people who benefit from systemic market corrections”) to (“market corrections are manufactured by a subset of people who benefit by them”). As another question illustrating this point, would you say that people purchasing homes with overextended mortgages during the housing market bubble were contributing to that crash? If so, did they have a part in “manufacturing” it even though they didn’t benefit? How do you reconcile the ideas of market participants with agency, systemic volatility, and irrational exuberance with the idea of a conspiratorial group capable of systematically driving a market crash?
- csomar 9y ago
  If you give a guy $10.000, x10 leverage and a trading system; and we assume he has low emotion control and is bad at math. The result is that he'll burn these $10k getting margin called. 1. You can't get all people to play this game. 2. You can't get people margin called if the stock price doesn't drop enough. You can get 1 if you complicate loans (Mortgage based securities); and you can get 2 if you make the issue related to the whole economy. So people get bankrupted instead of margin called. Their house is sold instead of the stock. Same game, bigger market. That being said I don't believe the "rich" or the "powerful" are doing it. I don't believe in Conspiracy theories. I think this "movement" is inherent in the nature of the market and the humans who play around it. It burns both the poor and the rich, but it magnifies inequality whether by making the rich richer or creating new riches.
cmrdporcupine 9y ago
This is the really terrible problem of the push to dismantle state and company pension systems and aggressively replace them with private retirement schemes and the addition of new investment systems under the guise of "retirement" plans -- it has led to the extreme growth of the quasi-snake-oil mutual fund sales industry ("financial planners" whose only job is to sell high commission funds) and has unfortunately also led to the middle working classes being very emotionally and ideologically invested in the fortunes of the stock market. They become easy victims for the process you describe, and also will push politically for anything which "makes the stock market happy" and so the bailouts of 2008, a kind of mass corporatization -- reverse socialism -- of the state not seen in the entire 20th or 19th centuries, was politically tenable in a way it wouldn't have been before.
- ataturk 9y ago
  What were the pension funds invested in? You do understand that the reason to move to 401K style plans is because pension obligations were over-promised and under-delivered by the same snake oil salesmen you describe. You understand that, correct? At least with individual plans, when people change jobs they get to keep whatever they contributed versus a pension plan which has varying types of payouts and much longer vesting schedules.
headmelted 9y ago
Please don't take offence, but you've misunderstood the mechanics of how wealth is accumulated. The wealthiest people in the world are wealthy by virtue of the gains made on the assets they already have. So, in a bull market, their assets grow while someone without assets is left behind. The inverse is true, too - they'll proportionally lose to the same degree in a crash - as while a poor person may have no investments, the wealthy person's investments will crash in line with the market. There won't be a financial cushion, at least not a significant one. Books have been written around timing markets and it's generally accepted that it cannot be done reliably. To get out before a crash then buy cheap would require you to predict three different moments accurately: when to get in, when to get out, and then when to buy on the "cheap". Timing even one reliably requires luck or clairvoyance. "Rich people have the financial cushion to not be impacted in the slightest way by such crashes". This is clearly false - wealthy people don't keep mountains of cash lying around as they would miss out on the growth in bull markets, and as a result their wealth would decrease relative to their peers. Investors generally just become relatively poorer during a crash then make it back and more during the next bull market, at least that's how it's worked until now. There's an old quote I can't find the source of right now that sums it up fairly aptly: "Stocks go down faster than they go up... but they go up further than they go down".
- dsacco 9y ago
  I agree with the thrust of your comment, but to nitpick: > Books have been written around timing markets and it's generally accepted that it cannot be done reliably. To get out before a crash then buy cheap would require you to predict three different moments accurately: when to get in, when to get out, and then when to buy on the "cheap". Timing even one reliably requires luck or clairvoyance. This doesn’t strike me as true, unless you’re describing the subset of academic economists who agree with EMH in some form. In particular, the first sentence on its own appears to be evidently untrue; it’s clear that there are many parties, including economists and financiers, who attempt to time the market and generally forecast macroeconomic shifts.
  - headmelted 9y ago
    I completely agree that it's the role of many parties to attempt to forecast the market, but I'm skeptical of how many (even those whose job it is to do so day-to-day) really believe that it can be done reliably. CNBC is probably a good example of this. When you don't predict anything specific, you can never be wrong. (Clairvoyance was not meant seriously, I should have made that clear!)
dharma1 9y ago
Oscillation happens in many complex systems - population sizes etc. I think the reasons for why cycles happen in economies are many. It's probably desirable to reduce the amplitude of the cycles, but I'm not convinced humans are capable of that. Due to biological reasons, reward functions are almost always short term. Humans, as individuals and societies, are not very good at optimisations at longer time scales. I'd like to think that we are capable of more, but it may be that we are not. AI (at some stage) might be able to help us there, if it turns out to have better predictive power than humans - and doesn't lead to more ruin rather than improvement in the human condition.
specialist 9y ago
aka disaster capitalism.
cmurf 9y ago
What is more obviously manufactured is bad tax policy, as in way too low top end tax rates. That has incentivized wealthy people to invest in real estate and the stock market, rather than in the working class. That's why a house costs on average 24 times more today than in 1960, and yet wages are only 8 times more today than in 1960. And the tax rates on these capital gains are lower than middle class payroll and income tax combined. Tax policy has incentivized top end hoarding. This is not investing. It's a neo-feudal give away. The top end tax bracket needs to go well above 50% to make it riskier to invest what's left in those markets, rather than taking a risk on starting or growing a business, the expenses of which are 100% tax deductible.
- opo 9y ago
  >...That's why a house costs on average 24 times more today than in 1960, There might be isolated cases of that happening, but in general, nothing close to that. >...In fact, if you look at a fifty-year period after World War II, home prices were absolutely steady. In 1947 the Case-Shiller index stood at 110, and in 1997, adjusted for inflation, it stood at 110 again. http://www.motherjones.com/kevin-drum/2010/08/chart-day-housing-prices-wwii/ http://www.motherjones.com/kevin-drum/2010/08/chart-day-hous... There is a chart at the bottom of the article. In terms of wages, it is more realistic to focus on total compensation: >...Economists long have noted that focusing on AHE rather than total compensation yields an inaccurate picture of labor compensation due to the omission from AHE of employer-provided benefits. https://files.stlouisfed.org/files/htdocs/publications/es/07/ES0707.pdf https://files.stlouisfed.org/files/htdocs/publications/es/07... The page has 2 charts showing the differences when you compare wages to total compensation. The tax burden has basically gone opposite of what you imply. For example, the top 10% paid 49% of taxes in 1980 and paid 70% in 2014. (http://www.ntu.org/foundation/page/who-pays-income-taxes http://www.ntu.org/foundation/page/who-pays-income-taxes) The "top marginal rate" means very little by itself. What matters is the effective rate which takes into account the credits/deductions that are allowed, the other lower tax rates, etc. >...The top end tax bracket needs to go well above 50% to make it riskier to invest what's left in those markets, rather than taking a risk on starting or growing a business, the expenses of which are 100% tax deductible. If the effective federal tax rate would be > 50% and there would likely be state taxes also, why would anyone invest in a small business? The vast majority of new businesses fail in the first 5 years. With such high tax rates, why take a risk when the vast majority of the time almost all the money will be lost and if you are able to make a successful business, taxes will take almost all the profit? Much more rational to invest in government bonds.

mjburgess 9y ago

Ah yes, the Flimflam-Fo Equation with its key parameters, "rich person a" and "rich person b". Conspiracy theories might well be defined just by the application of the fallacy, "if someone benefits, then they intended it". And here we see this fallacy being applied. Sound like a textbook conspiracy to me. The extremely weathly are not interested in increasing their net wealth, only in specific purchases to further their goals -- which are very easy to undermine with crashes. People who are merely wealthy might possibly wish to increase their general wealth and therefore believe a crash will help them do that. That is an incredibly outsized risk for a wealthy person to needlessly take however.

deleted 9y ago
[deleted]
zbentley 9y ago
> the fallacy, "if someone benefits, then they intended it". Slightly tangential, but neat: that fallacy has a name! It's the "Post hoc ergo propter hoc" fallacy: https://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc https://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc There might be a more specific named fallacy for when post-hoc happens with regard to individuals' intentions and benefits rather than causes and effects in general though.
- mjburgess 9y ago
  post hoc ergo sher lock
- mac01021 9y ago
  I don't think "after it, therefore because of it" describes the fallacy identified by the GP.

eru 9y ago

Financial crashes don't have to be bad. The last one wasn't so bad at first, before the central banks in some countries let nominal GDP dip and caused a mild recession to become the Great Recession. See eg http://econlog.econlib.org/archives/2017/11/old_classical_m.html http://econlog.econlib.org/archives/2017/11/old_classical_m.... Some countries like Israel, Australia (or to a lesser extent the UK) had more competent central banks. See https://marketmonetarist.com/2014/04/24/how-stan-fischer-predicted-the-crisis-and-saved-israel-from-it/ https://marketmonetarist.com/2014/04/24/how-stan-fischer-pre... for a piece about the example of Israel.

dsacco 9y ago

> And no, this is not conspiracy, it's pure economics. If everything you’re postulating here is “pure economics”, would you mind placing it in the context of an economic framework for the sake of precision? Something rudimentary like the macro credit-debt cycle is fine. As it stands, your exposition appears fairly politically loaded, and your specific claim that crashes are “manufactured” rather than an emergent side effect of market dynamics is, to me, an extraordinary claim that requires commensurately extraordinary evidence. It’s not at all clear to me how you’re getting from (“there exist people who benefit from systemic market corrections”) to (“market corrections are manufactured by a subset of people who benefit by them”). As another question illustrating this point, would you say that people purchasing homes with overextended mortgages during the housing market bubble were contributing to that crash? If so, did they have a part in “manufacturing” it even though they didn’t benefit? How do you reconcile the ideas of market participants with agency, systemic volatility, and irrational exuberance with the idea of a conspiratorial group capable of systematically driving a market crash?

csomar 9y ago
If you give a guy $10.000, x10 leverage and a trading system; and we assume he has low emotion control and is bad at math. The result is that he'll burn these $10k getting margin called. 1. You can't get all people to play this game. 2. You can't get people margin called if the stock price doesn't drop enough. You can get 1 if you complicate loans (Mortgage based securities); and you can get 2 if you make the issue related to the whole economy. So people get bankrupted instead of margin called. Their house is sold instead of the stock. Same game, bigger market. That being said I don't believe the "rich" or the "powerful" are doing it. I don't believe in Conspiracy theories. I think this "movement" is inherent in the nature of the market and the humans who play around it. It burns both the poor and the rich, but it magnifies inequality whether by making the rich richer or creating new riches.

cmrdporcupine 9y ago

This is the really terrible problem of the push to dismantle state and company pension systems and aggressively replace them with private retirement schemes and the addition of new investment systems under the guise of "retirement" plans -- it has led to the extreme growth of the quasi-snake-oil mutual fund sales industry ("financial planners" whose only job is to sell high commission funds) and has unfortunately also led to the middle working classes being very emotionally and ideologically invested in the fortunes of the stock market. They become easy victims for the process you describe, and also will push politically for anything which "makes the stock market happy" and so the bailouts of 2008, a kind of mass corporatization -- reverse socialism -- of the state not seen in the entire 20th or 19th centuries, was politically tenable in a way it wouldn't have been before.

ataturk 9y ago
What were the pension funds invested in? You do understand that the reason to move to 401K style plans is because pension obligations were over-promised and under-delivered by the same snake oil salesmen you describe. You understand that, correct? At least with individual plans, when people change jobs they get to keep whatever they contributed versus a pension plan which has varying types of payouts and much longer vesting schedules.

headmelted 9y ago

Please don't take offence, but you've misunderstood the mechanics of how wealth is accumulated. The wealthiest people in the world are wealthy by virtue of the gains made on the assets they already have. So, in a bull market, their assets grow while someone without assets is left behind. The inverse is true, too - they'll proportionally lose to the same degree in a crash - as while a poor person may have no investments, the wealthy person's investments will crash in line with the market. There won't be a financial cushion, at least not a significant one. Books have been written around timing markets and it's generally accepted that it cannot be done reliably. To get out before a crash then buy cheap would require you to predict three different moments accurately: when to get in, when to get out, and then when to buy on the "cheap". Timing even one reliably requires luck or clairvoyance. "Rich people have the financial cushion to not be impacted in the slightest way by such crashes". This is clearly false - wealthy people don't keep mountains of cash lying around as they would miss out on the growth in bull markets, and as a result their wealth would decrease relative to their peers. Investors generally just become relatively poorer during a crash then make it back and more during the next bull market, at least that's how it's worked until now. There's an old quote I can't find the source of right now that sums it up fairly aptly: "Stocks go down faster than they go up... but they go up further than they go down".

dsacco 9y ago
I agree with the thrust of your comment, but to nitpick: > Books have been written around timing markets and it's generally accepted that it cannot be done reliably. To get out before a crash then buy cheap would require you to predict three different moments accurately: when to get in, when to get out, and then when to buy on the "cheap". Timing even one reliably requires luck or clairvoyance. This doesn’t strike me as true, unless you’re describing the subset of academic economists who agree with EMH in some form. In particular, the first sentence on its own appears to be evidently untrue; it’s clear that there are many parties, including economists and financiers, who attempt to time the market and generally forecast macroeconomic shifts.
- headmelted 9y ago
  I completely agree that it's the role of many parties to attempt to forecast the market, but I'm skeptical of how many (even those whose job it is to do so day-to-day) really believe that it can be done reliably. CNBC is probably a good example of this. When you don't predict anything specific, you can never be wrong. (Clairvoyance was not meant seriously, I should have made that clear!)

dharma1 9y ago

Oscillation happens in many complex systems - population sizes etc. I think the reasons for why cycles happen in economies are many. It's probably desirable to reduce the amplitude of the cycles, but I'm not convinced humans are capable of that. Due to biological reasons, reward functions are almost always short term. Humans, as individuals and societies, are not very good at optimisations at longer time scales. I'd like to think that we are capable of more, but it may be that we are not. AI (at some stage) might be able to help us there, if it turns out to have better predictive power than humans - and doesn't lead to more ruin rather than improvement in the human condition.

specialist 9y ago

aka disaster capitalism.

cmurf 9y ago

What is more obviously manufactured is bad tax policy, as in way too low top end tax rates. That has incentivized wealthy people to invest in real estate and the stock market, rather than in the working class. That's why a house costs on average 24 times more today than in 1960, and yet wages are only 8 times more today than in 1960. And the tax rates on these capital gains are lower than middle class payroll and income tax combined. Tax policy has incentivized top end hoarding. This is not investing. It's a neo-feudal give away. The top end tax bracket needs to go well above 50% to make it riskier to invest what's left in those markets, rather than taking a risk on starting or growing a business, the expenses of which are 100% tax deductible.

opo 9y ago
>...That's why a house costs on average 24 times more today than in 1960, There might be isolated cases of that happening, but in general, nothing close to that. >...In fact, if you look at a fifty-year period after World War II, home prices were absolutely steady. In 1947 the Case-Shiller index stood at 110, and in 1997, adjusted for inflation, it stood at 110 again. http://www.motherjones.com/kevin-drum/2010/08/chart-day-housing-prices-wwii/ http://www.motherjones.com/kevin-drum/2010/08/chart-day-hous... There is a chart at the bottom of the article. In terms of wages, it is more realistic to focus on total compensation: >...Economists long have noted that focusing on AHE rather than total compensation yields an inaccurate picture of labor compensation due to the omission from AHE of employer-provided benefits. https://files.stlouisfed.org/files/htdocs/publications/es/07/ES0707.pdf https://files.stlouisfed.org/files/htdocs/publications/es/07... The page has 2 charts showing the differences when you compare wages to total compensation. The tax burden has basically gone opposite of what you imply. For example, the top 10% paid 49% of taxes in 1980 and paid 70% in 2014. (http://www.ntu.org/foundation/page/who-pays-income-taxes http://www.ntu.org/foundation/page/who-pays-income-taxes) The "top marginal rate" means very little by itself. What matters is the effective rate which takes into account the credits/deductions that are allowed, the other lower tax rates, etc. >...The top end tax bracket needs to go well above 50% to make it riskier to invest what's left in those markets, rather than taking a risk on starting or growing a business, the expenses of which are 100% tax deductible. If the effective federal tax rate would be > 50% and there would likely be state taxes also, why would anyone invest in a small business? The vast majority of new businesses fail in the first 5 years. With such high tax rates, why take a risk when the vast majority of the time almost all the money will be lost and if you are able to make a successful business, taxes will take almost all the profit? Much more rational to invest in government bonds.