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It sounds like that experiment is flawed, but the article doesn't go into detail about what the participants are told. At any rate, you can't draw the conclusi

by lzw 16y ago

It sounds like that experiment is flawed, but the article doesn't go into detail about what the participants are told. At any rate, you can't draw the conclusion it does from that experiment as given and then extrapolate it to the outside world. IF you put any group of people together for an experiment, and give them nothing else to do, they are going to trade. especially fake money because there's no real risk. Unnecessary trading is going to result in abberant activity. The bubbles we've had in our economy are due specifically to government forcing interest rates below their market level. You do that and you give institutions the power to make free money-- buy from the government at %x, invest it in low risk situations like mortgages at %Y and then pay back the government in devalued currency (due to inflation) at %Z. In each of those steps you make money...so, its a no-brainer. If you want to stop having bubbles, remove the power to set interest rates from the federal reserve / government. Then the market has a chance to self regulate. Right now the primary price signal that would keep bubbles from inflating is being held down, and the natural bubble prevention is being short circuited. So, it is no wonder that bubbles are happening. The sad thing is that this is not a very controversial or difficult subject, but it is rare to find an article in a publication like the Atlantic that seems even aware of the effect of interest rates on interest bearing securities! The reason that the mainstream media and government pretends like they aren't manipulating us into bubbles is very simple: Letting interest rates operate normally would also put a restraint on reckless government spending.

prewett 16y ago
> If you want to stop having bubbles, remove the power to set interest rates from the federal reserve / government. Then the market has a chance to self regulate. The article's assertion is that the problem is people themselves, so removing the Federal Reserve would make no difference. Anyway, we've already done that experiment. The Federal Reserve was not created until 1913 (as a result of the Panic of 1907). Prior to that, the unregulated U.S. economy had regular boom-bust cycles about every 10-20 years: The Panic of 1819, 1837, 1857, 1873, 1884, 1893, 1907. Of those, speculation was part of the Panic of 1819, and directly responsible for the Panic of 1837. The Panic of 1857 was caused by banks lending too much (arguably a bubble in something). The Panic of 1893 was caused by speculation in railroads (it sounds similar to the recent speculation in housing). The Panic of 1907 was precipated by a failed short squeeze on United Copper, causing a quick mini-bubble where its price doubled in a day and then halved a few days later when it the squeeze failed. This left the Otto Heinze unable to pay his loans that he used to buy United Copper shares, causing a chain reaction in the banking system. The negotiations of J.P. Morgan in NY described in the wikipedia article (http://en.wikipedia.org/wiki/Panic_of_1907 http://en.wikipedia.org/wiki/Panic_of_1907) sounds very reminiscent of what happened with the banks in the Panic of 2009. (See http://en.wikipedia.org/wiki/Panic_of_1819 http://en.wikipedia.org/wiki/Panic_of_1819, http://en.wikipedia.org/wiki/Panic_of_1837 http://en.wikipedia.org/wiki/Panic_of_1837, http://en.wikipedia.org/wiki/Panic_of_1857 http://en.wikipedia.org/wiki/Panic_of_1857, http://en.wikipedia.org/wiki/Panic_of_1893 http://en.wikipedia.org/wiki/Panic_of_1893) I think it is very clear that, left to themselves, financial markets cannot regulate themselves. I don't know if the Federal Reserve has reduced bubbles, since we had the Panic of 1929 (too much borrowing), the 1987 Black Monday stock market crash, the Savings and Loans bankruptcies that may have resulted from that, the dot-com bubble of 2001, and the Panic of 2009 (housing). I'm not sure that the Federal Reserve has reduced bubbles (that being a function of human greed), but it has reduced the aftermath. Read how long the recession/depressions lasted in the 1800s. I'll take the Federal Reserve.
regularfry 16y ago
> IF you put any group of people together for an experiment, and give them nothing else to do, they are going to trade. especially fake money because there's no real risk. Unnecessary trading is going to result in abberant activity. The implication is that it's not fake money: The difference between a good trading performance and a bad one is about $80 for a three-hour session, enough to motivate cash-strapped students to do their best. Now, there's an argument to be explored there about whether the behaviour of a cash-strapped student accurately represents that of an institutional investor, but I think it's probably as close as it's reasonable to expect.

by lzw 16y ago

prewett 16y ago

> If you want to stop having bubbles, remove the power to set interest rates from the federal reserve / government. Then the market has a chance to self regulate. The article's assertion is that the problem is people themselves, so removing the Federal Reserve would make no difference. Anyway, we've already done that experiment. The Federal Reserve was not created until 1913 (as a result of the Panic of 1907). Prior to that, the unregulated U.S. economy had regular boom-bust cycles about every 10-20 years: The Panic of 1819, 1837, 1857, 1873, 1884, 1893, 1907. Of those, speculation was part of the Panic of 1819, and directly responsible for the Panic of 1837. The Panic of 1857 was caused by banks lending too much (arguably a bubble in something). The Panic of 1893 was caused by speculation in railroads (it sounds similar to the recent speculation in housing). The Panic of 1907 was precipated by a failed short squeeze on United Copper, causing a quick mini-bubble where its price doubled in a day and then halved a few days later when it the squeeze failed. This left the Otto Heinze unable to pay his loans that he used to buy United Copper shares, causing a chain reaction in the banking system. The negotiations of J.P. Morgan in NY described in the wikipedia article (http://en.wikipedia.org/wiki/Panic_of_1907 http://en.wikipedia.org/wiki/Panic_of_1907) sounds very reminiscent of what happened with the banks in the Panic of 2009. (See http://en.wikipedia.org/wiki/Panic_of_1819 http://en.wikipedia.org/wiki/Panic_of_1819, http://en.wikipedia.org/wiki/Panic_of_1837 http://en.wikipedia.org/wiki/Panic_of_1837, http://en.wikipedia.org/wiki/Panic_of_1857 http://en.wikipedia.org/wiki/Panic_of_1857, http://en.wikipedia.org/wiki/Panic_of_1893 http://en.wikipedia.org/wiki/Panic_of_1893) I think it is very clear that, left to themselves, financial markets cannot regulate themselves. I don't know if the Federal Reserve has reduced bubbles, since we had the Panic of 1929 (too much borrowing), the 1987 Black Monday stock market crash, the Savings and Loans bankruptcies that may have resulted from that, the dot-com bubble of 2001, and the Panic of 2009 (housing). I'm not sure that the Federal Reserve has reduced bubbles (that being a function of human greed), but it has reduced the aftermath. Read how long the recession/depressions lasted in the 1800s. I'll take the Federal Reserve.

regularfry 16y ago

> IF you put any group of people together for an experiment, and give them nothing else to do, they are going to trade. especially fake money because there's no real risk. Unnecessary trading is going to result in abberant activity. The implication is that it's not fake money: The difference between a good trading performance and a bad one is about $80 for a three-hour session, enough to motivate cash-strapped students to do their best. Now, there's an argument to be explored there about whether the behaviour of a cash-strapped student accurately represents that of an institutional investor, but I think it's probably as close as it's reasonable to expect.