Moral conundrums aside, the reality of asset bubbles that have burst is that bad debts that cannot be repaid–won’t be. Extend and pretend policies, only prolong the economic drag aftermath. Admitting and purging bad debts from the financial system is key to the healing process. Irish business people are flocking to file for bankruptcy in the UK in order to get out of debt years sooner. Here is a direct video link.
Here is a direct video link.
See also: Share trading volumes drop after Reuters changes release schedule
HFT coupled with record levels of margin abuse and leverage in financial market participants today poses elevated instability and downside risk in asset prices. We have seen this story many times before. We do know better. This exert from the Fed’s own 2006 report available here: “A Brief History of the 1987 Stock Market Crash with a discussion of the Federal Reserve Response” offers an assessment eerily similar to present conditions:
“During the years prior to the crash, equity markets had been posting strong gains. Price increases outpaced earnings growth and lifted price-earnings ratios; some commentators warned that the market had become overvalued…”
“Importantly, financial markets had seen an increase in the use of “program trading” strategies, where computers were set up to quickly trade particular amounts of a large number of stocks, such as those in a particular stock index, when certain conditions were met…”
“The macroeconomic outlook during the months leading up to the crash had become somewhat less certain. Interest rates were rising globally.”
Of course, in the months leading up to the crash of 1987, few expressed any concern that soaring stock prices had far exceeded reasonable valuations for investment. And then suddenly the probable yet widely unexpected happened. From the Fed’s own report:
“On October 19, 1987, the stock market, along with the associated futures and options markets, crashed, with the S&P 500 stock market index falling about 20 percent. The market crash of 1987 is a significant event not just because of the swiftness and severity of the market decline, but also because it showed the weaknesses of the trading systems themselves and how they could be strained and come close to breaking in extreme conditions. The problems in the trading systems interacted with the price declines to make the crisis worse.”
As usual none of this is ringing any bells for the Bernanke led fed and its cheerleaders in the financial services sector. As John Galbraith so aptly quipped:
“There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”
Here is a direct video link. See also: The state of America’s middle class in 8 charts
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