Market Oddities

[elvum]

So, it seems to be universally agreed that the 0.75% base rate cut announced today by the US Federal Reserve Bank was an attempt to stop global stock markets from continuing their recent sharp downward trend. It also seems to be agreed that the size of the cut is unusually large, and unusually timed, in that it didn't follow a regular meeting of their "Open Market Committee". My rudimentary understanding of economics leads me to believe that by making it less attractive to invest your money with the US government, investors will preferentially buy shares, increasing demand and hence prices.

So far, so good. But I found this article interesting. It seems to be agreed by those quoted in the article that cutting the base rate by 0.75% is very significant. There also seems to be agreement that the action is "risky". But what I don't understand is people asserting that the decision is evidence of "panic". Do those commentators actually believe that the committee made their decision in the throes of gut-wrenching terror? That the decision was not the result of rational decision-making nor of reasoned argument? Do they have inside information on the mental states of the committee members? If they don't have any evidence for their assertions, aren't they acting irresponsibly by baselessly contributing to the fall in investor confidence?

I think I have previously analogised bankers and traders to a troupe of monkeys encountering fire for the first time, egging each other closer and closer until one of them gets burned, whereupon they all run away screaming. This kind of negative commentary strikes me as being the equivalent of shouting "fire!" at the first imagined whiff of smoke - dangerous; unhelpful; irresponsible.

Comments

[gaspodog.livejournal.com]

The wondrous Market that the hardline capitalists tell us should be responsible for absolutely everything does have this tendency to be strongly affected by tiny minorities (of one on occasion) shouting "Panic". And then presumably raking in the cash as their share deals accrue the resulting profit.

[bazzalisk.livejournal.com]

This is because the Free Market Model assumes that all economic entities will act completely rationally and with total awareness of all pertinent information at all times.

And they say that Communism fails to take human nature into account?

[elvum.livejournal.com]

The free market does at least assume that everyone's selfish... :-)

[bazzalisk.livejournal.com]

No, it doesn't. It assumes that all economic entities are perfectly informed perfectly rational entities working in a way to maximise their own economic potential. It makes no comment about people at all. If you assume that individual people are economic entities (dubious at best) it's predicting that they will be perfectly selfish about the goal of maximising their own economic potential and have no other goals whatsoever. Moreover it assumes that although they are selfish they will never use coercive measures against other economic entities.

Which seems to be just as ridiculous as assuming everyone is selfless (which communism doesn't do).

There are a lot of reasons why communism has failed, but common wisdom that it was a lack of taking into account "human nature" seems totally bogus.