Characteristics of a free thinking capitalistic society

Diversity of thought? Contrary ideas? and just plain argumentative? These are characteristics of a free thinking capitalistic society. The US is supposed to be one. But unfortunately, what led to the current economic situation is too few applications of these three vital attributes. I can’t say it better than James Surowiecki so I’ll post an excerpt from his recent writing in The New Yorker called Greasing the Slide:

But the madness of crowds wasn’t the whole story.
In a healthy market, there are countercyclical forces—mechanisms and
institutions that go against the general market trend and encourage
diversity of thinking—that make it harder for feedback loops and
vicious cycles to take hold. Lately, though, many of these institutions
and mechanisms have become procyclical: instead of countering trends,
they amplify them.

Take, for instance, the credit rating
agencies, which investors rely upon for evaluations of companies’
creditworthiness and general financial well-being. They are supposed to
be a kind of early-warning system for investors, evaluating the health
of companies in a way that’s insulated from prevailing market trends.
Yet many studies have found that rating agencies are more likely to
upgrade companies when investors are bullish and downgrade them when
investors are bearish. This makes rating changes less useful to
investors and also means that they push the market in the direction
it’s already going. On October 9th, Standard & Poor’s announced,
late in the day, that it was considering downgrading G.M. That helped
an already shaky market fall four per cent in the final hour of trading.

Street analysts have also been good at pouring gasoline on a raging
fire. Analysts’ ability to take the long view and scrutinize company
fundamentals should make them a counterweight whenever investors get
too giddy or too gloomy. And sometimes it works that way: last fall,
when investors were still relatively optimistic about banks,
Oppenheimer’s Meredith Whitney correctly forecast serious trouble for
the industry. More often, though, we see what the U.C.L.A. finance
professor Bradford Cornell calls “positive feedback between stock price
movements and analyst recommendations.” In other words, analysts often
end up following the market, rather than leading it. In the case of a
sell-off, this tends to make a bad situation worse. Earlier this month,
Goldman Sachs downgraded steel companies like AK Steel. A bold call,
you might think, except that it came only after AK Steel’s stock had
fallen nearly seventy-five per cent in two months.

agencies and Wall Street analysts are always with us. But the most
destructive procyclical force in today’s market is relatively new—hedge
funds. There’s an irony here: hedge funds have been touted as a great
countercyclical force. Because hedge-fund investors, unlike mutual-fund
investors, usually can’t pull their money out on a daily basis, the
funds were supposed to be able to take a longer-term view and pursue
contrarian strategies (like the hedge-fund manager John Paulson’s huge
bets against the subprime bubble). Because they can follow myriad
investment strategies—selling short as well as going long, trading
derivatives, and so on—they were supposed to add diversity to the
market. And the growing influence of hedge funds did indeed coincide
with a decline in market volatility. A study by the Federal Reserve
Bank of Cleveland showed that hedge funds generally made markets more

I like the identification of countercycle and procycle forces in economics. And even though Surowiecki doesn’t mention it, there were a lot of people that were placing countercycle arguments. They just weren’t saying it too loudly. And no one wanted to listen i.e. the number of credit default swaps placed against subprime packaged securities had to be an alarm for someone? I guess now the countercycle force is straight cash. Is there such a thing as a cash bubble?


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