An Annoying Market Failure

[becoin]

This could possibly be something to do with bank failure on such a massive scale destroying civilisation as we know it and rushing in another dark age but whatever.

Ah, I see - the sky is falling, the sky is falling. Give us all your money or the sky will fall...

In Iceland a referendum took place and the people of Iceland voted to let their banks fail on a massive scale. Is civilization in Iceland destroyed? Is Iceland rushing in another dark age? But whatever...

[Sovereign]

Classic give us all your money (this time it was literally trillions) or it will be the 'end of the world'

Works every time

[onesalt]

This could possibly be something to do with bank failure on such a massive scale destroying civilisation as we know it and rushing in another dark age but whatever.

Ah, I see - the sky is falling, the sky is falling. Give us all your money or the sky will fall...

In Iceland a referendum took place and the people of Iceland voted to let their banks fail on a massive scale. Is civilization in Iceland destroyed? Is Iceland rushing in another dark age? But whatever...

There was riots for weeks and the "letting the banks fail" ended up with one being nationalised (so it could be properly run by the government) and two others being sold to other buyers. The Icelanding stockmarket crashed from 9000 points to less than 300 in the space of a year, caused an economic recession of 5.5% of economic growth, and cost iceland as a whole almost 8 billion dollars as well as completely HALVING its GDP. That is not nothing. There was plenty of other effects because of overseas issues (a lot of places have money in icelandic banks) and overseas debt in icelandic banks.

Now you imagine what would happen if this happened in the USA, with a GDP of 14 trillion dollars, suddenly had its GDP drop by half.

[NghtRppr]

Now you imagine what would happen if this happened in the USA, with a GDP of 14 trillion dollars, suddenly had its GDP drop by half.

That would be terrible because we all know that when GDP drops to zero, all the machinery, labor force and natural resources magically vanish.

[AyeYo]

Cool image bro, it doesn't change the fact that 'markets' and not some magical God-like entity or a hard mathematical equation, they are comprised of people and thus behave as irrationally as people do.

That's like saying that a hammer fails if you smash your thumb with it. Hammers don't smash thumbs. People do. It's just a tool and it can be used poorly or wisely. Hammers aren't people either.

Your analogy would be appropirate if hammers were made of people, but it would still be wrong.  Markets are a non-tangible entity comprised of interactions between people.  So, as JeffK said, markets ARE the people that comprise them.  Markets are fallible because people are fallible.  This IS one of the many cases of market failure.  Now that that's established, let's get back to the topic of discussing why it failed...


I'm not sure if Hawker is trying to get at something specific, but as far as I'm concerned the answer is simple and basically summarized here:

Corporations, businesses, etc. can be counted on to do one thing well: ensure the financial prosperity of upper management. Among the strategies to aid in that outcome are: limiting the flow of information, creating propaganda, consuming resources at the expense of our future and taking advantage of disparities between nations.

[onesalt]

Now you imagine what would happen if this happened in the USA, with a GDP of 14 trillion dollars, suddenly had its GDP drop by half.

That would be terrible because we all know that when GDP drops to zero, all the machinery, labor force and natural resources magically vanish.

No but GDP does influence tax rates, employment rates, laws and legislation that gets passed and so on. The GDP dropping by half in a year would essentially mean that the country would get much less in tax income, massive lay-offs of staff would occur at a lot of businesses (since GDP is a direct translation of income from businesses and suchlike) and some goods would suddenly drop into non existence as the company that makes or imports them goes bust. Companies can't do business if the money they're using for their business suddenly vanishes from their bank becuase their bank exploded, essentially.

[NghtRppr]

No but GDP does influence tax rates, employment rates, laws and legislation that gets passed and so on. The GDP dropping by half in a year would essentially mean that the country would get much less in tax income, massive lay-offs of staff would occur at a lot of businesses (since GDP is a direct translation of income from businesses and suchlike) and some goods would suddenly drop into non existence as the company that makes or imports them goes bust. Companies can't do business if the money they're using for their business suddenly vanishes from their bank becuase their bank exploded, essentially.

It would be chaos for a while but once people settled on a new sound monetary system we'd recover. Of course, it would be a smart move to already adopt sound money before anything happens. Someone should invent some kind of electronic money that could store value and be transmitted digitally without it being easily counterfeited. Then we could use that instead of money created by arbitrary fiat and not have to worry about these problems.

[JeffK]

Cool image bro, it doesn't change the fact that 'markets' and not some magical God-like entity or a hard mathematical equation, they are comprised of people and thus behave as irrationally as people do.

That's like saying that a hammer fails if you smash your thumb with it. Hammers don't smash thumbs. People do. It's just a tool and it can be used poorly or wisely. Hammers aren't people either.

This analogy doesn't make a goddamn bit of sense. Does anyone on these forums know how analogies are supposed to work?

[TiagoTiago]

The top hats still get their bonuses 'cause otherwise the company would loose money; if they didn't get their big bucks as usual it would send the message the company is fragile and doesn't expect to keep making money and the investors would run away. Like this guy mentioned in the video, the top guys in the drug gangs still make it rain even when busyness is bad, for the fear of showing weakness.

[becoin]

Now you imagine what would happen if this happened in the USA, with a GDP of 14 trillion dollars, suddenly had its GDP drop by half.

Nothing unwitnessed before will happen. What did happen when the Soviet empire collapsed? Nothing too dramatic. The sky didn't fall.

The US is an economic bubble for decades for they consume 25% (producing less than 20%) of the world GDP virtually living on credit for decades. Their military budget is bigger than military budgets of all other countries on this planet taken together! If what you describe takes place the US will just cease to be the only super power in this world - nothing more and nothing less. The sky will not fall. Economic power will shift to Asia-Pacific region. It is currently shifting anyway. Postponing the inevitable by money printing in the US and EU is just borrowing from the future, deteriorating the consequences, and blatantly robbing future generations.

[NghtRppr]

This analogy doesn't make a goddamn bit of sense.

I'm sorry you don't understand it. Tell me what's confusing about it and I'll walk you through it.

[JeffK]

A group of people cannot be a part/whole of a hammer. They can be part or the whole of a market though. Your 'blame the person, not the tool' analogy does not make sense, because markets are not so much a tool as they are a product of human interactions.


Side note: You, however, are a tool, so maybe it makes sense if you think about it that way.

[NghtRppr]

A group of people cannot be a part/whole of a hammer. They can be part or the whole of a market though. Your 'blame the person, not the tool' analogy does not make sense, because markets are not so much a tool as they are a product of human interactions.


Side note: You, however, are a tool, so maybe it makes sense if you think about it that way.

I was going to debate this with you since you were making a decent argument but now I'm just going to add you to my ignore list. If someone with some manners wants to take up your argument, I'll debate it with them instead. Don't bother responding to me because I won't be able to see it. Unless, of course, you just like talking to yourself.

[JeffK]

A group of people cannot be a part/whole of a hammer. They can be part or the whole of a market though. Your 'blame the person, not the tool' analogy does not make sense, because markets are not so much a tool as they are a product of human interactions.


Side note: You, however, are a tool, so maybe it makes sense if you think about it that way.

I was going to debate this with you since you were making a decent argument but now I'm just going to add you to my ignore list. If someone with some manners wants to take up your argument, I'll debate it with them instead. Don't bother responding to me because I won't be able to see it. Unless, of course, you just like talking to yourself.

(He just can't think up an analogy)

[AyeYo]

A group of people cannot be a part/whole of a hammer. They can be part or the whole of a market though. Your 'blame the person, not the tool' analogy does not make sense, because markets are not so much a tool as they are a product of human interactions.


Side note: You, however, are a tool, so maybe it makes sense if you think about it that way.

I was going to debate this with you since you were making a decent argument but now I'm just going to add you to my ignore list. If someone with some manners wants to take up your argument, I'll debate it with them instead. Don't bother responding to me because I won't be able to see it. Unless, of course, you just like talking to yourself.

(He just can't think up an analogy)

He'll eventually have the entire forum on his ignore list and he'll just be talking to himself.  It's easier to hang out to laughably idiotic beliefs when you don't have to hear anyone challenge them.

[FirstAscent]

He's got at least four on his ignore list (me included). And I've never seen someone so perfectly embody the definition of petulance as when he puts someone on the ignore list.

[becoin]

Markets are people, If people fail, markets fail.

No! Markets are markets. People are people.

Do you remember that scene from the baron Munchausen story when the famous baron and his horse are sinking into the swamp, then, driven by a brilliant idea, the baron grabs his own hair and pulls himself and his horse out of the swamp.

You must be a great fan of baron Munchhausen's approach to surrounding reality?!... People just need to change their mind to get the markets going?!... Huh?...

[GideonGono]

How in hell is that a Market Failure when you have Central Planning in Monetary Policy, innumerable banking and finance regulations and an army of bureaucrats to go with it??!! This is a clear failure in govt policy, and govt supporters are failing to take responsibility! 

[Hawker]

How in hell is that a Market Failure when you have Central Planning in Monetary Policy, innumerable banking and finance regulations and an army of bureaucrats to go with it??!! This is a clear failure in govt policy, and govt supporters are failing to take responsibility! 

Actually you don't.  Investment managers are free to invest where they choose but are supposed to invest where they get the gretest return.  The higher their returns, the better their bonuses.  Its a good system.  But for soem reason, they are investing in banks that are very badly managed and the bank management are taking millions as huge bonuses.  The investment managers are essejntially paying for people to mess them up - it doesn't make sense.

Apparently the problem is "asymmetrical information" - its a known cause of market failure.

[becoin]

Investment managers are free to invest where they choose but are supposed to invest where they get the gretest return. 

The greatest return is when you bribe government officials. You get the information you need (you say it is asymmetrical, huh) and lucrative contracts, and government bail-outs!

The investment managers are essejntially paying for people to mess them up - it doesn't make sense.

I hope it now does make sense!