Sep 29, 2012

Greek riots, Spanish anti-austerity marches shatter Europe’s relative financial calm - The Washington Post


The brief but intense clashes by several hundred rioters among the 60,000 people protesting in Athens came a day after anti-austerity protests rocked the Spanish capital.
In Madrid, thousands of angry protesters again swarmed as close as they could get Wednesday night to Parliament, watched by a heavy contingent of riot police. There was no fresh violence, but the demonstrators cut off traffic on one of the city’s major thoroughfares at the height of the evening commute.
The protesters chanted for the release of 34 people detained Tuesday night in clashes that injured 64 others. They also demanded new elections to oust Prime Minister Mariano Rajoy and his conservative government, which has imposed cutbacks and tax hikes, deepening the gloom in a country struggling with recession and unemployment of nearly 25 percent, the highest among the 17 nations using the common euro currency.
Spain’s central bank warned Wednesday the country’s economy continues to shrink “significantly,” sending the Spanish stock index tumbling and its borrowing costs rising.
Across Europe, stock markets fell as well. Germany’s DAX dropped 2 percent while the CAC-40 in France fell 2.4 percent and Britain’s FTSE 100 slid 1.4 percent. The euro was also hit, down a further 0.3 percent at $1.2840.
The turmoil Wednesday ended weeks of relative calm and optimism among investors that Europe and eurozone might have turned a corner. Markets have been breathing easier since the European Central Bank said earlier this month it would buy unlimited amounts of government bonds to help countries with their debts.
The move by the ECB helped lower borrowing costs for indebted governments from levels that only two months ago threatened to bankrupt Spain and Italy. Stocks also rose. Media speculation about the timing and cost of a eurozone breakup or a departure by troubled Greece faded.
However, the economic reality in Europe remained dire. Several countries have had to impose harsh new spending cuts, tax rises and economic reforms to meet European deficit targets and, in Greece’s case, to continue getting vital aid. The austerity has hit citizens with wage cuts and fewer services, and left their economies struggling through recessions as reduced government spending has undermined growth.
“Yesterday’s anti-austerity protests in Madrid, together with today’s 24-hour strike in Greece, are both reminders that rampant unemployment and a general collapse in living standards make people desperate and angry,” said David Morrison, senior market strategist at GFT Markets.

Breakthrough: This electronic implant can dissolve inside your body


The boundary that divides man from machine continues to dissolve — and in more literal ways than you might imagine. Scientists today announced a new class of electronics that can disappear completely, resorbing into its environment after carrying out a designated task.
The potential applications of this technology — dubbed "Transient Electronics" by its creators — are many, and they run the gamut from vanishing biological implants to environmentally friendly cell phones. To learn more, we spoke with lead researcher John Rogers and bioengineer Todd Coleman about evanescent electronics, and how they stand to revolutionize humanity's relationship with technology.
Traditional electronics are hard and unyielding. This is often perceived as a good thing. The stiffness of a computer chip bespeaks strength, its physical invariance reliability.
Breakthrough: This electronic implant can dissolve inside your bodyAnd yet, the physical rigidity of most modern technology is analogous to its practical limitations, in that it is not easily adaptable. Some applications call for a softer, or less permanent solution that the vast majority electronics just can't provide. That's where John Rogers comes in.
Rogers is an engineer at The University of Illinois at Urbana–Champaign, where he studies and applies the characteristics of "soft" materials in ways that are transforming how we think about electronics. Last year, Rogers' group unveiled an "epidermal electronic system" — an electronic circuit, applied to the skin like a temporary tattoo, that can stretch, flex and twist as a person moves. The announcement marked an impressive leap forward in the field of biocompatible electronics.
And now, with the introduction of transient electronics, Rogers and his colleagues have taken the concept of dynamic, unobtrusive, and biocompatible technology to an entirely separate plane.
"The history of development in electronics has, up to now, focused on the development of devices that last forever, with stable performance," Rogers tells io9. "We are postulating that devices with the opposite behavior — that is, physical transience in a manner with engineering control — could open up different, complementary kinds of applications."
Breakthrough: This electronic implant can dissolve inside your bodyIn today's issue of Science, Rogers and his team have demonstrated the use of their system in a biomedical setting by embedding transient circuits in the surgical wounds of mice. These devices were programmed to not only fight infection (heat generated by the circuit acts as a bacteriocide, curbing the proliferation of potentially harmful microorganisms), but to resorb through the tissue, after exposure to a certain amount of the mouse's own biological fluids.
In many cases, explains Rogers, "interventional function is needed only during a healing period," after which the device is no longer needed. "Instead of leaving them in the body, as an unnecessary device load, or instead of performing a surgical removal process, the best thing is for the device to resorb and disappear in the body."
Three weeks after implantation, the researchers found reduced infection at the wound site, trace residues of the transient circuit, and evidence of slow reintegration into the the layers of tissue beneath the skin. Signs of revascularization (the restoration of circulation at the point of injury — an important part of the healing process) were observed, as well.
The secret to transient electronics' disappearing act are the materials used to create them. The circuits implanted in the mice were crafted from sheets of porous silicon and magnesium electrodes, then packaged in silk collected from silkworm cocoons. By tweaking the crystalline structure of the silk, the researchers can control how quickly it dissolves, be it over a matter of seconds or several years.
All of these materials are capable of being broken down and reassimilated into their environment. The amount of silicon in a transient circuit comes in at well below your daily recommended allowance, and the magnesium content is less than what you find in a multivitamin. In the mice, resorption was precipitated by exposure to biofluids. In the video below, Rogers demonstrates how a transient circuit can be dissolved with water. In theory, changes in heat, radiation or pH could be used to trigger dissolution, as well.
Rogers tells us that potential uses for this biodegradable format abound. "For environmental monitoring," he explains, "a transient device might be needed only while a chemical spill is being cleaned up." For consumer electronics, like a smartphone, Rogers says components could be designed for the lifetime of the device (about two years), "after which it can dissolve away because the consumer will be ready for an upgrade."
At this stage, however, Rogers says the most promising applications for transient electronics are in biomedicine. "Devices that simply go away after they have performed their necessary function solve the problem of long-term biocompatibility," he explains. "For us, implantable devices are the most compelling opportunity, because we feel that we can achieve clinically relevant function, even with the technology at its current, early state of development."
Breakthrough: This electronic implant can dissolve inside your bodyTodd Coleman — a bioengineer at UC San Diego who worked with Rogers on epidermal electronic systems, but was not involved in the transient electronics study — agrees, and explains how the medical field might utilize transient technologies in the near future:
"We can imagine applications where some of these devices are placed on/near a wound or inside the body after surgery, where they interrogate the body and wirelessly transmit information." At the same time, says Coleman, "sophisticated number-crunching algorithms from our smart phones or the cloud" will interpret this data and gauge the state of the body:
From here, the smart phone could transmit control signals back to the transient electronics, and they directly interact with the body to steer it towards the natural state as efficiently as possible. Afterwards, the transient electronics literally disappear and the subject is back to normal. That is science fiction [now], but can soon become reality.
Moving forward, Rogers says that the biggest challenge facing transient electronics will be manufacturing them at high volume, low cost, and high levels of function. "We need to figure out how to do this using foundry type capabilities."
Coleman concurs, noting that one method of addressing issues of volume could be to place design tools in the hands of "everyday creative people," who can customize the technology for applications scientists have yet to even imagine. "When this challenge is met," Coleman says, "it has the potential to scale like crazy." He continues:
As such, I think we as a society should be having conversations with one another about the intended and unintended consequences of having these capabilities in the hands of almost anyone. Overall though, I think the pros will outweigh the cons with this development and we will be healthier and live more fulfilling lives.

Sep 28, 2012

Sleepy regulators must sever the HFT pipes

In the major markets around the globe the sleepy securities industry regulators are starting to wake up to the fact that their markets have been captured by investment banks who are effectively legalised insider traders – the so-called “high frequency” traders.

These traders have been allowed to have a pipe into the major markets to give them an advantage over legitimate stock buyers and sellers. Business Spectator has led the world in highlighting the insider advantages these traders have secured (Getting the jump on high-frequency trading, July 18). 

The New York Times reports last night that global regulators are trying to stamp out the practice with new regulations. And of course because the large genuine institutions do not like being ripped off by the high frequency traders, and their pipes into the market, legitimate people have left the large exchanges. They have started what are called dark pools, where effectively legitimate institutions trade among themselves. It’s not ideal but better than the stock exchange system. 

My view is that the high frequency traders are making so much money and the regulators are so sleepy that the new regulations will fail. 

I hope I am wrong. There is only one way around the problem created by the pipes that the legalised insider traders have into the market – the pipes must be severed and the markets restored to fair places to do business. 

The CEO of the ASX Elmer Funke Kupper in in his KGB Interview agreed that if the regulators failed in these current efforts, then cutting the pipes were the only solution. 

According to The New York Times the high frequency traders and their pipes into the market conduct 65 per cent of US stock exchange trading. In Europe the proportion is 45 per cent. In Australia 30 per cent of the trading is subjected to these crooked practices. We are better than the US but its still a woeful indictment on our sleepy regulators. 

But in the US regulators are so bad that they seem corrupt. Next week the US Securities and Exchange Commission is hosting a round table on the topic but the agency has not proposed any major new rules this year. The conference is simply window dressing. 

In contrast, the German government this week advanced legislation that would, among other things, force high speed trading firms to register with the government and limit their ability to rapidly place and cancel orders – one of the central strategies used by the firms to take advantage of small changes in the price of stocks. 

A few hours later, a committee at the European Parliament agreed on similar but broader rules that would apply to all 27 member states of the European Union if governments also give their approval.

The New York Times reports that in Australia, the top securities regulator recently stated its intention of bringing computer-driven trading firms under stricter supervision and forcing them to conduct stress testing, to protect “against the type of disruption we have seen recently in other markets.”

However the broadest and fastest changes have come out of Canada, where this spring regulators began increasing the fees charged to firms that flood the market with orders. The research and trading firm ITG found that the change had already made trading more efficient by reducing the crush of data burdening the market’s computer systems.

It's good to see that the regulators acting but I just don’t think they are smart enough.

Storm collapse was triple whammy for the little people who lost all | The Australian


THE Australian Securities & Investments Commission is there to protect us from the spivs, crooks, charlatans and fraudsters who operate in the corporate world.

ASIC's role is not merely to chase the bastards after the crime has been committed but to probe the dealing of suspect companies and shut them down before too many gullible, honest citizens lose their money, their homes and the life for which they had planned.

A couple of weeks ago I read an article in this newspaper in which the chairman of ASIC, Greg Medcraft, proclaimed the great achievement of a $136 million settlement of an action between the commission and the Commonwealth Bank over the collapse of Storm Financial.

He made it look like a great victory for the watchdog and the little guy against a predatory bank. It prompted me to look further into the Storm Financial investigation and its aftermath. It did not take too long to discover that billions were lost by thousands of little people, particularly those who had just retired, or were about to retire, and had saved their nest eggs through a lifetime of effort.

For these people, the glib spruikers for Storm Financial were the breakthrough they had always wanted and never received. They had heard about all the money being made by the sharpies and rich people on the sharemarket. Suddenly they were presented with promises of ridiculous returns of up to 20 per cent on their money. It mustn't have seemed to be too good to be true because they knew that people were making fortunes on the markets.

The cruel twist in the Storm Financial pitch was that these people, largely ignorant of how markets worked, were told only about the upside. Markets had been going up for 15 years, they were told - there was no good reason this bonanza would end any time soon. They could hear the till ringing. The fact every bull market comes to an end was not put to them by Storm Financial or by the banks they signed up with. Greed isn't good; it's just widespread.

Unwitting investors lined up to ratchet up the mortgages on their houses and take out margin loans. The banks' position was always protected by the documents that the gullible signed but rarely read. In this situation people often turn to a financial adviser. In this case that was often a fatal step because Storm Financial was buying up financial advisory companies left, right and centre. These financial advisers sent everyone who walked through their doors to Storm Financial and received handsome fees for so doing. The mug punter had no chance.

In the Federal Court in Brisbane this week, the first stages of a class action of duped investors against Macquarie Bank were heard. From that case a startling example of the greed that enveloped the banks in the Storm Financial saga emerged. A mother of three from Brisbane, earning a meagre $24,000 a year, was granted a $2 million line of credit by Macquarie Bank.

What hope did she have? Even in the good times what she could earn from her investment at Storm would have been greatly diminished by the interest demanded by the bank. This was a triple whammy for those who signed up. First, they were dealing with Storm Financial, which at best would be described as shonky. Second, they were dealing with banks overwhelmed by greed and seeing their real client as Storm Financial rather than the person they were loading up with second mortgages and margin loans. This is best illustrated by the CBA's Aitkenvale branch, which had more mortgages than any branch in the country - far more than the branches in Toorak or Vaucluse.

Storm Financial began in Townsville and cut a swath through that town. It is little wonder the head of Storm Financial, Emmanuel Cassimatis, hightailed it out of town the minute things turned sour. The queue to get at him in Townsville would have been long indeed.

Third, they were dealing with a regulator that refused to accept there was anything worth investigating at Storm Financial until the end of 2010 when it was all too late. Journalist Paul Barry rang ASIC in December 2006 to inquire about the status of any investigation into Storm Financial. He was told there had been complaints but it was not investigating. Despite repeated warnings, ASIC sat on its hands and acted only after the scandal was too public to ignore.

I can't complain about ASIC investigating me over the Offset Alpine matter. It was doing its job. If you think something is wrong you investigate. In that case a few hundred thousand dollars, in so far as I was involved, was at stake. How is it that when billions of dollars are lost and thousands of Australians devastated, nothing is done? In 2006, 2007 and 2008, when the Aitkenvale branch of the CBA had the highest volume of home loans in the country, it was congratulated by head office. ASIC did nothing about the banks either. In 2007, Storm Financial was planning a float largely underwritten by Macquarie Bank.

ASIC inspected the prospectus and ticked the whole thing off. All of the promises backed up by the most dubious of records were apparently OK. The float never happened because Macquarie Bank smelled a rat and it pulled the pin. Had the bank batted on, how many more Australians would have lost their life savings on the word of the ASIC? I don't blame Medcraft for the Storm fiasco. It did not happen on his watch. The spin he put on the CBA settlement is all his. If the CBA could get away with what it did for a few hundred million it would be delighted.

As for Cassimatis, he is laughing. All ASIC is prepared to do, apparently, is to mount a civil case against him. He will continue to live in luxury while his despairing dupes wonder why he isn't facing a far less attractive future.

Sep 27, 2012

In defense of high-frequency trading: regulate it, don’t destroy it

The knee-jerk reaction of legislators worried about “flash crashes” and other sudden market flips caused by high-frequency trading (HFT) algorithms has often, not surprisingly, been to try to constrain their use. The European Parliament and the German government today became the latest to take action over growing concern about HFT: The MEPs on the economic and monetary affairs committee voted to impose a minimum half-second delay on executing trade orders, while Germany’s cabinet approved new regulation on trading firms. They join a slew of countries and regulators that are taking a look at this kind of trading—more or less understood to be the buying and selling of financial securities at high speeds based on algorithms.
Outsiders have claimed that the high-speed race to execute the fastest trades in opaque markets set off market disasters like the May 6, 2010, flash crash and a $440 million trading loss that crippled Knight Capital Group earlier this year. Insiders are concerned that high-speed trading could get out of hand, causing markets to collapse at an inconceivable speed. Limits on how fast orders can be executed—essentially, a promise by trading firms to honor the price they offer on a trade for a minimum time—are one common proposal for limiting market risk.
Yet the data show that, for the most part, HFT benefits long-term investors. And while it has been shown to make markets fall sharply in sporadic events, the real problem isn’t the use of HFT; it’s that the rules haven’t been brought up to date with the technology.

Why you win from HFT

The trend towards HFT is part of a broader change on Wall Street, says Joel Hasbrouck, a professor of finance at NYU’s Stern School of Business. It is a move from markets run by a network of New York traders to a global, electronic network with near-perfect information. In the old days, market specialists would often hail from the same family, and friendships and dinners would be rewarded with preference on the floor. Now quotes are much more accessible. ”It’s not that high-frequency trading is very new, it’s that they have speeded up strategies that have been there for a very long time,” Hasbrouck explains. ”The world of high frequency trading is a lot more open.”
In a July 2012 study, he and co-author Gideon Saar wrote that high-speed machines and their engineers have essentially replaced the human market specialists, or people who used to facilitate the matching of bids and offers on the exchange floor. Under normal market conditions, “increased low-latency activity [i.e., trading with very high speeds] improves traditional yardsticks for market quality such as liquidity and short-term volatility.” In other words, high-speed trading makes for markets that are easier to enter and exit because there are more trading partners (liquidity) and fewer wild swings in the markets (volatility).
This is because HFT firms make high numbers of trades for very small profits. The sheer volume of trades makes it easier for other market players to sell and purchase those securities whenever they want. Further, the fact that HFT firms are in constant competition for the slightest differences in share price across exchanges means that the differences disappear quickly, making the price of publicly available securities all but equal for most long-term investors.

Trading fast in crisis

But it’s true, Hasbrouck and Saar say, that HFT accelerates market crashes sometimes. This has come with some serious risks. The old-time NYSE specialists, they write,
were obligated to stabilize prices and maintain continuous presence in the market. They were subject to restrictions on reaching across the market to take liquidity (destabilizing trades). They were prohibited from interpositioning (trading separately against buyers and sellers who otherwise would have traded directly). The electronic market making firms and other low-latency traders have no such obligations. Their efficiency and lack of obligations could therefore drive traditional suppliers of liquidity out of business by gaining at their expense in normal times. As a result, at times of severe market stress, low-latency traders can simply step away from the market, causing fragility that did not exist in the old model.
In other words, HFT firms have taken on a role in stock exchanges that used to come with a certain responsibility, but nobody is obliging them to fulfill that responsibility now. So far, most regulators have done nothing to change this. Today’s move by the German government was, for the most part in the right direction: the draft bill it approved will require high-frequency firms to be licensed, authorize the use of circuit breakers to stop sudden swings in the market, and impose fees on firms that place too many orders without conducting a trade. (By placing orders and not trading, they can skew the perceived market price.) But these are small steps.
The European Parliament’s decision to put an arbitrary speed limit on HFT, though, is misguided. ”Just because you slow the order down doesn’t mean people aren’t going to be trying to cut to the front of the queue,” argues Adam Sussman, Research Director at the TABB Group, a group closely connected to discussions of HFT at the Commodities Futures Trading Commission. “Slowing markets down probably wouldn’t have any impact on making more stable markets.” Instead, he argues, regulators need to impose “an actual cost-benefit in favor of not blowing up the market.”
The European Parliament committee’s proposal is likely to face resistance, as some European countries have already said they would oppose such a speed limit. But the fact that so many officials are pushing for a speed bump rather than a more comprehensive fix to the problems of HFT is worrisome. Technology is moving forward at a breakneck-pace, and regulators are way behind the pack.

Noahpinion: EconoTrolls: An Illustrated Bestiary

Some wicked humour in the series of self-images and public-perceptions.... sampling below

Post Keynesians

"[I]t is always the outliers that are pushing back the curtain of ignorance. It's not the zebra in the middle of the herd, safely away from predators and mishaps, who finds the new food sources for the herd, or alerts the group to impending dangers."

"I'm not going to provide the links, but I called the crisis more precisely than any of those people."

How they see themselves:

How the world sees them:
Favorite blog: Steve Keen's Debtwatch

Favorite dead economist: Hyman Minsky
Will appear in response to posts regarding: Who predicted the economic crisis first
Craziest idea: That anyone is listening
Special attack: Anger
Secret weakness: the fear that Paul Krugman has said everything they've thought of, but better

Notes: When not engaged in bitter denunciation of the "neoclassicals" who supposedly pushed them out of their once-hallowed place in the halls of academia, this species can actually have quite a lot of interesting things to say...

World markets tumble amid Euro unrest


World shares fell sharply and the euro hit a two-week low as growing opposition in Europe to measures aimed at resolving the euro zone's debt crisis unnerved investors already skittish about the weak outlook for global growth.
Investors focused on Spain, where the main share index lost 3.9 per cent and yields on 10-year bonds hit 6 per cent on worries about Madrid's commitment to reform after violent protests and talk of secession by the wealthy Catalonia region.
A general strike in Greece and signs of discord among top euro zone officials over new policies to tackle the crisis added to concerns, taking the gloss off recent moves by the European Central Bank to calm markets by buying bonds.
International lenders are at loggerheads over how to solve the crisis in Greece, threatening more trouble for the euro zone as the International Monetary Fund demands European governments write off some of the Greek debt they hold.
The euro fell to $US1.2836, a two-week low, and traded at $US1.2858, down more than 0.3 per cent on the day.
Crude oil prices fell more than 1 per cent, and stocks on Wall Street followed European shares lower, though not as sharply. Stocks in the euro zone suffered their worst session in two months, while government debt rose in a safe-haven bid.
"Things are bumpy again in Europe. You are seeing more tension there," which has driven a rally in bonds, said Eric Green, global head of rates and FX research and strategy with TD Securities in New York.
Yields on Spain's 10-year bond topped 6 per cent for the first time in a week, while US government debt prices rose for an eighth straight session. Reluctance by Spain to ask for aid could prolong the euro zone debt crisis.
The benchmark 10-year US Treasury note was up 15/32 in price to yield 1.6198 per cent.
"As if insulted by all the attention that Spanish protesters were getting, Greek citizens held a protest of their own as well," said Neal Gilbert, market strategist at GFT in Grand Rapids, Michigan. "All of this uncertainty is causing investors to head for the exits and scramble for some safe-haven assets, propping up the US dollar."
Traders and investors active in the market realize that despite reduced risks, the ECB's bond-buying program does not resolve all the problems in the euro zone, analysts said.
A fresh batch of weak data and gloomy corporate reports from across the globe weighed on sectors most sensitive to the economic cycle, like autos and basic resources.
The Euro STOXX 50 index of euro zone blue chips closed down 2.7 per cent at 2,498.52 points, marking the biggest one-day drop since early August.
MSCI's all-country world equity index was down 1.2 per cent at 330.93 points.
The FTSEurofirst 300 of top regional shares fell 1.86 per cent to 1099.01.
In the United States, the view of the economy deteriorated sharply in the third quarter and is now as bleak as it was in the immediate aftermath of the last recession, according to a survey of chief executives released by the Business Roundtable.
Slowing global growth is likely to crimp company profits. Caterpillar Inc cut its earnings outlook for 2015 on Monday, as have FedEx Corp and Norfolk Southern, both of which are economic bellwethers because of their shipping roles.
"Buyers have reached a point of exhaustion after FedEx and Caterpillar and the like, all of whom pointed to economic weakness," said James Dailey, portfolio manager at TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.
"People had been buying on the idea that the Fed would prop everything up, but if they can't, there's real potential for panic selling," Dailey said.
The Dow Jones industrial average was down 32.80 points, or 0.24 per cent, at 13,424.75. The Standard & Poor's 500 Index was down 6.44 points, or 0.45 per cent, at 1,435.15. The Nasdaq Composite Index was down 23.90 points, or 0.77 per cent, at 3,093.83.
In the oil markets, developments in Europe overshadowed any bullish sentiment generated by government data that showed US crude inventories fell by 2.45 million barrels last week, against analyst expectations for an increase.
Brent crude oil, the global benchmark, fell more than 1 per cent to below $US109 a barrel early in the session, but later pared a good deal of its losses.
Brent futures fell 41 cents to settle at $US110.04 a barrel. US light sweet crude oil fell $US1.39 to settle at $US89.98 a barrel.
"It is 'risk off' today," said Olivier Jakob, energy analyst at Petromatrix in Zug, Switzerland. "The Greek strike and Spanish demonstrations are getting a lot of coverage."

Sep 24, 2012

Why all the morbid interest in the Great Depression?


Irving Fisher (1844-1944) was a neoclassical economist. I say “was” not merely because he is dead, but also because he emphatically rejected the neoclassical approach after his “Near Death Experience” during the Great Depression.
Fisher was worth over $US100 million in today’s money when The Great Crash began. Unlike most economists, he was also an inventor, and he invented a predecessor of theRolodex – the iPad of its day. He sold his invention to the predecessor of Unisys in return for shares and a seat on the board – and like so many others back then, levered his wealth by buying shares on margin.
Back in the heady ‘20s, a typical margin loan was levered 10 to one. Put down (in Irving’s case) $10 million and your broker would buy $100 million worth of shares on your behalf.
The magic of margin was that, if shares rose a mere 10 per cent, you doubled your money, turning $10 million into $20 million. The catch was that, if shares fell by 10 per cent, the broker could insist that you keep the value of your portfolio by adding another $10 million. If you didn’t have a spare $10 million, you were bankrupt.
But a 10 per cent fall in stock prices could never happen, could it? Fisher expressed this common confidence wearing his most well-known hat, that of a columnist for The Wall Street Journal. Taking issue with his 'bear' rival Babson, he wrote his now most infamous lines on October 15, 1929:
"Stock prices have reached what looks like a permanently high plateau. I do not feel that there will soon, if ever, be a fifty or sixty point break below present levels, such as Mr Babson has predicted. I expect to see the stock market a good deal higher than it is today within a few months" (15 October 15, 1929).
Over the next week, as the market fell almost 50 points, Fisher continued to spout words of reassurance:
Figure 1: Fisher quoted in the New York Times, 2 days before Black Thursday

Then it plunged 40 points in one day – Black Thursday – and Fisher’s continued optimism moved from the back of the paper to the front, just behind the news of the biggest one-day fall in the market’s history:
Figure 2: Fisher in the New York Times on Black Thursday



In the midst of 
The Panic of 1929, Fisher even took his campaign against “the lunatic fringe” (as he called those who believed the market was overvalued) to the movies, in a Fox MovieTone News statement. saying the market would be certain to rebound.
Figure 3: The Dow Jones Industrial Index October to November 1929

By the end of November 1929, Fisher’s reputation was in tatters (as was his fortune). No-one wanted to hear from America’s once most famous economist any more, but he still desperately wanted to understand what had happened. Less than three years later, he wrote “Booms and Depressions: Some First Principles” which he refined in 1933 into the “Debt Deflation Theory of Great Depressions”. These works marked his break from essential error of neoclassical thinking: that the economy can be modelled as if it is always in, near, or tending towards, equilibrium.
His previous fame as a neoclassical economist emanated from his Theory of Interest, which extended the conventional tools of supply and demand analysis to the market for money. An essential aspect of that work was the assumption that the market was in equilibrium at all times. As he put it:
"The more fundamental theory of interest presupposes a stable purchasing power of money… In that case the rate is theoretically determined by six sets of equations or conditions: the two Opportunity Principles; the two Impatience Principles; and the two Market Principles. The last pair may be said to cover prima facie supply and demand:
"(A) The market must be cleared – and cleared with respect to every interval of time. (B) The debts must be paid."
His 1933 work identified this assumption of continuous equilibrium (not to mention the absence of defaults on debt!) as the fallacy that had led him astray. Disequilibrium was the rule in ordinary life, it was the factor that explained phenomena like the Wall Street Crash, and economic theory had to be based on disequilibrium:
"We may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, toward a stable equilibrium…" Fisher said. "But the exact equilibrium thus sought is seldom reached and never long maintained. New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium…
"Theoretically there may be – in fact, at most times there must be – over- or under-production, over- or under-consumption, over- or underspending, over- or under-saving, over- or under-investment, and over or under everything else. It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will "stay put," in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave.
Had economists built on Fisher’s Road to Damascusconversion, an entirely new economics could have resulted from the Great Depression, with disequilibrium rather than equilibrium as its organising principle. Instead, with Fisher ignored, the economics profession rebuilt itself aroundHicks’s equilibrium interpretation of Keynes’s General Theory. By the time our modern-day crisis hit, equilibrium thinking was utterly ascendant in economics – and only heretics like me worked in disequilibrium.
However in the real sciences, disequilibrium became the rule – so much so that they don’t even use the term to describe what they do. A decisive break with equilibrium thinking came in 1963, when the meteorologist Edward Lorenz accidentally discovered what became known as chaos theory (and is today called complexity theory). The Wikipedia describes the motivation behind Lorenz’s work well:
"During the 1950s, Lorenz became sceptical of the appropriateness of the linear statistical models in meteorology, as most atmospheric phenomena involved in weather forecasting are non-linear. His work on the topic culminated in the publication of his 1963 paper “Deterministic Nonperiodic Flow” in Journal of the Atmospheric Sciences, and with it, the foundation of chaos theory."
Lorenz’s key discovery was that a relatively simple non-linear system could display incredibly complex behaviour: what became known as Lorenz’s Strange Attractor had 3 equilibria, all of which were unstable. Today, any scientist worth his or her salt knows that dynamics means not merely a transit from one equilibrium to another, but a complex “far from equilibrium” path.

Figure 4: Lorenz's Strange Attractor, with 1 equilibrium shown & the dynamics of a 5 per cent deviation from that equilibrium



Would that this wisdom had penetrated economics. Instead, the vast majority economists remain locked in their neoclassical equilibrium fetish, so much so that they deride anyone who dares challenge their equilibrium view of the world.

A recent instance of this was the response by the Canadian Neoclassical economist Nick Rowe to an excellent post by Dan Kervick on a blag called “Shamanistic Economics”. Rowe’s condescending tone is evident in his comment – as is his belief that “all roads lead to equilibrium”:
Dan: before writing about this stuff, you really ought to think about the difference between:
1. A system with multiple equilibria (aka “sunspot equilibria”) where beliefs about intrinsically irrelevant events can change which equilibrium is the outcome. (e.g philosopher Lewis’ book on conventions.)
2. A dynamic system with a unique equilibrium time path, where beliefs about that future equilibrium path are part of what determines the current outcome.
And a little bit of knowledge of game theory might help too, where players’ beliefs about off-equilibrium path play (counterfactual conditionals) are part of what determines the equilibrium.
Sigh. Economists like Rowe should instead think about the difference between stable and unstable equilibria, rather than simply assuming that all equilibria are stable. Their inability to realise that instability may be the defining feature of the economy, five years after the economic crisis began, is testament to economics being far more a religion than a science. As Dan Kervick stated in his reply to Rowe’s missive, this is a dereliction of the duty economists owe the world, especially after we are in a crisis that most of them didn’t see coming, and whose advice about a solution is justifiably described as shamanistic:
"You guys in economics are supposed to be empirical scientists, not philosophers. You are supposed to develop the a priori elements of your science only so that you can produce empirically testable models of the real world, and then bring those models to bear on the world we actually live in.
"You are also supposed to help develop techniques that are relevant to decision-making and government policy in having predictable outcomes. You need to map the terrain of the actual world in detail, so you can help others navigate through it. To the extent you want to give policy advice that deserves to be taken seriously, your focus needs to be on contingent reality, not a priori possibility.
"My criticism is that an awful lot of the policy advice we are getting lately is from theorists who are lost in the clouds of a priori models, and who don’t have a clear understanding of the structure of the actual economic order we live in, based on the functioning of actual, highly contingent and specific economic and political institutions."
If you’ll pardon a religious final word from me, Amen.

Hopin' n prayin' n wishin'


Global financial markets have been remarkably calm in the last month. Daily share market moves are generally up and down not much more than a quarter or half a per cent. Bond yields in the G7 markets are little changed from levels a month or two ago. In currency markets, the US dollar is weaker as the market correctly judges that the Fed’s latest QE is a structural break for its currency, but in the event, the depreciation has been orderly.
Policy makers and investors should be delighting at this lack of volatility which reflects tentative news of an economic recovery and a growing acceptance that policy makers are finally on the right track.
Financial market participants have just witnessed some of the most far-reaching and radical policy changes ever seen. Those policy changes are of course focused on the open-ended bond buying from the US Federal Reserve and the European Central Bank, which are part of the “do whatever it takes” campaign to generate a sustained and meaningful economic recovery. Adding to the easing tone is the Bank of Japan which extended its QE with close to $US800 billion of asset purchases.
The relative market calm, which follows periods where it was not uncommon for daily stock market moves of one or two per cent or more, may also reflect a holding pattern for investors as the huge stimulus in the global economy weaves its magic on borrowing, lending, confidence and spending in the months ahead.
The market calm begs a question: How long should markets wait before forming judgment of the success or otherwise of the Fed and ECB actions?
Obviously it will later rather than sooner before we see economic and jobs growth return to normal levels in the US and much of Europe and with that, the repair of bank balance sheets and profitability. Indeed, it could well be a good year or two before there can be full confidence that the worst has definitively past.
Given its slightly more favourable position, the US recovery is likely to be earlier and more meaty than in the eurozone.
In a chicken and egg type situation for markets, if the economy in either the US or Europe improves earlier and faster than currently expected due to prior stimulus or some other factor, the Fed and ECB will be delighted. This is clearly the best case scenario and in the event, share prices would be well advanced from current levels if this happens. We would also be seeing higher government bond yields and discussion of exit strategies from the bloated balance sheets of the central banks.
More likely, unfortunately, is a period where the economic news is mixed for the next half year or so. Bits of good news, such in the housing sector in the US, will likely be tempered by ongoing sluggishness in the jobs market. Signs of improving consumer spending could well be offset by still fragile confidence. In Europe, sound news in the German economy is likely to be offset by a torrent of bad news in Greece, Spain and Italy.
In all this time, governments in the US and in Europe will be implementing fiscal austerity – either mild, medium or strong – as they all work to repair the fiscal damage inflicted from the crisis. Cuts in government spending, reduced public service numbers and higher taxes all point to a sharp contraction from activity from public demand. This is a given.
This means that when looking for a sustained recovery, it will be up to the private sector to engineer and lock in a return to prosperity.
Which loops back to the bond buying of the Fed and ECB. Patience is required for the efforts of central banks to keep borrowing costs lower for the corporate sector generally and, in the US, the mortgage market.
Academic literature is littered with research that shows there is a long and variable lag between and interest rate change and the impact on the real economy.
This time is no different.
In the near term, the data are likely to confirm ongoing sluggish economic conditions, which means markets will be focusing on events like bond auctions and judging whether governments are funding themselves at reasonable rates.
Updates on the fiscal progress will also be vital for market sentiment and the extent to which the sovereign debt problems are receding will have the potential to move markets.
For now, the current market calm is good news. There is a begrudging acknowledgement that the policy makers are getting closer to getting it right.