2 thoughts on “Are financial markets ‘short-termist’? A crucial gap in Haldane’s argument”

  1. Posted 17/05/2011 at 16:47 | Permalink

    Philip

    Your point that politicians built up a debt of 500% of GDP is moot.

    There is a fairly well-reasoned argument that it was commercial organisations and consumers that built up large debts and had to be bailed out by the state to prevent a banking collapse and economic crisis much greater than that experienced in the 1930s.

    The various temporarily state owned assets will be sold off to generate returns and cash for taxpayers in the future. Due to market conditions it is likely that this ownership will last longer than a week or two, which immediately makes outside the scope of short-term. The likelihood is of state ownership lasting years; in fact already two and a half are on the clock. So the state and therefore politicians have already acted with a longer term perspective to their decision making by these purchases of distressed private sector banking assets. Meanwhile, those market participants that rely on short-term fluctuations in market prices to generate their rents continue to be very active in markets such as commodities, BRIC stocks and some currency markets currently. UK inflation in particular and economic recovery has been adversely affected by such short-term market speculation in commodities.

    It was the poor decisions of those in the commercial sector, such as extremely-well paid bankers; seeking ill-advised mergers for commercial returns; short or long term, or providing insurance against adverse short-term stock price market movements, or speculative property developments that generated the greatest losses of all in the private sector.

    We wait to see whether the private sector managers, brought in at high cost, through the “market rate” salaries will be able to create the commercial rents to generate a return on the state’s emergency investment. Only markets can decide their fate. Clearly markets have failed to regulate the market of executives and their pay in the past, only the future will tell if it will fail similarly again.

    There are simple solutions to subjects like pensions, whereby consumers may be encouraged to invest more in them. Its well known that many are under-invested in pensions currently. A little carrot and stick in this area would help both the funds and consumers pensions; both in the long-term of course.

  2. Posted 17/05/2011 at 21:54 | Permalink

    Jonathan – most of your comments are moot. Not least I think we need to ask the question why banks behaved in the way they did. Is it anything to do with the fact that to avoid the short-term consequences of financial institution failure, governments (especially the US government) underwrote the financial system in so many ways? Secondly, only a tiny proportion of that 500% is to do with the banking crisis – most of it is social security debt built up as a result of politicians setting up systems that involve making payments to people before capital funds have been built up. Thirdly, i think that given the incentives that people face (and the proportion of disposable income that is taken in tax) it is highly unlikely that small nudges will dramatically change behaviour. Thank you for your thoughtful comments – they are moot, not necessarily wrong!

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