You Got to Be Kidding Me!

Financial Crisis?

Posted in Economics, Politics by Stacy McMahon on October 7, 2008

Well, I don’t think there’s any serious debate that the banking and investment sector is hosed. But Arnold Kling makes an interesting point (hat tip: Instapundit)

It used to be that warnings about a coming Depression were issued by crackpots and members of the lunatic fringe. Today, prominent members of the political, financial, and journalistic establishment are warning of a Depression, and those of us who resist their panic solutions are accused of being crackpots or lunatics.

The one thing I managed to learn about financial markets during my short tenure as a stock trader, is that the fundamentals only matter in the long term. In the short term it’s all about herd mentality and smoke and mirrors, so you need to pay careful attention to who is saying what. The short sellers will always say the market’s about to crash, and analysts have a tendency to issue buy ratings on stock their employers want to sell. The pump-and-dump is a constant of life.

Of the groups Kling mentions, financial institutions have an obvious incentive to have their losses made good by the government. Politicians generally have an incentive to practice patronage, except in the rare instance where the public gets really worked up over something; in that case, you see what you saw last week – they very publicly vote for what the public wants, then come back a few days later and quietly vote what they originally planned to do. And of course crises sell newspapers, and reporters are otherwise too ignorant to know the difference.

So … everyone who’s screaming about a depression has a dog in the fight. That doesn’t mean it can’t be true, but it’s something to keep in mind.

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