Efficient market is a mythThe text, see "Finance" magazine in 2009 No. 22 Published October 26, 2009
The demand for money is effective? The answer to this question relates to how monetary policy be regarded as the best. With the increase in the rate financial institutions to leverage on the demand for money is increasing, and this problem is equivalent to asking the financial system is valid. I think the answer is no. Monetary authority or central bank has the responsibility to take this into account. The best way is to restrict money growth and nominal GDP growth rate of the deviation between. In particular, when the economic fundamentals may be damaged in the short term, the continued bias should be corrected.
Shattered
This is a serious academic subject. Why am I here, and the general reader should discuss this issue?
First, it is closely related with each person. China's retail investors dominate the asset markets. Them to make investment or speculative decisions, the majority view that "the Government will not let asset prices fall." Once you have restrictions on government spending, then this expectation there is a bit credible? Restrictions on the discussion of monetary expansion could help Chinese investors to assess the risk of investment decisions.
Secondly, from a global point of view, money supply growth are much higher than the nominal GDP growth rate. In other words, money growth is used to support highly leveraged rate, which is particularly evident in the financial sector. Of course, the reason is that central banks by lowering interest rates to fight financial crisis, and sometimes even forced to increase the liquidity of banks in order to be able to increase their loans to stimulate the economy. However, the money has flowed into asset markets, leading to asset markets and prosperity. Active asset prices stabilize the global economy. While most analysts believe that active asset markets reflects the booming global economy, they are the correct expectations. However, I think this is not true. As in the past decade, as the prosperity of asset markets to support economic growth, rather than the other way around - because of strong economic growth has led to asset markets, and prosperity - and therefore, everything is just a bubble.
While the global economy is recovering moderately, the overall economic situation remains difficult. The unemployment rate in OECD countries are at historic highs. Boom in asset markets and real contrast between the economic difficulties, can be described as unique in modern times. Despite the efforts of workers and enterprises are struggling, asset players book profits are re-harvested. Assets behind this prosperity, the central bank's monetary policy. We must ask, policy has achieved its goal to help the real economy, it? Or that the policies to help only those speculators, hoping that they can give the real economy to leave some cold leftovers?
Financial institutions to obtain large amounts of currency from the Central Bank, but the current financial crisis had revealed the existence of money to run a serious inefficiency. Triggered a crisis for those who provide so much money on the ground precisely because they triggered the crisis, which is what the logic is that? Like that when the house was on fire, you have to extinguish the fire and find the culprit. The problem is, arson and were asked to go to the fire. How, then, can be sure that they will not cause another fire?
Most people think that the reform of the financial system, rather than restrict the money supply is the solution to this problem. When this happens, the future demand for money would be valid. So far, the problems found in the financial crisis still not been corrected. Over the past decade, the global financial system has become very large, will be the central bank, legislators and the government trapped in them. About to push forward the reform to those who will not touch the main factors triggered the current crisis. Even the best reforms can be introduced, the core question remains difficult to resolve: the financial practitioners use someone else's money gambling, the moment of injection, they will get a huge return; the wrong note, they will not compensate. This incentive problem that the current global financial system, encouraging aggressive risk preferences, the efficient market is not the case. Central Bank restrictions on money supply, is the only way to solve this problem. Asset price inflation over the past decade, as well as after the bursting of the disaster, are proof of this argument is credible.
70 years of stagnation of the last century, prompting economists examine why the monetary stimulus, and no increase in demand, but directly to inflation. This study contributed to the development of rational expectations theory to explain the public's monetary policy response. It is obvious the conclusion that the decision-makers can be fooled by ordinary people again. People won a Nobel Prize. Milton Friedman advocates will be money supply growth target, as the central bank's guiding principle. This approach will allow central banks to money growth target, "autopilot" and let the market determine interest rates.
Rational expectations theory is further used to explain investor behavior, and leads to the efficient market theory: under certain conditions, rational investors will bring effective asset prices, such prices to accurately reflect the anticipated future. With the academic terms, an effective asset prices, that is, contains all the useful information about future prices. This has to remove those from the "Great Depression" period of the lessons learned and set up a regulatory framework, laid the foundation.
The last century, 70 years of stagnation, making the central bank struggled to cope with short-term inflation. Based on the efficient market theory, the central bank decided to completely satisfy the demand for money financial institutions to support their leverage ratio. This combination has emerged over the past decade, has laid the foundation for a huge bubble. As inflation remained at a low level of globalization, Wall Street can be unlimited access to liquidity from the central bank, to create a bubble.
In Western financial markets, institutional investors dominated by retail or individual investors dominated the East financial markets. Most institutional investors is based on quarterly market index as the benchmark, while the amount of cash they hold there are limits. These constraints make them at a disadvantage it is difficult to outperform. That is why most institutional investors are the index of his followers. The additional management costs, making the performance of the majority of institutional investors, worse than the index, it will not increase market efficiency.
The plight of the reform
Over the past decade, the financial markets, the most significant development is the absolute performance of the Fund (Absolute performance funds) and hedge funds increases. However, they only amplified the volatility of the market did not improve market efficiency. Because hedge fund managers pay is Hanlaobaoshou, so they naturally like to see a long-term fluctuations. This is a euphemism for "positive balance I win, you lose the negative operator" in a coin toss game. Let the hedge fund industry managers, rather than the investors a lot of money.
No matter how trying to improve the incentive structure of institutional investors, "managing other people's money" to bring the incentive distortions difficult to change. Institutionalized to improve market efficiency, once hailed as a big step forward has been proved to the invalid condition even worse. Faced with fast-changing market, developing countries, has sought to institutionalize to stabilize the market. They should think twice. Institutionalized or be able to reduce the short-term fluctuations, but it will become a big crash.
Retail or individual investors often mistake a short period of volatility as the trend. "Herd behavior" that resulted in the trend of self-realization, which is mostly only temporary. However, this herd behavior sometimes continue for a long period of time, triggering a huge bubble. This bubble will lead to serious mismanagement of resources.
In order to minimize the possibility of future financial crises, people can reform the financial system in order to reduce the tendency of a crisis; or in the formulation of monetary policy, taking account of asset prices and consumer prices. A year ago, crisis, policy-makers around the world, has vowed to reform the financial system, the elimination of corruption and over-leveraged. Spend hundreds of trillions of dollars in government aid financial institutions, the reform momentum has diminished. The U.S. Congress Reform Act has been diluted, so they are unable to prevent another major crisis.
Capital adequacy ratio requirements, and transparency is the key to effective financial reform. For example, the OTC derivatives notional value of trillions of dollars. They are an opaque environment to flourish. Market makers can be cheating the buyers and regulatory agencies to obtain high profits: charging them high fees, but they did not provide this high-risk products to a lot of money. If the market is transparent, and the capital request is reasonable, then this business has not been conducted so big. In theory, derivatives can help buyers to reduce risk; while in practice, due to complex structures can be hidden leverage, derivatives, will bring even greater risk. Unless it can see the derivatives market is intended to address the issue of reform, otherwise, the so-called financial reform is difficult to call it "effective."
Who will be its reputation?
There is no never-ending feast, and now as well. There are two cases indicates that another crisis. First, each trader to borrow U.S. dollars to buy things. Most of Wall Street traders are Americans, British, as well as Australians. They were all very understanding of the United States. U.S. Federal Reserve to maintain a zero interest rate policy, the U.S. government also supports a weaker dollar to boost U.S. exports. Unless it is a fool, everyone can see that the U.S. government is "help" you borrow U.S. dollars to the speculation. However, these traders are not familiar with other countries, especially in emerging economies. They also go there once or twice a year, even though a moment or two, or and the United States to go along with investment banks: These investment bank, but would like to sell things to them. They are willing to believe anything, except the dollar will appreciate. Of course, the Wall Street banks will tell them so. Because a large number of these people, their actions in the short term self-realization. For example, counting from the bottom dollar, has appreciated by 35%. Now, these guys sitting on huge profits on the book, she felt so smart. Of course, Wall Street traders are paid to investors in the Prior has already begun to feed himself.
Once the transaction is too large, as now, only a small shock could trigger hurricanes, but you never know what the impact would be. If anything does happen, all of these dealers will be quick exit, which may lead to another crisis.
The oil price surge may be another party uninvited guest. It may trigger a rebound in inflation expectations and caused the bond market crash. The resulting high bond yields could force central banks to raise interest rates to reduce inflation concerns. Another round of big decline in asset prices, will once again stirred the world's major financial institutions for the balance sheet fears, once again cause confusion.
The oil is to create a perfect foam materials: oil supply can not be a timely response to rising oil prices, it takes a long time to expand production capacity, and because of lifestyles and production methods of the viscosity, can not quickly reduce oil demand. Either demand or supply side, oil prices are lower in sensitivity, it is suitable for manufacture of foam. When liquidity is cheap and easy to get the time, oil speculators everywhere.
Oil speculators are no longer just those secretive hedge funds. Ordinary people can also purchase exchange-traded fund has oil or anything else. Moreover, there is no reason not to do so. Central Bank has made it clear that it would maintain an adequate money supply as much as possible, so that depreciation of paper money to help the debtor. If you are a very big bet, when you inject the wrong time, the Government will help you overcome adversity, and lower interest rates to enable you to have even greater stakes. Therefore, in this world, it is best to be a speculator, those in power will always be with you.
For those who want to be opportunists, I have a word offer advice: Once the bond market fell sharply as soon as possible for their lives go. Oil bubbles easier to disappear just as quickly, because it will puncture the other bubbles. Once the bubble burst, for the survival of the oil bubble of oxygen also disappeared.
In 2010 the situation has emerged the second dip is obvious. The current economic recovery has benefited from the enterprise supplementary inventory and financial incentives. Next year, cash-strapped consumers in the West soon after the little chance of recovery. High unemployment, the income will allow them to support their consumption is difficult. They are unlikely to Zaiqu borrow and spend.
Many analysts believe that as long as unemployment remains high, then the policy should continue to stimulate. As I mentioned earlier, supply and demand do not match - rather than weak demand in itself - is the main reason for high unemployment. More stimulus would trigger inflation and financial instability.
The last century, 70 years of stagnation, so that a group assumed to be "a little inflation is available in exchange for substantial economic growth," the banker notorious. The current crisis will make those who ignore asset price inflation, or even create inflation and to stimulate economic growth, this generation of central bankers reputation for consistency. Playing with fire are bound to self-immolation. ■Xie Sohu blog http://xieguozhong.blog.sohu.com/
MyView
China, a government driven growth. Will it last? What drives China? Not the Chinese, it is the American.
The American consumption growth has been driving the world economy over the last 20 years. And China is one of the BRIC countries that benefited during these period. When the consumption bubble imploded, can China growth continue perpectually?
Now the Chinese government is driving its economy, based on the efficient market theory, which is a fallacy to start of with. Using monetary policy, increasing credit and adjusting the interest rate will not solve the structural problem, which is Demand collapse from the American consumption.
There is a myth that China domestic demand will replace American consumption. American consumption is USD10 trillion a year as against China consumption of USD1 trillion a year. It is sad to understand that the daily media which is overselling China.
The fundamental issue here is the world must slow down to digest its over eating habit for last 2o years. No amount of government intervention can stop the adjustment or normalisation, it may delay it, but not stop it.
