For the enemies of freedom in general , and of the economy in particular, the recent crash has been the occasion to re-assert that markets in general, and financial ones in particular, are inherently unstable — and thus dangerous — because they are driven by irrational behaviors such as the “mimetic effect,” which, according to many experts and politicians, explains how Wall Street booms and then busts. FULL ARTICLE
Source link: http://blog.mises.org/10188/can-the-mimetic-effect-explain-speculative-bubbles/
Can the “Mimetic Effect” Explain Speculative Bubbles?
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You explaination of the “mimic effect” is correct if the level of market participants remain somewhat constant. Any move in the market by a handful of participants will have a very short term effect, in many cases, just a few minutes.
But when the level of market participants expand in huge numbers, then the “mimic effect” can last much longer. For example, there was a time you traded oil futures in the US on the NYMEX and was mostly traded by people that were in a position to buy full contracts.
Then came the hedge funds, ETF’s and a whole host of funds traded on every exchange. Soon everybody could participate in the oil market with as little as a $30 investment and trade in and out of the market without setting up option accounts. Plus, online brokerage accounts makes trading these funds easier to anyone with an internet connection.
This open the market up to more than triple the number of participants that are not buying futures as a hedge, but nothing more than pure speculation for a trade. And yes, the majority of these investors are sheep that tend to follow the sheep herders.
There is a market price for oil and the market tends to move to that price. The speculating sheep will force the price above the market price when the masses go long and they will go under the market price when they go short. The smart investor will realize these movements and take the opposite side of the trade at the right moment.
The “mimic effect” is alive and well in the markets, accept it and play it.
Sure it’s there. The article admits as much. But it doesn’t explain bubbles. Nor is it at all unhealthy.
Some will make good bets, other bad bets. The winners will get a good reputation for allocation of capital, and in the future the market will be all the more efficient as the members of the market that allocate capital wisely will have the reputation.
Excellent job of demolishing the mimetic effect. It’s just a subset of the psychological explanations of business cycles that Hayek demolished in “Monetary Theory and the Trade Cycle.” I think Roepke does similar damage to them in his book on cycles.
I like the phrase by Gerard Jackson which gets right to the essential: You can’t spend exuberance!
A thoroughly jaundiced look at Goldman Sachs and their brand of bubblenomics by Matt Taibbi from the new Rolling Stone is in no way discordant with ABCT (the piece would benefit greatly from an Austrian addendum for popular consumption *hint*).
http://www.scribd.com/doc/16763183/TaibbiGoldmanSachs
Interesting. During what decade did current account deficits begin to accumulate? Debt to GDP ratio begin increasing? What happened to the current account when public savings went positive? What happened to private savings? Why?
Here is some help – http://www.gpoaccess.gov/eop/tables09.html
I hope you have a wonderful time ignoring the data. Good luck!
Oh. Table B-32 and B-103 will have the corresponding data I believe.
OK, you insist that “Monetary Theory and the Trade Cycle” rules. That is fine for debating economic theory, but apply it to real world and you may find yourself on the short end of the trade.
When the government runs up deficits and must increase borrowing, interest rates should go up for those bonds as the supply in the market increases. As more money goes to finance government spending, the cost of private borrowing should go up as well.
In the face of huge deficits at levels never seen before, bond prices should be falling. But today, the 7 year Treasury went off without a hitch and the price rose slightly. TMV, the 3X short the 30 year futures, is currently down over $5.
What this tells me is the mimics are in control because none of this makes any sense. Or maybe “Monetary Theory and the Trade Cycle” does not apply. I believe both are real and are a part of the markets.
Greg, Actually I think Hayek shows that mimetics is a part of the business cycle, but not sufficient to cause business cycles.
As for bond yields, more goes into them than just supply. Demand is just as important as is inflation expectations. Your expectations of the direction of bond yields is true if all other things are held constant. In our current situation, the increased supply of state bonds is offset to a large degree by a decrease in the supply of corp bonds and corps try to pay down debt. In other words, you need to look at the total supply of bonds, private and public.
In addition, there is excess demand for state bonds due to lingering fear and uncertainty. When the recovery begins, you’ll see a return to demand for higher yielding corp bonds and stocks in place of gov bonds and then you’ll see interest rates pick up again.
A useful distinction seems to apply here:
Mr. Rostan’s analysis explains the causes of speculative bubbles in GENERAL. The ‘mimetic effect’ explanation fails at this.
However, the ‘mimetic effect’ is still perhaps useful in explaining SPECIFIC speculative bubbles, once the underlying fundamentals are accounted for using Mr. Rostan’s analysis/ABCT.
Everything should be made as simple as possible … but not simpler.
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Funny I was discussing having a buddy about this just the other day, we should share the same views. I hope it is ok I added your website to a number of of my bookmark lists?
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