Month: October 2019

There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily–or sufficient knowledge to make his plan an intelligent play.

I knew something was wrong somewhere, but I couldn’t spot it exactly. But if something was coming and I didn’t know where from, I couldn’t be on my guard against it. That being the case I’d better be out of the market.

By this date the post-bubble revulsion against stocks was so complete that over 60 percent of Japanese personal assets were committed to cash bearing interest of less than 0.5 percent per annum.

The day after the October crash, representatives of Japan’s largest brokerages–Nomura, Daiwa, Yamaichi, and Nikko Securities, collectively known as the “Big Four”–were summoned to the Ministry of Finance. They were ordered to make a market in NTT shares and keep the Nikkei above the 21,000 level. Complying with this request, the brokers offered their most important clients guarantees against losses in order to encourage them to reenter the market. Within a few months, the Nikkei had recovered its losses and was progressing to new heights. In private, Ministry of Finance officials boasted that manipulating the stock market was simpler than controlling the foreign exchanges.

Acting on the belief that land prices would never fall again, Japanese banks provided loans against the collateral of land rather than cash flows. Towards the end of the 1980s, they increased lending against property, especially to smaller companies. The rising value of land became the engine for the creation of credit in the whole economy. Tochi-hon’i sei, the land standard, had arrived.

Paradoxically, the widespread acceptance of the Efficient Market Hypothesis may have served to make the markets less efficient: in the Panglossian world of efficient markets, investors were told that, theoretically, it was not possible to pay too much for financial assets. As a result, they were encouraged to bid up prices to unsustainable levels.

When governments found their formal currency arrangements disintegrating, the speculator became a convenient scapegoat for the failure of policy. Before the war, Hitler had blamed the inflation and deflation of the Weimar Republic on foreign currency speculators, while both Lenin and Stalin cursed speculators for the Soviet Union’s economic woes.

In other words, Mellon suggested that the market should be left to fall until it found its own clearing level when demand would return and the economy revive. Instead, Hoover’s policies prevented wages from falling at a time when asset and commodity prices were declining. This served to increase unemployment and reduce the returns on capital, thus preventing reinvestment. Rothbard concluded that the “guilt of the Great Depression must be lifted from the shoulders of the free economy, and placed where it properly belongs: at the doors of politicians, bureaucrats, and the mass of ‘enlightened’ economists.”

The Federal Reserve, with its ability to control interest rates and conduct “open market operations”–buying and selling government bonds in order to affect the supply of money available to banks–was hailed in the 1920s as “the remedy to the whole problem of booms, slumps, and panics.” As a result, bankers and speculators alike were lulled into a false security which led the to operate irresponsibly, exacerbating the severity of the ensuing class.

“Stock prices have reached what looks like a permanently high plateau,” declared the eminent Yale economist Irving Fisher in the autumn of 1929.