Thursday, 27 November 2008

J K Galbraith on post-bubble reflection

A snippet from A Short History of Financial Euphoria:

"There will... be scrutiny of the previously much-praised financial instruments and practices - paper money; implausible securities issues; insider trading; market rigging; more recently, program and indez trading - that have facilitated and financed the speculation. There will be talk of regulation and reform. What will not be discussed is the speculation itself or the aberrant optimism that lay behind it. Nothing is more remarkable than this: in the aftermath of speculation, the reality will be all but ignored.

There are two reasons for this. In the first place, many people and institutions have been involved, and whereas it is acceptable to attribute error, gullibility, and excess to a single individual or even to a particular corporation, it is not deemed fitting to attribute them to a whole community, and certainly not to the whole financial community. Wisespread naivete, even stupidity, is manifest; mention of this, however, runs drastically counter to the... presumption that intelligence is intimately associated with money. The financial community must be assumed to be intellecually above such extravagance of error.

The second reason that the speculative mood and mania are exempted from blame is theologiocal. In accepted free-enterprise attitudes and doctrine, the market is a neutral and accurate reflection of external influences; it is not supposed to be subject to an inherent and internal dynamic of error. This is the classical faith, So there os a need to find some cause for the crash, however far-fetched, that is externaal to the market itself. Or some abuse of the market that has inhibited its normal performance."

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