Our financial system is crumbling this week.

[clement]

Even people on Wall Street don't use the stock market as an indicator of economic success/failure in the short term. The S&P over something like 6-12 months might give you a long term reflection of the economy, but for short term stuff they use everything from basic indicators like employment numbers and consumer confidence, to more arcane things like changes in machinery orders at factories.

Geitner making a speech and the market reacting means little to nothing.

++

The stock market lags behind the economy.

That's being generous. The stock market is no more a reflection of the state of the economy than watching the evening news, standing in the mall and counting shoppers, or any other crude measure of some economic performance. Most investors in the stock market follow the crowd; that's hardly a good measure of performance.

Sure if most investors were actually smart and actually took the time to really study the stocks that they are investing in, understood the portfolio of investments that they were making, and diversifying properly, it would be a better proxy for the state of the economy, or the state of an individual company. But if this crisis has proven anything, it's that there are a lot of people in high positions making huge decisions about many people's money who don't understand what the hell they're doing. People watch CNBC to get stock tips, as if those clowns on TV know anything more than anyone else.

[greenback44]

Barry Ritholtz pointed outthis discussion of how forecasters missed the coming catastrophe:

What makes some forecasters better than others?

The most important factor was not how much education or experience the experts had but how they thought. You know the famous line that [philosopher] Isaiah Berlin borrowed from a Greek poet, "The fox knows many things, but the hedgehog knows one big thing"? The better forecasters were like Berlin's foxes: self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes and were rather modest about their predictive ability. The less successful forecasters were like hedgehogs: They tended to have one big, beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. The media often love hedgehogs.

How do you know whether a talking head is a fox or a hedgehog?

Count how often they press the brakes on trains of thought. Foxes often qualify their arguments with "however" and "perhaps," while hedgehogs build up momentum with "moreover" and "all the more so." Foxes are not as entertaining as hedgehogs. But enduring a little tedium is worth it if you want realistic odds on possible futures.

So if you were looking for a money manager, you'd want a fox?

If you want good, stable long-term performance, you're better off with the fox. If you're up for a real roller-coaster ride, which might make you fabulously wealthy or leave you broke, go hedgehog.

But it was doomster hedgehogs like money managers Robert Rodriguez and Jeremy Grantham who first saw the crisis coming.

Hedgehogs are sometimes way, way out front. But they can also be way, way off.

Most of the experts who called the downturn are still bearish. Would you expect them to be able to call the rebound too?

No. In our research, the hedgehogs who get out front don't tend to stay out front very long. They often overshoot. For example, among the few who correctly called the fall of the Soviet Union were what I call ethno-nationalist fundamentalists, who believed that multi-ethnic nations were likely to be torn apart. They were spectacularly right with Yugoslavia and the Soviet Union. But they also expected Nigeria, India and Canada to disintegrate. That's how it is with hedgehogs: You get spectacular hits but lots of false alarms.

[sighyoung]

I agree with that article, which actually gives me some hope. And Isaiah Berlin is wonderful.

[Leroy]

I'm just glad that it sounds like we will take the banks that ran themselves into the ground and put them in the hands of our government that...well, wait...

[TimeForGuinness]

The stock market lags behind the economy.

That's being generous. The stock market is no more a reflection of the state of the economy than watching the evening news, standing in the mall and counting shoppers, or any other crude measure of some economic performance. Most investors in the stock market follow the crowd; that's hardly a good measure of performance.

Sure if most investors were actually smart and actually took the time to really study the stocks that they are investing in, understood the portfolio of investments that they were making, and diversifying properly, it would be a better proxy for the state of the economy, or the state of an individual company. But if this crisis has proven anything, it's that there are a lot of people in high positions making huge decisions about many people's money who don't understand what the hell they're doing. People watch CNBC to get stock tips, as if those clowns on TV know anything more than anyone else.

I was assuming that, and people who follow CNBC for stock tips aren't investers, they're fools. And if you're letting someone else control where your money is being invested, I also think you're a fool.

Most of the time, the market lags the economy from a top level overall perspective (IE: more steel = more construction = more jobs = more spending). Now, the market may not react to that until they see a jobs report or quarterly earnings...but the economy is on the upswing and the market lags that.

The market, though, likes to be ignorant to the underlying foundation sometimes, and small variances tend to be more psychologically driven than anything. If things start going bad, people think the market can ride the bumps...until it becomes apparent that it can't. Then the downturn occurs. Vice versa...many people think that a bear market will be longer than it sometimes is even though the economic foundation has solidified. Then they miss the upswing.

You really need to get nervous when the market or certain sectors of the market (tech, commodities, etc) start taking off or diving, because that's where all the fool's money is going, late in the game, trying to make a quick buck. Those are traders and gamblers, not investors.

CNBC is noise, but sometimes provides tidbits of really good information even though they don't realize it.

JMHO.

[dangerous]

I think historically the stock and commodity markets anticipate the economy but the rules were changed to allow manipulation over the past 10 years which broke the system. Stock charts right now look more like textbook examples than they have in 20 years, because hedge funds are broke and out of the way. You guys ought to bone up on technical analysis and chart reading. I have made money buying some stocks since early December.

[Hungary Jack]

Here's a different view with some interesting arguments, mostly supply-side in nature.

Let's Stimulate Private Risk Taking

Tax cuts are the way to nudge capital toward productive uses.

By ALBERTO ALESINA and LUIGI ZINGALES

In virtually all economics classes, including those taught by the many excellent economists on the Obama team, the idea of government spending as an engine for growth is not a popular topic. Yet despite their skepticism of Keynesianism in the classroom, when it comes to public policy, these economists happily endorse a large stimulus package that could bring our deficit to 10% of GDP. Why?

One explanation is that these economists think this recession is an extraordinary one. In normal recessions -- the argument goes -- an increase in discretionary government spending is unnecessary and even counterproductive. But in the event that a recession becomes a depression, a Keynesian stimulus package might work. There are certainly economic models that show how government spending can shift the economy from a bad equilibrium (where people do not search for jobs because they do not expect to find them, and firms do not invest because they do not expect to sell), to a good equilibrium (where people search for jobs, and firms invest and generate demand for their goods).

But this particular recession is unique not in its dimensions, but in its sources. First, it is the result of a financial crisis that severely affected stock-market valuations. The bad equilibrium did not originate in the labor market, but in the credit market, where investors are reluctant to lend to risky firms. This reluctance is making it difficult for these firms to refinance their debt, forcing them to default on their credit, further validating investors' fear. Thus, the problem is how to increase investors' willingness to take risk. It's unclear how the proposed stimulus package would help inspire investors to do so.

The second reason this recession is unusual is that it was caused in large part by a significant current-account imbalance due to the low savings rate of Americans (families and government). Even assuming that more public spending would increase private consumption -- a big if -- such a measure would cause even more imbalance.

So how do we stimulate the economy without increasing the already large current-account deficit? It's not easy, but here is an idea: Create the incentive for people to take more risk and move their savings from government bonds to risky assets. There is no better way to encourage this than a temporary elimination of the capital-gains tax for all the investments begun during 2009 and held for at least two years.

If we fear this is not enough, we can temporarily increase the size of the capital loss that is deductible against ordinary income. This will reduce the downside of new investments and increase the upside.

More savings need to be invested, and firms need an incentive to invest in order to help aggregate demand in the short term and promote long-term growth. The best way to do this is to make all capital expenditures and research and development investments done in 2009 fully tax deductible in the current fiscal year.

A large temporary tax incentive may be just enough to jolt investors from their current paralysis to take action. Such a switch will also be fueled by the temporary capital-gains tax cut mentioned above, which will motivate people to move their savings from money-market funds to stocks, increasing valuations, investments and confidence.

Many are concerned about what we can do to help the poor weather this crisis. Unlike during the Great Depression, we have an unemployment subsidy that protects the poor from the most severe consequences of this recession. If we want to further protect them, it is better to extend this unemployment subsidy than to invest in hasty public projects. Furthermore, tax cuts have a much better effect on job creation than highway rehabilitation.

No doubt, it is much easier to sell the public and Congress a plan for more public works than tax cuts, particularly while Main Street despises Wall Street -- with some good reason. But the role of a good economic team is to courageously propose the right economic policy, even when it is unpopular. The role of a president is to sell it politically, as real change we can believe in.

[Jocephus]

Girl Scout cookie sales crumbling

http://www.usatoday.com/news/nation/200 ... lyBriefing

[Freed Roger]

Here's a different view with some interesting arguments, mostly supply-side in nature.

Let's Stimulate Private Risk Taking

Tax cuts are the way to nudge capital toward productive uses.

By ALBERTO ALESINA and LUIGI ZINGALES

In virtually all economics classes, including those taught by the many excellent economists on the Obama team, the idea of government spending as an engine for growth is not a popular topic. Yet despite their skepticism of Keynesianism in the classroom, when it comes to public policy, these economists happily endorse a large stimulus package that could bring our deficit to 10% of GDP. Why?

One explanation is that these economists think this recession is an extraordinary one. In normal recessions -- the argument goes -- an increase in discretionary government spending is unnecessary and even counterproductive. But in the event that a recession becomes a depression, a Keynesian stimulus package might work. There are certainly economic models that show how government spending can shift the economy from a bad equilibrium (where people do not search for jobs because they do not expect to find them, and firms do not invest because they do not expect to sell), to a good equilibrium (where people search for jobs, and firms invest and generate demand for their goods).

But this particular recession is unique not in its dimensions, but in its sources. First, it is the result of a financial crisis that severely affected stock-market valuations. The bad equilibrium did not originate in the labor market, but in the credit market, where investors are reluctant to lend to risky firms. This reluctance is making it difficult for these firms to refinance their debt, forcing them to default on their credit, further validating investors' fear. Thus, the problem is how to increase investors' willingness to take risk. It's unclear how the proposed stimulus package would help inspire investors to do so.

The second reason this recession is unusual is that it was caused in large part by a significant current-account imbalance due to the low savings rate of Americans (families and government). Even assuming that more public spending would increase private consumption -- a big if -- such a measure would cause even more imbalance.

So how do we stimulate the economy without increasing the already large current-account deficit? It's not easy, but here is an idea: Create the incentive for people to take more risk and move their savings from government bonds to risky assets. There is no better way to encourage this than a temporary elimination of the capital-gains tax for all the investments begun during 2009 and held for at least two years.

If we fear this is not enough, we can temporarily increase the size of the capital loss that is deductible against ordinary income. This will reduce the downside of new investments and increase the upside.

More savings need to be invested, and firms need an incentive to invest in order to help aggregate demand in the short term and promote long-term growth. The best way to do this is to make all capital expenditures and research and development investments done in 2009 fully tax deductible in the current fiscal year.

A large temporary tax incentive may be just enough to jolt investors from their current paralysis to take action. Such a switch will also be fueled by the temporary capital-gains tax cut mentioned above, which will motivate people to move their savings from money-market funds to stocks, increasing valuations, investments and confidence.

Many are concerned about what we can do to help the poor weather this crisis. Unlike during the Great Depression, we have an unemployment subsidy that protects the poor from the most severe consequences of this recession. If we want to further protect them, it is better to extend this unemployment subsidy than to invest in hasty public projects. Furthermore, tax cuts have a much better effect on job creation than highway rehabilitation.

No doubt, it is much easier to sell the public and Congress a plan for more public works than tax cuts, particularly while Main Street despises Wall Street -- with some good reason. But the role of a good economic team is to courageously propose the right economic policy, even when it is unpopular. The role of a president is to sell it politically, as real change we can believe in.

I don't think the tax rate on capital gains -generally 15%, precludes people from investing and taking on risk. However, i agree the $3000 max per year on net capital losses is more of a deterrent for risk.

[Hungary Jack]

A 15% decrease in the marginal tax rate is significant, but I wonder if it would have much effect at this point given that capital gains are hard to find. Expanding the credit for net losses at this point would appear to offer much more leverage.