This page has been archived and commenting is disabled.

The Fed Discusses The Relevancy Of The "Invisible Hand"

Tyler Durden's picture


With America on the fast-track to a centrally planned economy, courtesy of a surging budget deficit and a debt load that would make Greece blush (at the current rate of debt accumulation, US debt will surpass 100% of GDP by mid-2011) it is imperative to reassess the macroeconomic framework of America from a simplistic Econ 101 perspective, as the US economy of the past 50 years (or even of two years ago) is no longer the prevalent model. This reevaluation should necessarily consider the thoughts of Smith, Pareto, and Hayek, as to whether these are even relevant any longer, now that both the government will be running the majority of the country (at least those sectors that are Too Big To Not Be bailed Out), and a corrupt DC will be regulating the multi-trillion financial industry with the dexterity of gloved Parkinson-afflicted kickboxer. Incidentally, none other than current Fed visiting scholar Stephen LeRoy, a professor emeritus at UC Santa Barbara, has put together a coherent investigation into just how relevant the whole premise of the Adam Smith "invisible hand" (not to be confused with the FRBNY "invisible hand" appearing every night in the futures market at around 2 am) is in our day and age. While somewhat theoretical, economic purists and particularly Austrians may enjoy this brief essay.

Is the “Invisible Hand” Still Relevant?

By Stephen LeRoy

The single most important
proposition in economic theory, first stated by Adam Smith, is that
competitive markets do a good job allocating resources. Vilfredo
Pareto’s later formulation was more precise than Smith’s, and also
highlighted the dependence of Smith’s proposition on assumptions that
may not be satisfied in the real world. The financial crisis has
spurred a debate about the proper balance between markets and
government and prompted some scholars to question whether the
conditions assumed by Smith and Pareto are accurate for modern

The single most important proposition in economic theory is that, by
and large, competitive markets that are relatively, but generally not
completely, free of government guidance do a better job allocating
resources than occurs when governments play a dominant role. This
proposition was first clearly formulated by Adam Smith in his classic Wealth of Nations.
Except for some extreme supporters of free markets, today the
preference for private markets is not an absolute. Almost everyone
acknowledges that some functions, such as contract enforcement, cannot
readily be delegated to market participants. The question is when and
to what extent—not whether—private markets fail and therefore must be
supplanted or regulated by government.

The answer to that
question is something of a moving target, with views of the public and
policymakers tending to ebb and flow. In much of the latter part of the
20th century, support for Smith’s pro-private-market verdict gained
favor, as reflected in the partial deregulation of financial and
nonfinancial markets in the 1980s and subsequent decades. The financial
and economic debacle of the past few years, however, has led many to
revisit this question, particularly in Europe, but also in the United
States and elsewhere. To many, financial markets in the last several
years appeared dysfunctional to an extent that was never imagined
possible earlier. Did Adam Smith get it wrong about private markets?

This Economic Letter
discusses two versions of the argument in favor of private markets:
that of Adam Smith in the 18th century and that formulated in the 19th
century by the Italian sociologist and economist Vilfredo Pareto. The
discussion in this Letter points to the key assumptions in
the arguments. Differing views on the degree of applicability of those
assumptions underlie a good deal of the debate over the appropriate
balance between relying on markets versus government intervention. Also
important are views on the effectiveness of government involvement.

Competitive markets work: Adam Smith

In 17th and 18th century England prior to Smith it was taken for
granted that economic and political leadership came from the king, not
from private citizens. If the king wanted to initiate some large
economic project, such as expanding trade with the colonies, he would
encourage formation of a company to conduct that project, such as the
East India Company. The king would grant that company a monopoly,
usually in exchange for payment. Smith thought that these monopoly
grants were a bad idea, and that instead private companies should be
free to compete. He called on the king to discharge himself from a duty
“in the attempting to perform which he must always be exposed to
innumerable delusions, and for the proper performance of which no human
wisdom or knowledge could ever be sufficient; the duty of
superintending the industry of private people, and of directing it
toward the employments most suitable to the interests of the society.”
(Smith 1776 Book IV, Chapter 9)

Thus, Smith’s conclusion was that private markets worked better if
they were free from government supervision, and for him it was just
about that simple. Smith’s idea received its biggest challenge when the
Soviet Union achieved world power status following World War II. In the
1960s, reported gross national product grew at much higher rates in the
Soviet Union than in the United States or western Europe. Such
authorities as the Central Intelligence Agency estimated that, before
long, Soviet gross national product per capita would exceed that in the
United States. To many, it looked as though centrally planned economies
could achieve higher growth rates than market economies.

Economists who saw themselves as followers of Smith took issue. To
them, it was simply not possible for centrally planned economies to
achieve higher standards of living than market economies. As Smith put
it, government could not be expected successfully to superintend the
industry of private people. Too much information was required, and it
was too difficult to structure the incentives. G. Warren Nutter, an
economist at the University of Virginia, conducted a detailed study of
the Soviet economy, arguing that the CIA’s estimates of Soviet output
were much too high (Nutter 1962). At the time, those findings were not
taken seriously. But, by the 1980s, we knew that Nutter had been
correct. If anything, the Soviet Union was falling further and further
behind. By 1990, this process came to its logical conclusion: the
Soviet empire disintegrated. Score a point for Adam Smith.

Competitive markets work: Vilfredo Pareto

the 19th century, economists had largely abandoned the informal and
literary style of Smith in favor of the more precise—if less
engaging—style of today’s economics. Increasingly, economists came to
appreciate the role of formal mathematical model-building in enforcing
logical consistency and clarity of exposition, although that
development did not get into high gear until the 20th century. Under
the leadership of Pareto and others, Adam Smith’s argument in favor of
private competitive markets underwent a major reformulation.

Pareto’s version of the argument is usually taken to be a refinement
of Smith’s. But, for the present purpose, it’s best to emphasize the
differences rather than the similarities. First, Pareto provided a more
precise definition than Smith of efficient resource allocation. An
allocation is “Pareto efficient” if it is impossible to reallocate
goods to make everyone better off. Or, to put it another way, you
cannot make someone better off without making someone else worse off.
This idea captures part of what we usually mean by “good performance,”
but not all of it. For example, attaining a reasonably equal income
distribution is often taken to be part of what we mean by good
performance, but an equal income distribution is not an implication of
Pareto efficiency. Indeed, public policies designed to reduce the
degree of income inequality can involve redistribution of income,
making some better off and others worse off. (See Yellen 2006 for a
discussion of income inequality.)

Pareto reached the remarkable conclusion that competitive markets
generate Pareto-efficient allocations. In competitive markets, prices
measure scarcity and desirability, so the profit motive leads market
participants to make efficient use of productive resources. The English
economist F.Y. Edgeworth made a similar argument at about the same time
as Pareto. Economists Kenneth Arrow and Gérard Debreu presented precise
formulations of the Pareto-Edgeworth result in the 1950s and 1960s.

A mathematical proof that competitive allocations are Pareto
efficient required a characterization of a competitive economy that is
more precise than anything Smith had provided. For Pareto, unlike
Smith, it was not enough that the economy be free of government
intervention. The essential characteristic for Pareto was that a
buyer’s payment and a seller’s receipts from any transaction be in
strict proportion to the quantity transacted. In other words,
individuals cannot affect prices. This assumption is satisfied, to a
close approximation, by the classical competitive markets, such as
those for corn, wheat, and other agricultural commodities. The
assumption rules out monopoly and monopsony, in which individual
sellers and buyers are large enough to be able to manipulate prices by
altering quantities supplied or demanded. When monopolists and
monopsonists can distort prices in this way, allocations will not be
Pareto efficient.

Pareto’s efficiency result was first formulated in mathematical
models of economies that were static and deterministic—that is, models
in which time and uncertainty were not explicitly represented. In the
20th century, economists realized that the validity of the
Pareto-efficiency result does not depend on these extreme restrictions.
Arrow and Debreu showed that allocations will be Pareto efficient even
in economies in which time and uncertainty are explicitly represented.
They showed that, in any economy, there is an irreducible minimum level
of risk that somebody has to bear. In a competitive economy with
well-functioning financial markets, this risk will be borne by those
who are most risk tolerant and who therefore require the least
compensation in terms of higher expected return for bearing the risk.
This is exactly as one would expect—risk-tolerant participants use
financial markets to insure the risk averse. These aspects of
equilibrium are discussed in standard texts on financial economics
(such as LeRoy and Werner 2001).

However, demonstrating these results mathematically depends on
assuming symmetric information—that is, assuming that everyone has
unrestricted access to the same information. Such an assumption is less
unrealistic than excluding uncertainty altogether, but it is still a
strong restriction. The advent of game theory in recent decades has
made it possible to relax the unattractive assumption of symmetric
information. But Pareto efficiency often does not survive in settings
that allow for asymmetric information. Based on mathematical economic
theory, then, it appears that the argument that private markets produce
good economic outcomes is open to serious question.

Nonmathematical economists such as Friedrich Hayek proposed an
argument for the superiority of market systems that did not depend on
Pareto efficiency. In fact, Hayek’s argument was the exact opposite of
that of Arrow and Debreu. For him, it was the existence of asymmetric
information that provided the strongest rationale in favor of
market-based economic systems. Hayek emphasized that prices incorporate
valuable information about desirability and scarcity, and the profit
motive induces producers and consumers to respond to this information
by economizing on expensive goods. He expressed the view that economies
in which prices are not used to communicate information—planned
economies, such as that of the Soviet Union—could not possibly induce
suppliers to produce efficiently. This is essentially the same as the
argument against socialism discussed above.

Reevaluating the balance between markets and the government

financial crisis that we have just experienced puts the question about
the appropriate balance between reliance on markets and government
intervention on center stage. Those who believe that unregulated
markets generally work well express the view that misconceived
interference by the government was the major cause of the crisis. In
contrast, those who take a more critical view about the functioning of
private markets believe that the crisis stemmed mainly from the
destructive consequences of factors such as information asymmetries in
financial markets and distortions to incentives that encouraged
excessive risk-taking. The problem was not government involvement per
se, but rather government’s failure to place checks on destructive
market practices.

This latter view dominates most of the recent proposals for
financial reform. And, while the particulars of financial reform are
still to be determined, it appears that current sentiment is less
supportive of Adam Smith’s verdict on the efficiency of markets than
was the case prior to the financial crisis. At the same time, it seems
clear that neither extreme view of the causes of the financial crisis
is accurate. Reforms based only on one of these views to the exclusion
of the other will not lead to a set of changes that will guarantee
improvement of the performance of financial markets and prevent
recurrence of financial crisis. The problems are complex, and sweeping
changes in the regulatory structure could do more harm than good. A
better strategy may be to identify specific problems in the financial
system and introduce regulatory changes that address these clearly
defined weaknesses, such as executive compensation practices that
encourage excessive risk-taking.

Stephen LeRoy is a professor emeritus at the University of California, Santa Barbara, and a
visiting scholar at the Federal Reserve Bank of San Francisco.


LeRoy, Stephen, and Jan Werner. 2001. Principles of Financial Economics. Cambridge: Cambridge University Press.

Nutter, G. Warren. 1962. The Growth of Industrial Production in the Soviet Union. Princeton, NJ: Princeton University Press.

Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations.

Yellen, Janet. 2006. “Economic Inequality in the United States.”FRBSF Economic Letter 2006-33-34 (December 1)


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 05/03/2010 - 20:17 | 329925 Thunder44
Thunder44's picture

Don't you wish you had a invisible hand if you were going pick someones pocket.

Tue, 05/04/2010 - 02:36 | 330315 dcb
Mon, 05/03/2010 - 20:23 | 329931 TheGoodDoctor
TheGoodDoctor's picture

But isn't that the crux really? You never know what caused the bubble until it pops and causes the problems.

Tue, 05/04/2010 - 00:49 | 330241 G-R-U-N-T
G-R-U-N-T's picture

Yeah...Pop Goes the Weasels!!!!

Mon, 05/03/2010 - 20:29 | 329945 Fraud-Esq
Fraud-Esq's picture

More powerful than the Supreme Court...


"We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand," Greenspan said, according to the transcripts of a March 2004 meeting.

Mon, 05/03/2010 - 21:54 | 330071 jeff montanye
jeff montanye's picture

the greeks had a word for it: hubris.

Mon, 05/03/2010 - 22:06 | 330085 Nikki
Nikki's picture

The unbridled hubris of a sociopathic narcissistic economic terrorist.

Mon, 05/03/2010 - 22:45 | 330115 deadparrot
deadparrot's picture

Translation: If we let private sector professionals with real-world experience into our ivory tower, they will be able to prove to the country that the Fed is a nothing more than a group of the most dangerous people on the planet: idiots with Phds.

Tue, 05/04/2010 - 00:44 | 330236 G-R-U-N-T
G-R-U-N-T's picture

Indeed...The finest so called minds in the country, coming from the most sophisticated, and prestigious universities, and the best they could do is bankrupt our country.

Back where I come from we call people like that "Dumb as a Fence Post!"


Tue, 05/04/2010 - 00:30 | 330203 Assetman
Assetman's picture

Sounds like classic groupthink to me.

The last thing the Fed has wanted, past and present, is for outsiders to get involved in an intellectual debate-- that only those in the inner circles actually understand.

What a much of pompous maroons.  Hopefully, this will be the rough phrasing in the annals of history.

Tue, 05/04/2010 - 02:20 | 330310 Double down
Double down's picture

That is the Quantum

Mon, 05/03/2010 - 20:40 | 329963 BlackBeard
BlackBeard's picture

Well, in that case the Fed can jerk me off with that invisible hand.

At least with all this assraping, they'd have the decency to give me a courtesy reach-around.

Mon, 05/03/2010 - 20:59 | 329970 Mercury
Mercury's picture

I think you're coming close to a breakthrough economic insight here: The marketplace has the power of the invisible hand but the government (via NY Fed, ZIRP, TBTF etc.) has the power of the invisible reach-around.

Oooh! hey that's not my that you Mr. Marketplace?

Oh my assets! Go easy, I'm trying to save for the fuuuutre....

Mon, 05/03/2010 - 21:34 | 330040 chumbawamba
chumbawamba's picture

Howard, that's definitely a t-shirt ;)

I am Chumbawamba.

Mon, 05/03/2010 - 22:42 | 330113 buzzsaw99
buzzsaw99's picture

The invisible handjob.

Tue, 05/04/2010 - 00:22 | 330212 Mr Creosote
Mr Creosote's picture


Mon, 05/03/2010 - 20:58 | 329983 TheDuke
TheDuke's picture

I guess what the author is trying to say is "this time is different".

Unfortunately when one questions or ignores the invisible hand it turns into an invisible fist and smacks down all that are non-believers in free and fair enterprise.

Mon, 05/03/2010 - 20:59 | 329985 Common_Cents22
Common_Cents22's picture

I see your invisible hand, and raise you a federal govt boot on the neck.


Obama's Interior Sec Ken Salazar:

"Our job is basically to keep the boot on the neck of British Petroleum," Salazar said, who often sports a Stetson and who four months ago stirred the ire of the oil business by saying unlike under his predecessors in the George W. Bush administration, oil companies would no longer be treated like "kings of the world." When he was a senator, he had to apologize after calling Christian conservative leader James Dobson "the antichrist of the world."

Mon, 05/03/2010 - 21:49 | 330061 Yardfarmer
Yardfarmer's picture

I also noticed that crude and ridiculous tough guy comment. Mr. Sleazliar has never been known for subtlety of expression or depth of intelligence. When running of the Senate in Colorado, at one of his campaign rallies, he demanded that security remove and arrest an individual silently bearing a sign in support of his opponent Peter Coors. I doubt if his signature chest thumping possesses any relevance or is going to have any effect on this catastrophe especially in light of the fact that BP, whom I believe is under contract with the South Korean government, has a reported $75 million liability cap in that arrangement. Certainly many unseen hands are working behind the scenes in this imbroglio.

Tue, 05/04/2010 - 00:11 | 330206 TBT or not TBT
TBT or not TBT's picture

The visible tyrant.

Mon, 05/03/2010 - 21:05 | 330001 LeBalance
LeBalance's picture

I would dearly love to know if this "invisible hand" model has ever been thought applicable.  A free market may have existed at your 12 year olds lemonade stand, but really nowhere else.  This is especially true in the crimnocentric US I find my self in.  Even the "founding fathers" tried to steal King George's enterprise in 1780 and came up short, but the US was never "free or brave", more aptly described as "fee and slave."

The doorway to begin realising a further rabbit hole bungie drop begins by understanding what the device called a "Constitution" is and what "Constitutors" are.

Oh in that sense the "invisible hand" is a useful myth to fog the minds of the "c"itizens.  They think that the smooth functioning of the economy is due to "fairies in the night" and recessions are due to "animal spirits."

I guess it is convenient to distract oneself from the distinct sigmoidal fullness and the heavy breathing on the neck that is our every day life.

Mon, 05/03/2010 - 21:07 | 330002 Invisible Hand
Invisible Hand's picture

Am I still relevant? Of course I am! (Don't ask my wife).

Bottom line: A single monkey with a piece of scrap metal can destroy in 1 second the most complex piece of machinary every built.  However, given all the parts of the same machine, a million monkeys could never assemble the machine in a million years.

Single monkey = FED

Million monkeys also = FED

They can break it, but they can't fix it.

The economy in the US worked despite the FED, not because of it.  However, eventually given rope and enough time the FED has managed to hang all of us.

Ain't government wonderful?



Mon, 05/03/2010 - 22:13 | 330095 jeff montanye
jeff montanye's picture

particularly in the last decade, the u.s. economy didn't work very well with or without the fed.  what the essay above seems to ignore is the gross perversion of free markets that the concept of too big to fail introduces.  apparently the smart financiers knew they would be bailed out and the dumb ones (seemingly the majority) never considered they'd need to be.  

the solution isn't an either/or.  if private industry is going to have the power to create money, and apparently they are, both those in daylight and those in the shadow banking system need to be intelligently and honestly supervised regarding, at a minimum, fraud, monopoly, insider trading and maintenance of sufficient reserves/insurance for risks taken.  most importantly, none may be to big to fail.  and when they do fail, the management, stockholders and bondholders are liable first.  long before the taxpayer.

Tue, 05/04/2010 - 00:03 | 330198 KevinB
KevinB's picture

what the essay above seems to ignore is the gross perversion of free markets that the concept of too big to fail introduces.

I am sorry, but I must disagree. The last sentence of the report - which is where you usually put your zinger - says they must remove incentives that encourage excessive risk taking by executives. Isn't that precisely what TBTF encapsulates? It's the ultimate bad incentive - heads I win, tails you lose. If you know that you are politically connected (hi Lloyd!), you don't have to fear losing your job (hi Marty! hi Ken!) and, while it causes considerable hardship for the guy on Main Street to lose his bonus for a year, when you've been earning tens of millions for years, it's more an annoyance. Of course, in the squid dominated DC establishment, Leroy had to be circumspect about saying this, lest he lose his own job.

Tue, 05/04/2010 - 00:52 | 330244 faustian bargain
faustian bargain's picture

The Fed has been ubiquitous since its inception, so there's no way of gauging whether the economy has worked well 'with or without it'. It's always been 'with', since 1913. And we've done pretty poorly since then.

Mon, 05/03/2010 - 21:07 | 330004 Fish Gone Bad
Fish Gone Bad's picture

What invisible hand?  All those traders that the Fed hired are doing what exactly?  This is actually pretty obvious, Dorsch said it best, "Imagine for just a moment, that the Dow Jones Industrials has become a key instrument of national economic policy, and that by “actively managing” its direction, the government could impact the wealth of tens of millions of US households, and by extension, influence consumer confidence and spending. By ramping up the growth of the money supply, and slashing interest rates to zero percent, in order to inflate market bubbles, the Fed could in theory, fuel an economic rebound."  Nothing is allowed to fail. 

Mon, 05/03/2010 - 21:31 | 330034 Implicit simplicit
Implicit simplicit's picture

The invisible hand has a prosthetic index finger with algorithmic sensors guided by misguided brains who think they know what is best.

Tue, 05/04/2010 - 00:16 | 330208 sweet ebony diamond
sweet ebony diamond's picture


the invisible band.



Mon, 05/03/2010 - 21:11 | 330010 ghostfaceinvestah
ghostfaceinvestah's picture

The President of the European Central Bank, Jean-Claude Trichet, told Forbes that global governance is extremely necessary if we want to prevent another financial crisis. In his prepared printed and spoken remarks to the Council on Foreign Relations, Trichet emphasized that politicians, economists, and financiers must work across the Atlantic and collaborate on methods to create an international set of standards

Mon, 05/03/2010 - 21:23 | 330021 Kreditanstalt
Kreditanstalt's picture

"Another crisis"?  You's OVER?

Mon, 05/03/2010 - 21:32 | 330036 nmewn
nmewn's picture

Oh goody...One World Government finally reveals itself...I've been waiting all my life for this...only half snark.

The Final Ponzi...LOL.

How is it that the same people who wrought all this social chaos, financial ruin and mass enslavement to THEIR credit system still get a microphone to even be heard???

Pondering the imponderables.




Mon, 05/03/2010 - 21:22 | 330017 Kreditanstalt
Kreditanstalt's picture

It's all very convenient to lambaste free markets when you are engaged in a desperate search for someone to take the blame.  Or when the organization for which you work bears some likelihood of someday being held responsible for the mess.  Or when you have lost a measure of your house value/living standards/wealth and need help in playing the needy victim...

But they're running out of other people's money...  

Mon, 05/03/2010 - 21:53 | 330070 Hansel
Hansel's picture

No, they're not.  They can print money.  I've seen no indication that this will end.  I have seen many people find some solace in thinking this will end eventually.

Mon, 05/03/2010 - 23:34 | 330174 Kreditanstalt
Kreditanstalt's picture

True.  But that is liquidity.  Or currency, or credit, or something...NOT real MONEY.  More and more people will be demanding real, unencumbered non-debt-derived MONEY.

Tue, 05/04/2010 - 10:47 | 330750 Jean Valjean
Jean Valjean's picture

Bingo.  Money is the key.  The invisible hand has not been functioning since 1971 because we have not been using REAL MONEY to transact and measure profits.

Tue, 05/04/2010 - 01:32 | 330279 Burnbright
Burnbright's picture

They aren't running out of "money", but they are running out of "value". As printing continues the incentive to actually produce something of value decreases.

So no I don't think it will go on for ever.

Mon, 05/03/2010 - 21:34 | 330033 Fraud-Esq
Fraud-Esq's picture

So long as there is no substantial debate about appointments to the Fed, this will continue. Glass Steagall was also slowly eaten away by regulatory changes inside the Fed too, not only legislative. A few "5-4" decisions with Volcker in the minority up against Greenspan. Nothing had broad debate. De-politicizing the Fed and monetary policy is the coup of coups. After 2008, it is still a nonissue, more-less, in mainstream media. Legislation rarely gets the whole job done. You have to get in these people's faces and demand accountability, especially when they hide their proceedings. We need supreme court style selection and consent. It ain't happening. They're hiding behind their economic degrees and bank support when it all really about...who's making money, how and who's side they're on. There is no rule Fed board member have to come from the banking industry just like Supreme court don't have to be judges.    

Mon, 05/03/2010 - 21:52 | 330067 drbill
drbill's picture

Once again, the "free market" has failed and we need government to correct the tendencies of the "free market" to self-destruct.

What's truly sad is that most people (and a sizable percentage of economists) actually go for this line of reasoning.

I guess that's why I believe the current system ultimately must collapse.

Tue, 05/04/2010 - 00:25 | 330214 Assetman
Assetman's picture

Good points, drbill.

I'm still amazed there was a regulatory structure in place over the past 2 decades, and although imperfect, the regulators (esp. the SEC, DOJ and Fed) did very little to enforce what was already in place.

Free markets didn't work because fraud was widely accepted as everyday business practice-- and it was something that could have been detected and enforced.

So do we REALLY think MORE regulation (though much of what has been inlcuded, esp the amendments, make sense) will really be the magic pill? 

I don't think so.


Tue, 05/04/2010 - 01:36 | 330284 Burnbright
Burnbright's picture

That is exactly right, you can lead a horse to water but you can't make em drink. What good does it do to increase taxes and regulations when simply following the law (i.e. the constitution) would have prevented all this from happening in the first place?

Mon, 05/03/2010 - 22:02 | 330078 GeoffreyT
GeoffreyT's picture

It annoys me immensely that academics never start their examinations in the right place (as my mentor once quipped: there is six weeks' worth of actual theory in economics - the rest is embroidery).

When considering the latest financial disruptions, the central counterfactual in the "regulation versus free-markets" argument should NOT be whether the problem could have been avoided by changes in the degree of oversight of financial market participants.

The central counterfactual should be whether the situation would have been avoided if the short term price of money (the interest rate) was determined by a market or by a politically-appointed group of frothy old crabbers led by a failed investment consultant (Alan "Wrong Way" Greenspan, whose forecasting performance is immortalised in an image on my site: had Greenspan not fastened himself to the public teat he would have starved to death).


If Mises and Hayek were correct about the information problem in economic calculation (and they were correct), then why the fuckety fucking fuck do we still insist on letting central planners decide the most important price in a modern western economy (the price at the short end of the yield curve)?


If you don't start at the right point, you wind up asking the wrong questions. The political-parasite class relies on this type of misdirection to mislead the polity into accepting greater degrees of regulation at levels ABOVE the root causes of core problems.

To refresh Diderot (to account for the collapse of kingdoms and priesthoods): man will be free when the last politician is bludgeoned to death with the severed arm of the last police sniper.

Caedite Eos.





Mon, 05/03/2010 - 22:11 | 330093 LeBalance
LeBalance's picture

are we clowns to you?  are we here to amuse you? can't you fff'n see us? didn't we make ourselves fff'n obvious?  don't we have our (ahems) so far up your (aha) that you know who we are?  c'mon, three guesses and the first two don't count.

Mon, 05/03/2010 - 22:10 | 330092 dumpster
dumpster's picture

man will be free when the last politician is bludgeoned to death with the severed arm of the last police sniper.

the hand having been severed  from the arm as it placed a  brown paper sack in front of a crowd of politicians

Mon, 05/03/2010 - 22:55 | 330121 Hulk
Hulk's picture

Dumpster, where the hell did that come from???

Tue, 05/04/2010 - 01:29 | 330277 dumpster
dumpster's picture

 paraphrase Diderot...

Tue, 05/04/2010 - 01:41 | 330292 Burnbright
Burnbright's picture

I understand that you were joking but there are some people who won't. Not trying to be rude...just sayin.

Tue, 05/04/2010 - 08:43 | 330498 Hulk
Hulk's picture

Thanks Dumpster. Diderot new to me , so I will need to do some reading...

Mon, 05/03/2010 - 22:16 | 330098 nmewn
nmewn's picture

"man will be free when the last politician is bludgeoned to death with the severed arm of the last police sniper."

If I can condense that to coffee mug size to sell to suburban college trained anarchists I intend to make a fortune ;-)


Mon, 05/03/2010 - 23:48 | 330185 Mitchman
Mitchman's picture

Go for it!  I'll buy the first dozen mugs.  Every libertarian in the US will buy one.

Tue, 05/04/2010 - 03:18 | 330330 i.knoknot
i.knoknot's picture

all seven of us? probably not the fortune he was envisioning.

what a mess.

Mon, 05/03/2010 - 22:16 | 330099 Common_Cents22
Common_Cents22's picture

Ask GM and Chrysler bond holders about the fed invisible hand that scalped them.

Tue, 05/04/2010 - 00:29 | 330219 Assetman
Assetman's picture

Yeah, that was really too bad for those auto bondholders.  They should have held those TBTF bonds instead.

It appears the latter got the invisible hand.

The auto bondholders got the invisible finger.


Mon, 05/03/2010 - 22:42 | 330114 faustian bargain
faustian bargain's picture

The Fed should instead be discussing the relevancy of itself.

Mon, 05/03/2010 - 22:45 | 330116 MisesFTW
MisesFTW's picture

"And here's what I'm trying to get you to understand: In the grown-up world, when an entire country's savings accounts are wiped out because of some do-gooder and his law books and his Thomas Jefferson 'What about free and fair markets?' crap, that is a big problem--people don't give a fuck about Jefferson and 'free and fair markets,' they just want their savings to be worth something. And people are right: Jefferson was an imbecile. He should have been a folk singer, not a Founding fucking Father. But that's another issue that's over your head--the point is, the guy who destroys this economy because it's 'the right thing to do' will have to flee for his life, and whatever president or political party was in power when that decision was made will be out of power for the next 200 years. That's why Washington panicked and passed 'the bailout,' they didn't want to be the fools whom all the Ponzi victims blame for tanking the Ponzi scheme, so they broke the glass and pumped up a newer, bigger Ponzi scheme. It was an expensive 14 trillion dollar lesson in, 'Stay the fuck away from free-market experiments, assholes!' How naive are you people to actually believe that 'free market' crap? The problem is when people in power are stupid enough to listen to guys like you: all the do-gooder libertarians and the do-gooder free-market Republicans who forgot that they're supposed to lie. Hello!"

"Confessions of a Wall St. Nihilist" By Mark Ames,  check out the whole article. Very entertaining read

Tue, 05/04/2010 - 03:25 | 330333 i.knoknot
i.knoknot's picture

it sounds like an entertaining read. will google.

i would argue that anyone who claims that this, the free market, has failed, doesn't know what a real free market is.

i remember a friend trying to convince me to believe in god by giving me a book that began with "it says in the bible...".

the premise that the bible is the word of god is a bigger leap of faith than the belief in god itself.

careful your critique of Picasso when you are unknowingly looking at a Rembrandt.

Tue, 05/04/2010 - 04:05 | 330351 Coming Down in ...
Coming Down in Powdery Sparks's picture

Jefferson was an imbecile?  WTF?  Explain yourself.  Your entire post is pretty much a pile of shit.

Tue, 05/04/2010 - 06:24 | 330390 nmewn
nmewn's picture

Apparently he believes, somehow, that Thomas Jefferson was a big fan of a central bank being established (he was not)...and with his mighty quil pen dipping robotic like in his ink well signed the Community Reinvestment Act into law (he did not)...then worked with Robert Rubin et al to repeal Glass-Steagall (he would not)...then went to work for Paulson and was on the other side of IKB's "investment" (he could not).

Actually what is happening right now was predicted by TJ a long time ago and he was against Alexander Hamilton's federalism.

It would seem there is a market for my coffee mug idea...LOL.

Mon, 05/03/2010 - 22:52 | 330119 GoldSilverDoc
GoldSilverDoc's picture

"Those who believe that unregulated markets generally work well express the view that misconceived interference by the government was the major cause of the crisis."

Well, duh.

"In contrast, those who take a more critical view about the functioning of private markets believe that the crisis stemmed mainly from the destructive consequences of factors such as information asymmetries in financial markets and distortions to incentives that encouraged excessive risk-taking. The problem was not government involvement per se, but rather government’s failure to place checks on destructive market practices."

Note the not-so-subtle phraseology.  The "more critical" (as in, "we are smarter") view...  The problem was not government involvement per se, but rather..... NOT ENOUGH GOVERNMENT INVOLVEMENT.

When, WHEN, are these FUCKING IDIOTS ever going to learn?  Ever?  EVER?  Are we goingto have to put up with these GODDAMNED MORONS FOR ETERNITY?

I vote we just institute a simple policy.  If you, at the age of 10, exhibit a tendency to love government, government institutions, power over other people, or a desire to be class president, we just take you outside and beat you to death.  And stop another idiot from abusing us.


Tue, 05/04/2010 - 03:27 | 330336 i.knoknot
i.knoknot's picture

"Are we goingto have to put up with these GODDAMNED MORONS FOR ETERNITY?"

hasn't it been that long already?

i fear the faces may change, but the character of the people putting them there most likely will not.

Mon, 05/03/2010 - 23:00 | 330127 RichardENixon
RichardENixon's picture

All you really have to remember is what your Accounting 101 professor wrote on the board the first day of class: Assets-Liabilities=Equity. When the right side of that equation goes red there's gonna be trouble, and currently the right side is really, really red.

Mon, 05/03/2010 - 23:11 | 330145 JackTheOffer
JackTheOffer's picture

Professor LeRoy = government ass-kissing imbecile.

But hey, in this economy, he probably needs the money.

Pity that he neglected to mention anything about government officials conspiring with financial criminals.  Too "real?"

Mon, 05/03/2010 - 23:23 | 330161 Cammy Le Flage
Cammy Le Flage's picture

OH MY GOD BECKY! LOOK AT HER BUTT!  SHE LOOKS LIKE ONE OF THOSE RAP GUYS GIRLFRIENDS! (music playing in the background we all know)......

I like big butts and I cannot lie....

Mon, 05/03/2010 - 23:32 | 330171 Kreditanstalt
Kreditanstalt's picture

The only "invisible hands" here are those of the deadbeat, mortgaged-to-the-eyeballs, borrow-and-spend middle classes, outstretched and demanding money.  And, as the 2010 mid-terms approach, the likelihood of them getting it increases.

Mon, 05/03/2010 - 23:45 | 330180 Reese Bobby
Reese Bobby's picture

Poor Stephen Leroy.

But God Bless Him.

It is no crime to live in the past.

I too miss morals...


Mon, 05/03/2010 - 23:46 | 330184 bluewarrior
bluewarrior's picture

I think all theory is just that......theory. It need not be whether this is better or that. Rather what is the best combination of different factors to get an optimal situation. There are 3 things important for the best planning : Right Information, Right Capability and Right Intent. The sad thing about today is that those with right intent do not necessarily have the right capability or right information. What could also be the case that the very fact of having the right intent could preclude one from getting the right information or the right capability. In that situation trying to get one optimal solutions would be impossible. Rather, we need to accept that there will be multiple sub optimal choices and we just ahve to make a choice which sub optimal solution we would want to live with.

Mon, 05/03/2010 - 23:48 | 330187 brown_hornet
brown_hornet's picture

Internet and ZH make information dissemination more symetrical

Tue, 05/04/2010 - 00:07 | 330200 chindit13
chindit13's picture

Another suggestion for Howard Beale.....

"Barry, the Wall Street Lap Dog"

Put Obama's smiling head on a dog's body, and have Blankfein or someone with a known face holding the leash.  Just to leave no doubt, put Goldman Sachs on Blankfein's shirt.

Incidentally, Rahm Emanuel is working with Wall Street to block the Audit the Fed Bill, thus the need for this shirt.

It's hardball time.

Tue, 05/04/2010 - 00:39 | 330228 Strider
Strider's picture

This is a long thread but i live on the left coast maybe someone will read this sand writing before high tide. Say what you will but the Constitution, the Bible, and the 1888 Sears catalog arent relative to these times. Lewis Black and I know those idelogolies are fucking 78 rpm records, all scratched up and yea we own them but try to find a player and get them to play. Lets try to move this music to at least an 8 track player but c'mon Adam Smith and Fredo Pareto?? That was back when reality was in session, that doesnt play in the rabbit hole. 

Here's the way it works in this century, you need a chapter on black box trading,quant trading, pumpand dump , deritives powered by Fiat currency . Thats the language of the rabbit hole , Anything else is sophist diatribe. Look it up under "shit or shinola? in

you tube


Tue, 05/04/2010 - 03:39 | 330339 i.knoknot
i.knoknot's picture

hence the timeless appeal of gol...


i assert that the game controllers may change, but the elements of human nature (fear/greed) won't, and that's ultimately why these seemingly antiquated ideologies do, and will continue to, survive. investing is merely one of many manifestations of these humanisms.

to be sure, things are amazingly bent now, and have been for years. so, in my MTV-birthed noggin, nothing should be working right now. but over the long term, gravity will always prevail. i just hope i can figure out when to pull the cord...

Tue, 05/04/2010 - 00:40 | 330232 Strider
Strider's picture

This is a long thread but i live on the left coast maybe someone will read this sand writing before high tide. Say what you will but the Constitution, the Bible, and the 1888 Sears catalog arent relative to these times. Lewis Black and I know those idelogolies are fucking 78 rpm records, all scratched up and yea we own them but try to find a player and get them to play. Lets try to move this music to at least an 8 track player but c'mon Adam Smith and Fredo Pareto?? That was back when reality was in session, that doesnt play in the rabbit hole. 

Here's the way it works in this century, you need a chapter on black box trading,quant trading, pumpand dump , deritives powered by Fiat currency . Thats the language of the rabbit hole , Anything else is sophist diatribe. Look it up under "shit or shinola? in

you tube


Tue, 05/04/2010 - 00:41 | 330234 tony bonn
tony bonn's picture

stephen leroy is another in a long line of voodoo economists who sees the need for a government bureaucrat behind every dollar...

i award him the fucktard of economic illiteracy for this week.....

adam smith is still good.....the fed and only the fed caused the economic crisis which was aided and abetted by criminal government bureaucrats....government intervention to cure failed government intervention is an infinite loop leading to hell....

mr leroy, i hope you die soon....preferably tonight....

Tue, 05/04/2010 - 00:54 | 330248 CEOoftheSOFA
CEOoftheSOFA's picture

The problem is that the fingers of the Invisible Hand now have names:  Goldman Sachs, JP Morgan...etc.  And on the other hand, General Dynamics, Northrup...etc.

Tue, 05/04/2010 - 00:59 | 330253 faustian bargain
faustian bargain's picture

I am wondering why the Fed even pretends to give a theoretical underpinning to its actions. I mean, they're gonna do what they want to do. They aren't employing any principles or rules that aren't completely arbitrary and unrelated to reality.

Tue, 05/04/2010 - 01:01 | 330255 mchawe
mchawe's picture

There is only one word that counts, PARASITE. The rules are always made for the parasite and by the parasite.

It has been that way for 2000 years

Tue, 05/04/2010 - 01:38 | 330287 imaginalis
imaginalis's picture

The invisible hand is always fisting our assets

Tue, 05/04/2010 - 01:38 | 330288 wsf123
wsf123's picture

CNET reported Friday that Silicon Valley police are investigating. The loss of the phone and the subsequent publishing of the device's features could cost Apple big money and has turned Powell into a figure of ridicule in some quarters. When news of the tag heuer monaco lost handset tag heuer monaco spread and after Gizmodo identified Powell as the person who lost the phone, many Apple watchers feared his career at the company was finished. But Gray's father, Robert Powell, told CNET tag heuer monza earlier in the tag heuer monza week that his son may be okay at the company. Apparently, Wozniak is able to empathize with Powell's plight, or at the least, he has compassion for him. I'd laugh if the same thing were done to me, Woz wrote new tag heuer formula 1 to his friend new tag heuer formula 1 Dan Sokol, an engineer and long-time friend of Wozniak's who forwarded the photos and an e-mail exchange between the two men to CNET. He sent the photos to his joke e-mail list, Sokol said in an interview.  

Tue, 05/04/2010 - 02:01 | 330303 faustian bargain
faustian bargain's picture

uh oh.

Tue, 05/04/2010 - 02:01 | 330302 JR
JR's picture

Speaking of markets, free or otherwise, here’s the one-page Mogambo Guru theory…

Stock Market Investing: Why the Majority Must Lose by Richard Daughty |

I was sitting there, cool and comfy, wearing my new Mogambo Crisis Outfit (MCO), consisting of a pair of snazzy red cowboy boots, a combat helmet, a bullet-proof vest and a ballerina tutu (which, as an aside, does a lousy job of concealing a pistol in a shoulder holster), each piece of my dazzling and daring fashion ensemble carefully chosen for either maximum protection or maximum confusion to the enemy, which, at last count, is apparently everybody.

I was idly thinking that maybe a nice tiara would really add that “little extra something” to my finery when I was interrupted in my meditations by Chris Mayer at The Daily Reckoning saying, “Ken Heebner’s CGM Focus Fund was the best US stock fund of the past decade. It rose 18% a year, beating its nearest rival by more than three percentage points. Yet according to research by Morningstar, the typical investor in the fund lost 11% annually! How can that happen?”

Naturally, I figured that he was tossing me an easy question to which I already knew the answer; the majority of investors must, by necessity, lose money so that a minority of investors can make a small profit (and the financial services industry can screw us with charges and fees and the government tax everything involved).

I mean, it’s simple arithmetic that a million guys putting $100 into the market can’t each take $200 out!

And besides, this ugly “loss of 11%” result is only the dismal result in nominal terms, because when using inflation-adjusted dollars, virtually all investors will lose over the long-term because of the loss of purchasing power of their dollars (because the Federal Reserve and the banking system keeps creating more and more money, measured in the literal trillions and trillions of dollars) makes prices go up, and which has the same effect as a tax, or a regular, nominal loss (like where that stupid stock you bought on the advice of your brother went bust), which you notice only when you compute the comparative metric of “the pile of stuff you could buy with your money when you started is smaller than the pile of stuff you can buy at the end.”

Unfortunately and embarrassingly for me, this was not exactly what Mr. Mayer was talking about, he ignored me and my fabulous explanation completely, and went on “It happened because investors tended to take money out after a bad stretch and put it back in after a strong run,” which, in short, is that the investors made the worst possible trading decisions, in that “They sold low and bought high. Incredibly, these investors owned the best fund you could own over the last 10 years – and still managed to lose money.”

Naturally, I interrupt and say, “Of course they lost money! They were the majority, and the majority of investors must lose money so that the minority of investors can make a profit, however small after suffering the fees-and-expenses pillage by the financial services industry and the tax bite of the government!”

Well, I suddenly noticed that Mr. Mayer must have been impressed with either my snazzy, radiant resplendence or the powerful logic of my original point (which was that the overwhelming majority of investors must lose money by investing, and that all investors will lose by virtue of the loss of buying power of their dollars) because he then went on to note that James Montier’s book, Value Investing: Tools and Techniques for Intelligent Investment, “cites research by the Brandes Institute that shows how, in any three-year period, the best investors find themselves among the worst performers about 40% of the time!”

Naturally, I think smugly to myself that this means that majority of idiots investing their pathetic IRAs and 401(k)s in the stock and bond markets are going to get whacked because of simple arithmetic, while I will wax prosperous because I invest in gold, silver and oil because, as Jethro Bodine said to his uncle on The Beverly Hillbillies, “I can cipher, Uncle Jed!”

And then I smile because, “Whee! This investing stuff is easy as shootin’ at some food and up from the ground came a bubbling crude. Oil, that is. Black gold. Texas tea!”

May 3, 2010

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group.

Tue, 05/04/2010 - 02:56 | 330325 Double down
Double down's picture

Nur noch ein Gott kann uns retten.

Martin Heidegger

Tue, 05/04/2010 - 03:18 | 330331 AnAnonymous
AnAnonymous's picture

I wonder what the value of such report is.

Smith's hand looked like an addition to solidify a grand thesis as it happened so many times (Einstein's biggest mistake for example)

Yet people focused on the Invisible Hand stuff (and its evolution) to determine whether or not Smith(and the others who furthered the idea) is still relevant.

Where are Smith's other tenets? Are they still relevant? Rhetorical question of course because at least one is unarguably relevant and the guideline of current economical policies.

The suggestion Smith's grand thesis could have it fully right is absurd. Smith like all the others had some points right, other wrong.

Practice has shown where Smith was right and wrong.

The issue is with people who stick to Smith's mistakes . They have it hard and will always cling to the topic, selling the idea that because Smith was right on the some points, he should be right on all the others.

Tue, 05/04/2010 - 04:21 | 330353 Boston Wealth
Boston Wealth's picture

Some of you might have read my comment this weekend about Greece.. I sent it to Tyler for possible publication as a guest post.. it never got posted..

Now who the f*ck just told your about Qatar possibly bailing out Greece on Sunday night!!!!!!!!!!

Qatar govt eyes $5bn investment in Greece

“This is a most welcome proposal for Greece at this time of economic hardship,” said Papandreou, whose country agreed a 110bn euro bailout by the EU and the IMF on Sunday to avoid default

did the article on SOH that Tim published and


...does Ben have contacts feeding him this information.. lol...or is he just that good....

I will be launching my $600 a week Mideast newsletter covering Iran, Abu Dhabi, Gulf Cooperation Council, etc.....time to forget about MortiES Premium at $100 a month.. found my true calling!!!! (j/k)

..such hubris at 4 a.m.. must be my heaving drinking!!!!... nah just exited that I got two world class stories correct that no other world class reporter was able to trump me on!

Tue, 05/04/2010 - 07:50 | 330429 Booger Smoot
Booger Smoot's picture

It seems like the Mr. Ames contracted syphilis from one of those nasty Russian whores he used to sleaze around with.  Don't take anything Ames writes seriously. He is a bitter troll of human especially with him getting his ass handed to him by the Russian authorities.  He now has nothing better to do than bash America since his limp dick now lies lifeless in his hand.

Tue, 05/04/2010 - 07:53 | 330430 Booger Smoot
Booger Smoot's picture

Boy did I mess that up...

Tue, 05/04/2010 - 08:21 | 330471 williambanzai7
Tue, 05/04/2010 - 09:02 | 330539 Grand Supercycle
Grand Supercycle's picture


Currently, SP500 futures indicate that the March 2009 bear market rally may be ending. We should get confirmation this week.


Do NOT follow this link or you will be banned from the site!