The Medium and the Message – Séance on Wall Street

Published on Counterpunch, by DEAN BAKER, July 21, 2009.

There is a long history of mediums who claim to communicate with the dead. They sell their services to people anxious to talk to relatives or great figures of the past. Such exercises can be dismissed as harmless entertainment – people spend a few dollars to be treated to tall tales.

There is a Wall Street equivalent to these séances. People who claim to be knowledgeable about financial markets tell policy makers and reporters what the financial markets are thinking about current policy. These Wall Street seers claim to interpret events in financial markets for those of use who are less familiar with the mysteries of market movements …

… One piece of evidence that these seers have occasionally used to support their case is the fact that the price of credit default swaps on U.S. debt have risen. Credit default swaps (CDS) are in effect insurance against default. If the price of this insurance rises, then presumably the markets judge default to be a more likely event. That is the reason that people in their 60s pay more for life insurance than people in their 20s.

There is one problem with this story. The payoff of a CDS depends not only on the default but also – as those who did business with AIG know – the ability of the counter-party to pay. What is the likelihood that J.P. Morgan, Goldman Sachs, or anyone else will be left standing in a world where the U.S. government has defaulted on its debt? It’s not clear what the price of CDS issued on U.S. government bonds means, but it is not a straightforward assessment of the probability of default on the government’s debt.

It should not be surprising that the vision of the Wall Street seers seem to be far from reality. After all, their crystal balls could not see the $8 trillion housing bubble, the collapse of which has wrecked the economy.

In fact, the self-proclaimed seers are using their visions to try to discourage the public from supporting policies that the seers don’t like.

These people want to see cutbacks in Social Security, Medicare, and other social programs. They are more concerned that higher deficits could mean higher taxes on the wealthy at some point in the future than they are about the tens of millions of unemployed or under-employed today.

In short, those who want fantastic stories about the unknowable would be much better off visiting the people who promise to communicate with the dead than listening to the Wall Street spokespeople. They will learn more and be associating with people of greater integrity. (full text).

(Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of
Plunder and Blunder: The Rise and Fall of the Bubble Economy.
This column was originally published by The Guardian
).

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