Stock market model first to reproduce main properties of the real market

in other words, the stock market is a scientifically predictable fraud. Those in power know exactly how it works, and influence every one else to fall in line with their motives, which are often evil and to the detriment of the general populace.

the stock market is a scientifically predictable fraud. Those in power know exactly how it works, and influence every one else to fall in line with their motives, which are often evil and to the detriment of the general populace.

?? The stock market is a ... market. They simply have a model that generates statistics that look like the market, they do not generate pricing predictions. Some people have more influence than others. Warren Buffet comes to mind. How would you design a market where Warren Buffet types have no more influence than, say, an 18 year old buying his first stock? In my long travels in life, I find that the people who are out of power are often as or more evil than those in power and that wealthy powerful people often want a well working general society since their wealth depends on this.

Exactly, GaryB. So, stealthc, do you also rail against the "injustice" of accomplished scientists attracting more funding than random newbies just starting out?

So, the market is influenced by a herding behaviour?! this is disappointing... because I thought people invest because they have a view of a company, either they thought it was profiting or not. -It is now clear that they are actually following other people's opinion and example (when investing). No wonder a mere speculations can cause a market crash or a bubble.

Successful traders have always known this (especially technical traders).

"Technical analysis" bears much if not most responsibility for the herding behavior since all "technicians" (and what a godawful name that is -- makes them sound competent and scientific instead of blabbering astrologers that they are) look for the same patterns and trends in random data and they all act on them in the same manner. Oh noes, the red line dropped below the blue line, sell, sell, SELL!!!

The herd behavior is not going away in the markets or any other aspect of human lives, so might as well learn about it through these types of models. And it's not all bad -- in the short run the market may be dominated by these technical idiots, but in the long run it's dominated by actual economic growth (or actual economic collapse if you're the doomsday type).

the mutualy shared illusion of money thats made from thin air - shaping humanitys destruction with no reset button - how long - not long

How does one model a 'market' that is controlled by the state?
"Investment banks know the government will continue to bail them out if they follow its rules. If they are forced to play by the rules of the free market with no regulations, there will be no one to bail them out and therefore the banks will take far fewer risks."
http://www.statep...ulation/

Ok, the simulation set-up appears plausable and the results appear to be similar to real markets. But then what? Are we going to get new stock/option pricing algorithms based on this? Does this propose any better way to predict investment risk and price fluxuations? Is there any significant new knowledge about the herd behaviour of markets to be learned here? Nice article, altough not very surprising.

...there will be no one to bail them out and therefore the banks will take far fewer risks...

Long-term company risks (company collapse in 2-3 years) were and are taken by individuals in exchange for short-term personal rewards (end-of-year bonuses). The individuals taking risks couldn't care less what happened to the company after they cashed in their $20,000,000 checks. Even more likely, many of these individuals simply didn't realize the kinds of risks they were taking. Stupidity and perverse incentives are all over the place and have nothing to do with "free markets" or government bailouts. Read "The Big Short" for details.

Long-term company risks (company collapse in 2-3 years) were and are taken by individuals in exchange for short-term personal rewards (end-of-year bonuses).

Sounds like a structural problem which was enabled by the the government safety net.
The first real estate collapse was enabled by the government guaranteeing the assets of S&Ls. Banks have FDIC. How would banks and depositors act if there were no government guarantees?

Do you understand the difference between individual employees and companies? Pretend there's no government at all -- would an individual employee in a government-less world magically turn down millions for himself (without breaking the law in any way, mind you) in order to prevent potential risk to the company later on? I suppose a few might but most obviously won't.

This has nothing to do with the government. It has everything to do with the fact that perverse incentives cannot be eliminated in any kind of society where individuals interact and form complex relationships. There will always be people willing to take advantage of others. They can't be eliminated but they can be monitored and punished if found to be breaking rules.

It has everything to do with the fact that perverse incentives cannot be eliminated in any kind of society where individuals interact and form complex relationships. There will always be people willing to take advantage of others.

Free markets work precisely because free markets recognize self interest.
Fool me once, shame on you. Fool me twice, shame on me.
All sorts of free market sources exist to evaluate companies and products: Amazon ratings, Angies list, Consumer Reports, etc. all exist to advise and inform.
How do such million dollar bonuses originate unless the company earns millions more? Such bonuses are not set up by companies, not the recipient. If such bonuses are economically stupid the company will be out of business soon and it is unlikely such bonuses will be offered by other companies in future unless the shareholders and employees believed it in the best interest of the company.

Free markets mete out punishment quite swiftly.
Apple will have to make extraordinary efforts to fix their I-phone problem or be quickly punished. Past experience and capability will carry them a while, but if they don't fix their problems, competitors are hot on their heels.
Madoff was able to perpetuate his fraud because the SEC failed to investigate providing him a government stamp of approval.

That's exactly what happened. Companies were run by idiot and/or corrupt individuals that set up bonus systems that rewarded short-term performance without regard to long-term risk. These companies collapsed when that long-term risk showed up (while the individuals responsible made out like bandits). The problem is that these weren't mom-and-pop ice cream stands but multi-billion financial giants whose collapse would bring down the rest of the financial system and usher in Great Depression 2.0. Mind you, all the inter-connectedness of major banks via derivatives which made them all so vulnerable to one another was brought about by free markets, not by some government mandate.

So either you have make sure such risk-taking is prevented in the future (which is regulation) or make sure that world's financial system is not so fragile that any one collapse can bring down the whole system (which is also regulation).

Madoff was able to perpetuate his fraud because the SEC failed to investigate providing him a government stamp of approval.

And so the SEC was broken, however, in a free market no one would have ever questioned Madoff, nor would anyone have the authority to examine him. You defeat your own arguments with this example.

he problem is that these weren't mom-and-pop ice cream stands but multi-billion financial giants whose collapse would bring down the rest of the financial system and usher in Great Depression 2.0. Mind you, all the inter-connectedness of major banks via derivatives which made them all so vulnerable to one another was brought about by free markets, not by some government mandate.

They were brought about by government regulations in the market, not government 'mandate'.
A small MA was punished by the FDIC because it did not make enough bad loans to meet their government CRA requirements.
The government controls the money. How many government officials used to work for those financial giants? They didn't quit their day jobs because of the pay. They work in government to control regulations to benefit their 'former' companies.
There is NO free market in the world financial system. ALL is regulated by governments.

however, in a free market no one would have ever questioned Madoff, nor would anyone have the authority to examine him. You defeat your own arguments with this example.

Do you give your money away without asking questions and demanding some assurance you will receive the product you are trading your money for?
Any investor could have demanded to see his books, demanded to verify all sorts of information before trusting their money with him. The customer has all the authority as it is his money. If Madoff refused, customer keeps his money. A Madoff competitor questioned Madof's performance, but was ignored by the SEC. His competitor should have shouted from the rooftops in advertising.
Nothing prevents the creation of free market agency like Consumer Reports or UL to audit financial managers.

Please marjon, explain how the government established OTC derivatives trading and forced all the major financial institutions enter into interest rate swaps and credit default swaps with one another.

Please marjon, explain how the government established OTC derivatives trading and forced all the major financial institutions enter into interest rate swaps and credit default swaps with one another.

It is called CYA. The government wanted banks to lend more money for houses. Read this: https://www.wacho...1872RCRD
They bundled mortgages of uncertain origin with and implied guarantee from Freddie and Fannie, government agencies.
CDS were insurance polices to cover those who bought that government promoted crap.

"The affordable mortgages were originated or acquired by First Union Corporation and subsidiaries. Customers will experience no impact - they will continue to make payments to and be serviced by First Union Mortgage Corp. CRA loans are loans targeted to low and moderate income borrowers and neighborhoods under the Community Reinvestment Act of 1977."
""The securitization of these affordable mortgages allows us to redeploy capital back into our communities and to expand our ability to provide credit to low and moderate income individuals,""
"The $384.6 million in senior certificates are guaranteed by Freddie Mac and have an implied "AAA" rating."
https://www.wacho...1872RCRD
The high points.

"JPMorgan's books were loaded with tens of billions of dollars in loans to corporations and foreign governments, and by federal law it had to keep huge amounts of capital in reserve in case any of them went bad. But what if JPMorgan could create a device that would protect it if those loans defaulted, and free up that capital?"
"For many of those mortgage-backed securities, credit default swaps were taken out to protect against default. "These structures were such a great deal, everyone and their dog decided to jump in, which led to massive growth in the CDS market,""
http://www.newswe...eet.html
Note too that CDS were created to get risky loans off the books to satisfy government regulators.

Actually I agree that Fannie+Freddie were part of the problem. But that in no way explains why the non-government affiliated AIG and Lehman were forced to sell CDS or invest directly in these crappy subprime mortgages which were NOT in any way guaranteed by Fannie+Freddie.

Non-govenrment affiliated Goldman and other non-government affiliated banks went to non-government affiliated rating agencies and convinced them to slap AAA on crappy mortgage tranches. These were then sold off, including to Fannie+Freddie and Lehman. And AIG then chose to sell CDS to cover these to dig itself into an even deeper hole.

Nowhere in their was the government forcing anybody to take any of those actions (except, as I agreed, they did indirectly encourage Fannie+Freddie, but that was only one part of the problem).

How free markets work:
"In 1982 seven people died in Chicago from consuming Tylenol tainted with cyanide by some criminal who is yet to be caught. Overnight, Johnson & Johnson ( JNJ - news - people ) found no market for its global 30 million bottles of Tylenol. Talk about a toxic asset! "
J&J recalled all 30 million bottles, threw them away, and replaced them with safety-sealed bottles.
How govt does it:
"Dodd-Frank's approach is different. This law is akin to J&J restocking the shelves with the same unsealed bottles, hiring thousands of people to randomly inspect drug store aisles in the hope of catching the miscreant, and contracting with funeral companies to quickly pick up the dead. Indeed, a major part of Dodd-Frank focuses on arranging speedier funerals for failing financial institutions rather than preventing such funerals in the first place."
http://www.forbes...et_3.htm

Nowhere in their was the government forcing anybody to take any of those actions

How would you expect banks to make loans to people who can't afford them to meet the government mandated CRA?
"Joseph A. Petrucelli is one of the most cautious bankers in America.

In fact, Petrucelli is so cautious that the Federal Deposit Insurance Corp. recently criticized his bank for not lending enough. "
"the FDIC slapped East Bridgewater Savings with a rare “needs to improve” rating after evaluating the bank under the Community Reinvestment Act…"
"Bad or delinquent loans?

Zero.

Foreclosures?

None.

Money set aside in 2008 for anticipated loan losses?

Nothing. "
http://sweetness-...ad-loans

Do you give your money away without asking questions and demanding some assurance you will receive the product you are trading your money for?
Any investor could have demanded to see his books, demanded to verify all sorts of information before trusting their money with him. The customer has all the authority as it is his money. If Madoff refused, customer keeps his money. A Madoff competitor questioned Madof's performance, but was ignored by the SEC. His competitor should have shouted from the rooftops in advertising.
Nothing prevents the creation of free market agency like Consumer Reports or UL to audit financial managers.

People gave him money because he had a good reputation. In the Free Market everything runs on reputation, or so you've said in the past. I'm not going to go down this path with you again. I just wanted to show you an egregious error in your argument.

Ralph_w,

You won't get an educated debate on this topic from your opponent. I'd cut your losses w

Most toxic subprime loans that caused the losses were made by originate-and-sell companies like New Century, not by banks. CRA has no jurisdiction with such companies. These mortgages were made, sold off to investment banks, securitized, stamped with AAA, and then finally sold to the investors (which, sadly, did include Fannie+Freddie).

Furthermore, as recently noted in NYT, a big chunk of foreclosures and defaults is actually high-income individuals walking away from an underwater mortgage.

"Madoff, who was recently arrested for securities fraud, had previously asked Trump to invest with him on numerous occasions. Trump, who always declined to invest, said, "I never knew he was such a guru. He was like the Svengali for rich people.""
http://www.huffin...863.html
Fools and their money are soon parted.

originate-and-sell companies like New Century, not by banks.

Where did they get their money to lend?

They had credit lines with regular or investment banks. They just needed a short window of time during which they tap into their credit line to allocate money for the loan, make the loan, and sell the resulting mortgage to investors directly or to an investment bank (for further securitization and resale to investors), and repay the line of credit with the proceeds. These companies were the first ones to go under during the crisis when their lines of credit were cut.

And again, these companies or their lines of credit were not in any way regulated by the CRA or any other government act. In fact, regulation that would've required loan originators to retain a big chunk of their loans on the books would've neutralized this perverse incentive of getting paid to make loans and not caring about their being repaid.

Of course they were regulated. They are out of business now are they not?
What makes the free market better is its motive to make profit. What if the FDIC was the Free Market Depositors Insurance Company? Banks would still pay insurance to protect their depositors money, but it would not be mandated under law. Of course banks who bought the insurance would use it to attract customers. The FMDIC, has an incentive to price their insurance properly and would have a real incentive to sell their insurance to sound banks they had evaluated. Any regulator in the FMDIC that failed to do his job would be fired.
How many FDIC regulators have been fired for letting so many banks fail? If the FMDIC screws up, they are out of business. If the FDIC screws up, they get more money from taxpayers.
The banking system with FDIC has little incentive to be responsible as they are not punished for screwing up. They are rewarded with more power and more funding.

1) What is FMDIC?
2) Why are you bringing up FDIC? It had nothing to do with the this crisis other than preventing a massive bank run in Fall 2008 (and thank goodness for that). FDIC was established in response to the "free market" failing regulate itself and bringing on the Great Depression, and the Panic of 1907 before that, and the Long Depression before that, and so on.
3) FDIC "bails out" consumers, not companies. All the stockholders in busted banks still lose all their $$.
4) You said government involvement in the form of CRA and Fannie+Freddie was responsible. I explained to you how the crisis started and it was via unregulated companies being corrupt and/or stupid (though eventually Fannie+Freddie joined the party, which was yes, a failure of gov't oversight, but hardly responsible for the entire mess).

Oh I see what you did with "FMDIC" there. Congratulations, you've just created another too-big-to-fail free market entity that would dwarf AIG in its importance. Imagine if FMDIC screws up... Sure the guys responsible get fired, though they get to keep their salaries, bonuses, etc. In the meanwhile a bank run ensues and the rest of the banks go under since every single one of them gets its credibility with customers from FMDIC insurance (now non-existent) and the world collapses into yet another Great Depression.

And as I said in previous post, FDIC has had absolutely nothing to do with causing this last crisis. And FDIC has had an exemplary history of preventing financial collapses without costing taxpayers anything (all paid via bank fees), most recently in Fall of 2008. Please point out a "free market" financial institution with a similar history of 75+ years.

Why would the government want to protect bank depositor's money? To encourage them to put money in banks. Why does the government want banks?
As I pointed out FDIC monitors banks for CRA compliance among other regulations.
What motivates the FDIC? How are they judged successful?
"Flat-rate insurance premiums not only force relatively safe banks to subsidize those more likely to fail, but they provide no disincentives to excessive risk taking" "federal insurers will always be subject to political pressures. " "Indeed, FDIC risk-related premiums conceivably could be used to promote social goals. The number of loans to women-owned businesses, for example, or mortgages to specified sections of a city could be given special treatment in calculations designed to assign risk. "
"private insurers should have an incentive to monitor and exercise control over the institutions they insured, "http://www.cato.o...054.html

without costing taxpayers anything (all paid via bank fees),

If banks did pay those fees, the banks could pay more in interest or more to shareholders. It does cost taxpayers.
From the FDIC head:
"We've had too many years of unfettered risk-taking, and too many years of government subsidized risk. It's time we changed the rules of the game. It's time we closed the book on the doctrine of too big to fail. Only by instituting a credible resolution process and removing the existing incentives for size and complexity can we limit systemic risk, and the long-term competitive advantages and public subsidy it confers on the largest institutions."
http://www.garyno...6025.cfm

"Americans are about to re-learn that bank deposit insurance isn't free,... The banking system and the federal fisc would both be better off in the long run if the political class owned up to the reality.

We're referring to the federal deposit insurance fund, which has been shrinking faster than reservoirs in the California drought. The Federal Deposit Insurance Corp. reported late last week that the fund that insures some $4.5 trillion in U.S. bank deposits fell to $10.4 billion at the end of June, as the list of failing banks continues to grow. The fund was $45.2 billion a year ago, when regulators told us all was well and there was no need to take precautions to shore up the fund. "
"Rather than further soak capital from already weak banks, the FDIC ought to draw down at least $25 billion from its Treasury line of credit. Ms. Bair is going to have to ask for the cash sooner or latter, http://online.wsj...640.html

Why does the FDIC have a US government line of credit? Sure, bank failures cost taxpayers noting.

For the third time do you understand that FDIC had nothing to do with causing the crisis and had a lot to do with cleaning up its consequences? I don't care about your weird anti-FDIC campaign. I can post quotes from John freaking Stewart about how evil Goldman and the rest of "free market capitalists" are -- would that convince you that I'm right? No, it wouldn't. So why do expect that your Cato or Forbes quotes would convince me?

And yes, no kidding, FDIC had wants to eliminate too-big-to-fail. That's called regulation and that makes a hell of a lot of sense. Sadly, the current legislation failed to break up too-big-to-fail thanks to the likes of Cato and Forbes.

If you have something to say on topic on this crisis (or the stock model that is the subject of the article), then I'm all ears. If you continue to chant your anti-FDIC/CRA slogans, then I'm done with you.

The CRA was used to beat up banks to fund bad mortgates.
FDIC evalutated bank's performance to CRA.
"Kathleen C. Engel and Patricia A. McCoy noted that banks could receive CRA credit by lending or brokering loans in lower-income areas that would be considered a risk for ordinary lending practices. CRA regulated banks may also inadvertently facilitate these lending practices by financing lenders."
http://en.wikiped...ment_Act
"the FDIC was exploring how to get bankers to offer "pay-day" type loans for favorable consideration in their CRA ratings, blissfully unaware that the banking system was about to collapse. "
http://www.campai...?view=12

"CRA exams appear to have gotten tougher. On March 5 the Federal Deposit Insurance Corp. announced five subpar CRA ratings, including three "needs to improve" grades for institutions that each had more than $3 billion of assets."
http://www.americ...6-1.html
"The CRA was amended and neighborhood groups strengthened during every administration. The rapid expansion of mortgages did not begin until the 90s. Once the banks in response to CRA pressures reduced their standards for collateral, etc., and Fannie Mae and Freddie Mac came to be seen as likely guarantors of mortgages, even those with poor collateral, the impression gained currency that the U.S. government stood behind those mortgages. "
http://www.idealt...38.shtml

My last reply on this thread. http://en.wikiped...l_crisis

"Some legal and financial experts note that CRA regulated loans tend to be safe and profitable, and that subprime excesses came mainly from institutions not regulated by the CRA. In the February 2008 House hearing, law professor Michael S. Barr, a Treasury Department official under President Clinton,[67][113] stated that a Federal Reserve survey showed that affected institutions considered CRA loans profitable and not overly risky. He noted that approximately 50% of the subprime loans were made by independent mortgage companies that were not regulated by the CRA, and another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. Barr noted that institutions fully regulated by CRA made "perhaps one in four" sub-prime loans, and that "the worst and most widespread abuses occurred in the institutions with the least federal oversight"

"CRA exams appear to have gotten tougher. On March 5 the Federal Deposit Insurance Corp. announced five subpar CRA ratings, including three "needs to improve" grades for institutions that each had more than $3 billion of assets."
http://www.americ...6-1.html
"The CRA was amended and neighborhood groups strengthened during every administration. The rapid expansion of mortgages did not begin until the 90s. Once the banks in response to CRA pressures reduced their standards for collateral, etc., and Fannie Mae and Freddie Mac came to be seen as likely guarantors of mortgages, even those with poor collateral, the impression gained currency that the U.S. government stood behind those mortgages. "
http://www.idealt...38.shtml

those in power and that wealthy powerful people often want a well working general society since their wealth depends on this.

A statement that could comprise a workable definition of enlightened self interest

a well working society can still be (and often is) a tyranny. There is no freedom, never was, and never will be.

Any smart person can see that there is no universal punishment meeted out for hurting others for self gain. In fact nature rewards the ruthless. So we will always be ruled by ruthless tyrants, and only ruthless tyrants will be inspired to rule.

Enjoy your freedoms, your democracy, and your free markets and all that other nonsense that isn't real, just like communism and magic.

Great!

Now we can do away with messy humans and keep the market on automatic.

- Wall Street Master Computer.

ask it to give us the details on how to create a better world

ask it to give us the details on how to create a better world

Been done: love your neighbor as yourself. A very simple algorithm.

Been done: love your neighbor as yourself. A very simple algorithm.

That just isn't possible unless you're assuming that your neighbor and yourself are identical. Sounds like socialism to me, Marjon. Aren't you against that?

Been done: love your neighbor as yourself. A very simple algorithm.

That just isn't possible unless you're assuming that your neighbor and yourself are identical. Sounds like socialism to me, Marjon. Aren't you against that?

How is that socialism? I love my liberty and property rights and I do the same for my neighbor.
I do not love having my rights and property stolen by my neighbor so I do not advocate and support socialism.

Socialism.
Capitalism.
Catholicism.

All are forms of religion.

One prays to the People, the other prays to Money and the last one prays to imaginary friends.

Choose the lies you want to believe.

I believe none of the above.

Socialism.
Capitalism.
Catholicism.

All are forms of religion.

One prays to the People, the other prays to Money and the last one prays to imaginary friends.

Choose the lies you want to believe.

I believe none of the above.

What lies do you believe?

@ marjon

Quess what?

I don't believe in lies.

Duh.

Socialism.
Capitalism.
Catholicism.

All are forms of religion.

One prays to the People, the other prays to Money and the last one prays to imaginary friends.

Choose the lies you want to believe.

I believe none of the above.

So true

ask it to give us the details on how to create a better world

Been done: love your neighbor as yourself. A very simple algorithm.

it proberly says a lot more than that but i feel leaders are unlikly to tell - sending love

@ marjon

Quess what?

I don't believe in lies.

Duh.

Tell me what you believe and I will decide if they are lies.

@ marjon

I have no beliefs.

Juste carefully weighted assumptions.

Which, understandably, are too numerous to list here...

@ marjon

I have no beliefs.

Juste carefully weighted assumptions.

Which, understandably, are too numerous to list here...

You have your heuristics, I have mine.