Money, Money, Money

‘Everyone is making money and spending it like no tomorrow’.

This week we were asked to watch a finance documentary of our choice, considering I find finance documentaries extremely boring, (I prefer the serial killer documentary type to be honest) choosing a documentary was actually quite difficult. 

I watched The Love of Money – Age of Risk documentary and I was actually pleasantly surprised as I actually enjoyed watching it. The documentary clearly linked with the stock market efficiency lectures delivered in week 3.

While it showed flashbacks of the ‘big boom’ in Britain in the early 2000s I couldn’t help but think it looked like a scene out of the 1920s. In the USA the property market was booming and the Labour government in the UK were splashing cash on the NHS and even schools. Unimaginable bonuses and wealth were created directly from the stock markets through tax which was subsequently invested into the public sector. Before the crash, the global economy was evidently experiencing the benefits of the international capital markets.

Thinking back to this time, I remember my secondary school going through major renovations and it is finally clear where all this money came from… heavy reliance on the stock markets (through tax), which was great until it all came crashing down in 2008.

While the programme delved into questioning the key players and discussed who may have been responsible for the global crisis, I think the important questions I took from the programme were:

1.   Can the capital market really take care of itself?
2.    The much-debated topic – is the capital market system efficient?
3.  If the capital market isn’t efficient why does the global economy rely on them so heavily?

Firstly, the ‘light touch’ regulation approach was introduced in the US and the UK shortly followed suit which meant that regulations took a backseat. This was due to the widely accepted view that the market could take care of itself. Maybe the market can take care of itself, but the problem is that those who work in relation to the capital market system cannot. With the light touch regulations, many companies were able to take advantage of others through stated income as they avoided doing the ‘proper checks’ when packaging mortgages in order to obtain high returns. The system seemed to work when money rolling in and housing market prices peaked but when they declined the entire economy declined with it.  

Which leads on to the next question of whether or not the markets are efficient.  

Kendal’s (1953) theory states that the market is not efficient at all and it actually follows ‘random walks’.  Glorified high returns you often see or have heard of, may be obtained through pure luck. If the market really is random and unpredictable, why were major governments relying on the wealth generated form the capital market and its luck? Did the global crisis occur due to bad luck? Well, from watching the first-hand accounts of the key players in the crisis in the documentary, it is quite obvious that it was not just bad luck but a series of bad decisions which led to the economic turmoil which occurred.

On the other hand, Fama (1970) stated that there are three forms of market efficiency. These are, weak efficiency, semi-strong efficiency and strong form efficiency. It could be argued that the markets are efficient to a degree, but they do not act in a rational manner.

Personally, I think that the markets are not efficient due to the fact there has been many instances where the market appears to have reacted randomly as well as evidence of traders’ luck running out. Also, if the market is efficient and really is able to look after itself, how did the market crash lead to a global crisis in 2008?

Alan Greenspan, (argued by most to have played a large role in the events leading to the global crisis) interestingly touched on the efficiency of the capital market to conclude the 60-minute documentary. He stated that the question isn’t whether or not competitive markets function properly as they do not. But regrettably there is nothing better.

To me, the global crisis was a clear example of how the competitive markets do not function properly and I would agree with Greenspan as if there was a better option, this clearly would have been implemented after 2008. Yet to this day, the competitive market is thriving.