Category: Economics

Another philosophical issue underlying the current financial crisis is the collective inability of our financial institutions to discern value. Lacking discernment they bought huge quantities of complex assets that turned out to be worthless, and now they require the tax-payer to bail them out.

One of the complex financial instruments whose actual value the banks failed to discern is Collateralized Debt Obligations (CDO’s). Sub-prime mortgages were packaged up as CDO’s and bought by the banks, creating the toxicity which the Paulson plan aims to hoover out of the US system, and which is undermining the British banking system so much that it needs to be partially nationalized at a cost of at least £50bn.

There are bigger ‘philosophical’ issues at stake than the systemic issues affecting the financial system. One important issue that receives little discussion within the mainstream media is ‘productivity’, and how little the global financial system, as currently organized, is concerned with maximizing human productivity and creativity. This is not a trival issue, as in fact the entire purpose of economics should be to deploy resources in the most effective way to enable and facilitate human productivity and creativity.

There are two basic approaches to stock market investment: fundamental analysis and technical analysis. A fundamental analyst studies individual companies in detail, looking at the quality of their balance sheets, the calibre of their management, the competitiveness of their products etc. Technical analysis, on the other hand, focuses on the performance of companies’ or whole sectors’ share prices in relation to the rest of the market, searching for historical trends that will indicate a good moment to buy or sell.