Re: fascinating read on wall st. by Michael Lewis - Liar's Poker author

[David Farber <dave () farber net>]

Begin forwarded message:

From: Peter Wayner <pcw () flyzone com>
Date: November 14, 2008 10:34:14 AM EST
To: Dave Farber <dave () farber net>, tongia () cmu edu
Subject: Re: [IP] fascinating read on wall st. by Michael Lewis -  
Liar's Poker author


On Nov 14, 2008, at 7:29 AM, David Farber wrote:
> The lingering Q I have for those more skilled at this - how much of  
> the current mess is transference of wealth vs. loss of wealth?  At  
> one level, isn't it all transfer? Every stock sale has two parties,  
> etc. Of course, some transfers may be outside the US.


There are two types of markets at play here and it's important not to  
get them mixed up. In the equity markets, wealth is ephemeral. It's  
not a zero-sum game by any stretch of the imagination. Imagine there  
are a billion shares of a stock outstanding and all except 1 share is  
held by long-term investors who won't sell. (n.b. see the recent  
Porsche/VW deal.)

If the one share in play trades for $10 more, than $10 billion in  
wealth might be said to be created. If the share trades for $10 less,  
well, then $10 billion might be said to disappear. Did that $10b ever  
exist? Is it conceivable that there is enough demand for all billion  
shares to trade at this price? Who knows!

If you focus on one sale, as you do in your question, then only $10 is  
in play. But there's a big multiple because people assume that all  
shares go up or down in value at the same time. This is the deep  
problem with "mark to market" rules-- rules that were designed to  
prevent financial chicanery but end up whipping the market up and down.

That's what people mean when they say that trillions of dollars of  
wealth have been destroyed by this crash.

The derivative markets, though, are generally different. If someone  
loses $1 on a futures contract, then someone else gains that $1. These  
are zero sum games. If someone loses a fortune in the futures markets,  
then everyone else gains that fortune.

-Peter




-------------------------------------------
Archives: https://www.listbox.com/member/archive/247/=now
RSS Feed: https://www.listbox.com/member/archive/rss/247/
Powered by Listbox: http://www.listbox.com