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Dampening speculation

Posted on October 24, 2008 by Richard Beddard
Filed Under Markets |

Robert Peston*1, the Beeb’s transcendental business editor:

The Tories have talked about giving the Bank of England the power to vary the capital ratios of banks depending on credit conditions, which is a fancy way of saying that the Bank of England would be able to force banks to lend less in a period of economic euphoria.

I don’t think the idea of curbing the kind of speculation that got us into the trouble we’re in now is new. I’m just reading (the great) Benjamin Graham’s 1995 testimony before the Committee on Banking and Currency*2. Talking about the speculative rise in the stockmarket since September 1953, he stated:

…in regard to the feasible methods of controlling excessive speculation in the future, I am in sympathy with the action of the Federal Reserve in increasing margin requirements as speculative activity increases.

I feel in general speculation on margin is expensive to the public, and is sound only when it is practiced by people who have a great deal of experience and a great deal of ability.

It looks as though the authorities found a way of curtailing exuberance. I wonder if it worked, or they just forgot about it in the next bout of euphoria.

Much more on the history of pre-empting bubbles, from Barry Ritholtz.

Footnotes:

  1. Some say our own supremo, Steve McDowell, bears a striking resemblance to Robert Peston. Separated at birth? What do you think? See the image below.
  2. In The Rediscovered Benhamin Graham, by Janet Lowe. Expect a review soon, it’s very good.
  3. I’m interviewing Robert Shiller, who really can spot bubbles before the burst, for iBall in November.

Separated at birth
 

Category: Markets

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