Raghu writes: >> I think I understand what you are saying. This discussion has probably >> reached the point where further consensus is impossible and we have to >> agree to disagree, but I have one last comment. >> >> This view of the markets that you have described seems unscientific in >> the Popperian sense. If the securities are priced correctly then the >> market works. And if they are priced incorrectly, well the market was >> wrong, but that does not mean the market failed because it still did >> the optimal thing under the circumstances.. In other words no set of >> outcomes can ever contradict the assumption "the markets cannot be >> snookered". >> >> It is simply not falsifiable. Btw this by itself is not a knock >> against your thinking because (as I understand it) Marxism is not >> falsifiable either.. And in any case who cares what Popper thinks. >> Still all else being equal a falsifiable theory is nice to have.
I am not sure what statement that I have asserted concerning markets is unfalsifiable. I never said the market can't be snookered. It can be. I worked on a case where the company literally had two sets of books -- the real books and the books it showed its bank. The company made up AR out of thin air and the bank was lending on the nonexistent receivables. The bank was snookered and took a real hit when the company defaulted and the bank's collateral base turned out to be fictitious. However, we were not talking about fraud. We are talking about potential lenders examining available information and then making a determination of the price at which they would lend money. Various lenders, based upon temperament, experience, skill, philosophy, desperation, and other factors will reach difficult conclusions. Clearly, the Raghu Mutual Fund would not treat the Sears securitization as anything but an unsecured loan and would price accordingly. Again, the fact that you might turn out to be right does not mean that somebody who disagreed was snookered. It bears emphasis that when it comes to lending, the interest rate inherently has built into it the risk of default and the knowledge that a certain percentage of loans are going to default. When credit cards companies blindly ship credit cards, they know a certain percentage are going to default. When I invest in a junk bond mutual fund, I know a certain percentage of the bonds are going to default. Those expected default rates are reflected in the interest rates charged. The fact that a specifc borrower defaults is not evidence that the interest rate was "incorrectly" priced or that the lender was snookered. David Shemano fails Popper testI am probably out of my league here, but I never would use the words "correct" or "incorrect" to describe a market price. Prices are a piece of information, period. I suppose if you wanted to Prices may be a product of misinformation, but However, that is a far cry from what we have been talking about. We have been contemplating a situation where we presume that Sears is going to go to the capital market and ask that loan secured by its intellectual property be treated as a secured loan rather than an unsecured loan.
