Allais: “Wall Street Has Become a Veritable Casino.” : Markets: Nobel laureate Maurice Allais says the weaknesses on the global exchanges are the same as those that led to the 1929 crash.
L oose credit practices, insufficient margin requirements and computerized trading on a nonstop world market have produced the volatile climate that now characterizes Wall Street, French economist Maurice Allais said in an interview with The Times.
“Wall Street has become a veritable casino,” said Allais, 78, a market theorist who won the 1988 Nobel Prize for economics. “In fact, the weaknesses of Wall Street today are the same as those that led to the crash of 1929. They are simply more marked.”
Allais, retired professor at the elite Ecole Nationale Superieure des Mines in Paris, is recognized as one of the leading researchers into the functioning of markets.
“Allais is a fountain of original and independent discovery,” American economist Paul Samuelson said of the French scholar at the time of the Nobel award. “Had his earlier writings been in English, a generation of economic theory would have taken a different course.”
Despite his influence on younger French economists, Allais has rarely been interviewed outside France. The questions in the following interview were posed by Los Angeles Times London bureau chief Dan Fisher. Allais’ responses were translated from the French by Times Paris bureau chief Rone Tempest in consultation with the economist.
Question: In view of the 190-point drop in the Dow on Friday, Oct. 13, and a sharp climb of 88 points on Monday, Oct. 16, do you think the Wall Street system has gone mad?
Answer: I wouldn’t say that Wall Street has gone mad. The reality is that the institutional framework in which Wall Street operates is fundamentally inappropriate, and it inevitably generates violent fluctuations of the market.
What must necessarily happen, inevitably does.
Q: Do you see this as reflecting some flaw in the American character? Or are the violent swings in the Dow Jones average just a price we have to pay for the world’s increasingly interrelated financial markets?
A: It is not a flaw particular to the American character. The European and Asian markets suffer from the same flaws.
The interrelations between today’s nonstop 24-hour financial markets are totally excessive and harmful. They are not at all necessary for the working of the world economy.
I note, for example, that more than $400 billion is exchanged every day on the foreign exchange markets, while the flow of commercial transactions is only about $12 billion.
Q: What do you see as the main weaknesses of the American markets?
A: First, excessive financing of speculation by means of payment created ex nihilo by the mechanism of credit; second, insufficient margin requirements for all the futures speculators; third, the continuous trading market, which is an aberration from an economic viewpoint and generates a potentially permanent instability favoring fraud and manipulation of the market--I think a single daily price quotation in each place for each stock would be by far preferable and would benefit both small and large investors, fourth, the automatic computerized buy and sell orders associated with continuous trading.
Because of these four factors, Wall Street has become a veritable casino.
In fact, the weaknesses of Wall Street today are the same as those which led to the crash of 1929. They are simply more marked.
It is understandable that the Fed injects cash to avoid the collapse of the stock market, but basically it is bad policy for monetary authorities to intervene to save speculators from bankruptcy. This is not their role.
Speculation would be useful if, and only if, these four major structural defects I mentioned are remedied.
Today’s system is anti-economic and basically unfavorable to the American system. It benefits only a very small minority.
Q: What do you think about the whole takeover phenomenon? Junk bonds?
A: Takeovers are fundamentally useful, but legislation concerning them should be reformed.
It is undesirable that they should be financed by means of payment created out of nothing by the banking system, or by the issuing of junk bonds.
In principle, junk bonds are basically useful, but they are used excessively and irrationally, notably in takeovers.
Q: How do you think that the American system could be changed to correct its flaws?
A: The American system could be reformed in the following ways:
* Making it impossible to create means of payment ex nihilo by the credit mechanism.
* Considerably increasing margin requirements on buying and selling.
* Eliminating the continuous trading market and replacing it everywhere with a single daily trading price for each stock in each market.
* Ending automatic, computerized buying and selling.
Q: How is the French system, for example, different from the American one? What is the impact of Wall Street on the French system? Is it growing or lessening?
A: The European criticisms of the American financial system could be addressed just as valuably to the European systems.
The French system suffers from the same defects. They are simply less pronounced.
Unfortunately, the French imitate the worst aspects of the American market, as in, for example, the continuous trading market.
The impact is increasing. The effects are very bad: basically, the creation of a potentially permanent instability and the greater and greater disassociation of the financial system from the real economy.
