Capitalism without gambling: It's not only possible. It will reduce speculative waste in the economy.

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Capitalism without gambling: It's not only possible. It will reduce speculative waste in the economy.

Trading derivatives and the rally-governed stock market should be abolished. All that is needed is a corporate bonds trading market. Capitalism without gambling: This is a possibility!

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Re: Capitalism without gambling: It's not only possible. It ...

 

Hope that happens, enough with derivatives already.  Wall Street has shown it cannot be responsible with those dangerous instruments.

 

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Re: Capitalism without gambling: It's not only possible. It ...

why only a corporate bond market?  Can you explain how the bond market is different than the equity or derivitave markets regarding your point?

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Re: Capitalism without gambling: It's not only possible. It ...

Do you think alcohol or gambling are good for society or should we abolish them also?  If you don't believe in the stock market, then don't personally invest in it.  Why do you claim the right to tell others what they should and should not do?

What about equity?  Small firms are effectively locked out the debt market and need the equity market to gain capital.

I don't think the problem is debt, equity, or even exchange traded derivatives.  The real problem is leverage and to big to fail.

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Re: Capitalism without gambling: It's not only possible. It ...

Bonds are more secure investments. A company can issue a bond to develop capital, so eliminating stocks from the equation does not eliminate CAPITALism outright. Bond rating analysis would be simplified. The profits would be based more on logic and fiscal conservative principles, rather than the vacuousness of the media. Stocks overvaluation is more severe than bond overvaluation. Without derivatives, it is harder to speculate on bonds than on stocks. Uncertainty is reduced, risk is attenuated. Auditing becomes easier. Bonds are ways we can invest in businesses without much interference from a financial intermediary. Also consider that the amount of corporate bonds that can be issued may be greater due to lower risk, which in turn leads to lower prices for bond issuers (in the form of interest). So for the same return on the market, which is a given by long-term profits, more money can be lended to the corporations.

So what we have is the same benefits of capitalism without the gambling and vacousness of stocks and derivatives. Now, it is still possible to trade bonds, so in a way it does act like a "derivative" but in this case the magnitude of risk appears no different than your average loan. It is harder for media to manipulate bond value vs. stock value. This makes it a much safer investment for the long-term.

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Re: Capitalism without gambling: It's not only possible. It ...

"Do you think alcohol or gambling are good for society or should we abolish them also?"

Alcohol and gambling are social countermeasures to injustices in society. So we should not abolish those.

It is a bad analogy in any case, as stock investing is hardly a social countermeasure to injustices in society.

"If you don't believe in the stock market, then don't personally invest in it."

You ordered me to not do something I *quit* doing. So?

"Why do you claim the right to tell others what they should and should not do?"

If we all agreed to do only what we agreed to do, there would be no debate.

"What about equity?  Small firms are effectively locked out the debt market and need the equity market to gain capital."

Compared to larger firms, small firms do not benefit as much from the equity market, so no wonder they have a problem entering the debt market that demands lower risk.

"I don't think the problem is debt, equity, or even exchange traded derivatives.  The real problem is leverage and to big to fail."

Leverage and too big to fail are not even the cause of themselves; that's circular reasoning. The root of the fungus is extreme overvaluation and undervalution. Any philosophy that attempts to defend systemic risk by saying its consequence is a problem is shooting itself in the foot.

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Re: Capitalism without gambling: It's not only possible. It ...

Capitalism without gambling (I would call it speculation) is not possible.  Every business venture has risk.  In order for money and idea to come together to form business, many creative solutions have been used.  Bartering has risk, bonds have risk, growing food as a farmer has risk.

Saying bonds have less risk than equities across the board is absurd.  I can show you plenty of stocks that have had less risk in the past year based on market fluctuations than US treasuries have.  Look at the first half of this year - treasuries declined 30% from their highs.  A six month decline in value of 30% in what historicaly has been called the safest investment in the world doesnt do much for your argument.

For a business to start or expand, ideas must come together with capital.  If easy methods of raising capital fail (say a loan or bond from your local bank), the group with the idea needs to get creative in order to raise money.  If you leave them with no other options, then you kill captialism.  You kill risk taking and medical, scientific, educational, and environmental breakthroughs all but die.

Derivitive markets, most of them anyway, serve huge risk reduction tools for many businesses.  Much of the options and futures markets are utilized to reduce individual risk, and thus result in lower system risk.  Goes211 is right - the issues are that extreme leverage was legalized on top of killing the separation of banks and prop trading. 

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Re: Capitalism without gambling: It's not only possible. It ...
goes211 wrote:

Do you think alcohol or gambling are good for society or should we abolish them also?  If you don't believe in the stock market, then don't personally invest in it.  Why do you claim the right to tell others what they should and should not do?

What about equity?  Small firms are effectively locked out the debt market and need the equity market to gain capital.

I don't think the problem is debt, equity, or even exchange traded derivatives.  The real problem is leverage and to big to fail.

I agree with you.  I don't have a  problem if a firm wants to trade derivatives, but just like alcohol and gambling, when your firm goes under due to reckless behavior, don't come looking to me to bail you out.  Don't steal my cash to go buy a pint of vodka or play roulette, and don't steal my cash so you can go try to make your money back on the exchange floor, prop up your firm and then pay your execs a billion dollar bonus.  Let the free markets, be just that, free.  But also adhere to the principle what makes freedom so great, with freedom comes responsibilty and ownership for one's choices whether they be wise or foolish.

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Re: Capitalism without gambling: It's not only possible. It ...
rickets wrote:

Capitalism without gambling (I would call it speculation) is not possible.

Not literally. Metaphorically it is. I call it the deliberate reduction of systemic risk. The premise of the maker of this site (Chris Martenson) is that such system risk should be avoided. The only way to avoid it is to cut down the risk, unless you are able to leave the system (you can't leave the world economy can you?). He attributes a big part of the problem (Economy) to exponential interest. We know this ultimately arises due to the creation of money as debt. Bryon Dale (author of the Minnesota Transportation Act) has a good explanation of this.

rickets wrote:

Every business venture has risk.  In order for money and idea to come together to form business, many creative solutions have been used.  Bartering has risk, bonds have risk, growing food as a farmer has risk.

Risk cannot be literally eliminated. It can be reduced.

rickets wrote:

Saying bonds have less risk than equities across the board is absurd.

Some equities are less risky than some bonds, and some politicans are smarter than Bill Gates. So? On average, bonds are less risky than stocks. The reason why that is so, is because equity has a inherent risk greater than bonds, its just that some equities are managed really well and some bonds are managed really bad. So?

rickets wrote:

I can show you plenty of stocks that have had less risk in the past year based on market fluctuations than US treasuries have.

The government does not know how to invest money properly. It is increasingly getting worse. If US treasuries were all stocks, it would be easier to bail out on them. Stock market crashes are tougher=[size*frequency] than bond market crashes—common sense.

rickets wrote:

Look at the first half of this year - treasuries declined 30% from their highs.  A six month decline in value of 30% in what historicaly has been called the safest investment in the world doesnt do much for your argument.

Red Herring. The US government is not like the rest of the economy. The government's closest relative is the financial industry. By whatever means it is financed, it is no coincidence in my mind that government today is a riskier investment than just a few years ago. A fool would think otherwise.

rickets wrote:

For a business to start or expand, ideas must come together with capital.

No one is disputing that. We both share this premise.

rickets wrote:

If easy methods of raising capital fail (say a loan or bond from your local bank), the group with the idea needs to get creative in order to raise money.

Initially loans and bonds are easier ways of raising capital. But if your firm can afford it, equity capital can bring more bang for the buck. The equity market gives privileges to mature companies that no longer require as much innovation as before to maintain its status.

rickets wrote:

If you leave them with no other options, then you kill captialism.  You kill risk taking and medical, scientific, educational, and environmental breakthroughs all but die.

A slippery slope fallacy and a non sequitur. Equity markets provide more privileges to big business than small business, so obviously the innovation-based companies have a harder time competing with the giant cash cows. Risk taking in the form of medical, scientific, educational, and environmental breakthroughs have more value than innovations in finance. Such developments in the advancement of human capabilities should be served by finance, not the other way around. In the long-term, the finance sector profits just as quickly as any other sector. For the average growth of all other industries to be continously exceeded by the growth of the financial system, it would require a massive number of legal contracts to be violated. The trickle down effect is the increase in fraud, resulting in taxing increases, debt mismanagement, not to mention other forms of misdemeanor and crime.

rickets wrote:

Derivitive markets, most of them anyway, serve huge risk reduction tools for many businesses.  Much of the options and futures markets are utilized to reduce individual risk, and thus result in lower system risk.  Goes211 is right - the issues are that extreme leverage was legalized on top of killing the separation of banks and prop trading.

Reducing individual risk in proprietary ways does nothing to reduce the risk of the whole system. Where is your accounting for your financial derivatives? It does cost more money to maintain the system of financial derivatives, so it is not logical for there to be less risk! How do you increase the average return of derivatives? Two ways, neither which make long-term sense:

1) An economy getting richer by betting on itself, just like a person getting rich by writing himself checks.

2) A Ponzi scheme.

The overvaluation of derivatives on balance sheets, even to this day, is so large it is astronomical. There ARE diminishing returns on liquidity, especially when it is more about gains than profits.

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Re: Capitalism without gambling: It's not only possible. It ...
kmarinas86 wrote:

"Do you think alcohol or gambling are good for society or should we abolish them also?"

Alcohol and gambling are social countermeasures to injustices in society. So we should not abolish those.

It is a bad analogy in any case, as stock investing is hardly a social countermeasure to injustices in society.

So getting drunk and gambling in Vegas is OK but investing in stocks is to be outlawed?  Interesting perspective.

kmarinas86 wrote:

"Why do you claim the right to tell others what they should and should not do?"

If we all agreed to do only what we agreed to do, there would be no debate.

I do not agree to let a busybody like you tell me what I can and cannot do.  Therefore you have not answered the question.

kmarinas86 wrote:

"What about equity?  Small firms are effectively locked out the debt market and need the equity market to gain capital."

Compared to larger firms, small firms do not benefit as much from the equity market, so no wonder they have a problem entering the debt market that demands lower risk.

I think you are confusing the primary and secondary markets.  Also as others have mentioned, if you think the debt markets are less risky than the equity market, you are making some big assumptions about market conditions.

kmarinas86 wrote:

"I don't think the problem is debt, equity, or even exchange traded derivatives.  The real problem is leverage and to big to fail."

Leverage and too big to fail are not even the cause of themselves; that's circular reasoning. The root of the fungus is extreme overvaluation and undervalution. Any philosophy that attempts to defend systemic risk by saying its consequence is a problem is shooting itself in the foot.

Leverage is what made the system unstable and susceptible to systematic risks.  To big to fail is what made the system unfair in that it rewarded those that made large amounts of money on the way up and denied them the final consequences of their actions at everyone elses expense.  By bailing out those that took risks in the first place, you are increasing the extremes in overvaluation that you claim to be concerned about.

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Re: Capitalism without gambling: It's not only possible. It ...
goes211 wrote:
kmarinas86 wrote:

"Do you think alcohol or gambling are good for society or should we abolish them also?"

Alcohol and gambling are social countermeasures to injustices in society. So we should not abolish those.

It is a bad analogy in any case, as stock investing is hardly a social countermeasure to injustices in society.

So getting drunk and gambling in Vegas is OK but investing in stocks is to be outlawed?  Interesting perspective.

Yes.

goes211 wrote:
kmarinas86 wrote:

"Why do you claim the right to tell others what they should and should not do?"

If we all agreed to do only what we agreed to do, there would be no debate.

I do not agree to let a busybody like you tell me what I can and cannot do.  Therefore you have not answered the question.

The answer is that I don't let ideology get in the way of analyzing what may be the root cause of the situation. I can make claims such as this without much risk because as an American Citizen I have learned that I have the right to free speech. Somebody telling someone they should do something is very different than a judge demanding orders. There is no legal binding contract that forces someone like me to have it their way as to how individuals must behave.

goes211 wrote:
kmarinas86 wrote:

"What about equity?  Small firms are effectively locked out the debt market and need the equity market to gain capital."

Compared to larger firms, small firms do not benefit as much from the equity market, so no wonder they have a problem entering the debt market that demands lower risk.

I think you are confusing the primary and secondary markets.  Also as others have mentioned, if you think the debt markets are less risky than the equity market, you are making some big assumptions about market conditions.

Market conditions change over-time. Risk-appetite favors short-term satisfaction and ignores long-term unsustainability. The long-term approach of sites like these propose just the opposite, to favor long-term satisfiaction even if it means short-term loss.

goes211 wrote:
kmarinas86 wrote:

"I don't think the problem is debt, equity, or even exchange traded derivatives.  The real problem is leverage and to big to fail."

Leverage and too big to fail are not even the cause of themselves; that's circular reasoning. The root of the fungus is extreme overvaluation and undervalution. Any philosophy that attempts to defend systemic risk by saying its consequence is a problem is shooting itself in the foot.

Leverage is what made the system unstable and susceptible to systematic risks.  To big to fail is what made the system unfair in that it rewarded those that made large amounts of money on the way up and denied them the final consequences of their actions at everyone elses expense.  By bailing out those that took risks in the first place, you are increasing the extremes in overvaluation that you claim to be concerned about.

I did not bail out those companies, the government did! What did I do to increase the extremes in overvaluation? You say these companies took too many (bad) risks? The overvaluation was done by traders, I mean who else overvalues the stock? Yes, people in the companies and the media can falsify or exaggerate information or what not to cause stock rallies, but what does that have to do with me? I quit investing in mutual funds two years ago. I never traded stocks individually. You did not account for the systemic portion of the bad risk these companies took!

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kmarinas86 wrote:
goes211 wrote:
kmarinas86 wrote:

"Why do you claim the right to tell others what they should and should not do?"

If we all agreed to do only what we agreed to do, there would be no debate.

I do not agree to let a busybody like you tell me what I can and cannot do.  Therefore you have not answered the question.

The answer is that I don't let ideology get in the way of analyzing what may be the root cause of the situation. I can make claims such as this without much risk because as an American Citizen I have learned that I have the right to free speech. Somebody telling someone they should do something is very different than a judge demanding orders. There is no legal binding contract that forces someone like me to have it their way as to how individuals must behave.

When you say something should be abolished it implies that it should be legally denied from all.  Your last statement implies that is is more of a desire on your part than an actual legal requirement.  Which is it?  If you want it abolished, you still have not explained what give you that right.

kmarinas86 wrote:

I did not bail out those companies, the government did! What did I do to increase the extreme in overvaluation? You say these companies took too many (bad) risks? The overvaluation was done by traders, I mean who else overvalues the stock? Yes, people in the companies and the media can falsify or exagerrate information or what not to cause stock rallies, but what does that have to do with me? I quit investing in mutual funds two years ago. I never traded stocks individually. You did not account for the systemic porition of the bad risk these companies took!

Without leverage, there would be no systematic risk.

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goes211 wrote:
kmarinas86 wrote:
goes211 wrote:
kmarinas86 wrote:

"Why do you claim the right to tell others what they should and should not do?"

If we all agreed to do only what we agreed to do, there would be no debate.

I do not agree to let a busybody like you tell me what I can and cannot do.  Therefore you have not answered the question.

The answer is that I don't let ideology get in the way of analyzing what may be the root cause of the situation. I can make claims such as this without much risk because as an American Citizen I have learned that I have the right to free speech. Somebody telling someone they should do something is very different than a judge demanding orders. There is no legal binding contract that forces someone like me to have it their way as to how individuals must behave.

When you say something should be abolished it implies that it should be legally denied from all.  Your last statement implies that is is more of a desire on your part than an actual legal requirement.  Which is it?  If you want it abolished, you still have not explained what give you that right.

I have the right to say that it should be abolished.

So what if I want that? I don't have the right to abolish it. No individual does. Only the people have the right. If it's done in respect with human rights and dignity, it's voluntary.

Just as you can't agree to deny your human rights, neither can I.

goes211 wrote:
kmarinas86 wrote:

I did not bail out those companies, the government did! What did I do to increase the extreme in overvaluation? You say these companies took too many (bad) risks? The overvaluation was done by traders, I mean who else overvalues the stock? Yes, people in the companies and the media can falsify or exagerrate information or what not to cause stock rallies, but what does that have to do with me? I quit investing in mutual funds two years ago. I never traded stocks individually. You did not account for the systemic porition of the bad risk these companies took!

Without leverage, there would be no systematic risk.

Without leverage, what are banks? Are you countering my claim that equities should be abolished by saying that abolishing leverage wouldn't be as bad? I agree that leverage is a systematic risk. Overvaluation is result residual risk, so obviously there is a systemic risk, but is that only from leverage? Is optimistic valuation of stock something that would disappear significantly by eliminating leverage?

What does work a lot better than eliminating leverage is the creation of money only as debt-free investment, however, that is not today's economy. One might ask: Who has the right to enforce money creation as an asset? Answer: The people!

You said the underlying cause of the stock bubble is too much leverage.

I said the underlying cause of the stock bubble was the very mechanics of the stock market.

If we do not know which one is less necessary (stocks or leverage), then it clearly doesn't make sense to remove either.

My plan was how to demonstrate that capitalism can exist without stock markets and derivatives. I tried to do this by assuming what would happen if stock markets and derivatives did not exist. Apparently we disagree on the implications. You think the economy would stop. I can't see how you could prove that. To me it sounds like you are sure enough to think no economy of any intelligent life in the universe having similar technological and social conditions as we do can't get their global economy to work without a stock market.

I believe capitalism can work just fine with the better long-term growth potential with corporate bonds and without the financial whiz-jizz of the stock market and derivatives. My principle is keep it simple!

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Re: Capitalism without gambling: It's not only possible. It ...

Capitalism (or maybe more precisely Entrepreneurship) IS gambling as it certainly involves risk. I don’t think that that there should be ANY restrictions on how a capitalist (or again, perhaps more precisely, an Entrepreneur) should be able to earn a profit UNDER ACTUAL FREE MARKET CONDITIONS.

The problem here is not the market for these exotic financial instruments (e.g. derivatives). The problem is the moral hazard caused by a government that facilitates the privatization of the profits, but socializes the losses of the banking oligarchy. 

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Re: Capitalism without gambling: It's not only possible. It ...
G-Money wrote:

The problem here is not the market for these exotic financial instruments (e.g. derivatives). The problem is the moral hazard caused by a government that facilitates the privatization of the profits, but socializes the losses of the banking oligarchy. 

Bingo.

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"The problem here is not the market for these exotic financial instruments (e.g. derivatives). The problem is the moral hazard caused by a government that facilitates the privatization of the profits, but socializes the losses of the banking oligarchy."

So what would motivate the government to stop doing that?

First all, we know that the corporate income tax alone socializes the losses of all industries through so-called tax savings on losses. Corporate income is taxed to some extent or another, but labor is much more taxed than profits, so we could say all industries have privatization of profits to some extent greater than expenses.

The banking industry is apparently less efficient as a result of the socialization of its losses. Does this mean exempting it from the corporate income tax or removing the corporate income tax altogether?

We could say that all we need to do is let the banks fail. Alright, if they fail, who will profit? This is a question that just begs to be answered. We could rephrase it another way: Where will our deposits go now? Mergers of banks seem likely, and perhaps even the buy out of one of our major banks by a major foreign bank! Some of our money would be managed by foreign bankers. How would that make sense in our current global corporate economic system?

Then after that, some American banks will still survive, especially the profitable ones, yet they would still run on Fractional Reserve Banking. People will, of course, want to milk the profits of that bank. The creates excitement in the entire financial industry again, and the media, with it its obfuscation of the market, convinced that it can rally up the stocks of seemingly good, growing banks, help them grow before they have proven their long-term worth. Then it turns out some of them were fraudelent or unsustainable. Nothing changes.

After kicking out the fractional reserve banking system, then banks will look harder for another shortcut. Banks are not in the business of reducing costs, but they are in the business of increasing profits. If we still which to preserve that system, that can only mean a dilemma between choosing high unreasonable bank fees more or debt. What a freak of a situation.

American corporate culture may be the ultimate root of the problem, gasp!

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kmarinas86

I for one am glad you started this thread. It really goes to the heart of one of the three e's and by extension to the other two. Nowhere is it more evident than in our recent bailout carnival that we can see how damaging the current system is. The FIRE economy works great for the people at the top of the scam. It is not a sustainable paradigm for a healthy economy however. Much talk has been happening about saving the economy, creating jobs etc etc. So we the people dump trillions into the scam. Meanwhile their is in reality no competition no free market and no capitalism. there is absolutely no incentive for the FIRE economy to create jobs. The incentive is to make money regardless of who loses.

Any arguments you get here will come from those in the Matrix who somehow have been convinced that this is all as it should be, that it is a benign system and the playing field is level. It is nothing but gambling and Wall Street is nothing but a casino. The owners of the casino are the big banks like GS, JPM etc. It is a given that we will and are seeing consolidation of the banking industry. As J. D. Rockefeller said " Competition is sin" There are two ways of eliminating competition, crush your opposition or join forces. Some of the little people wil make some money trading around the edges but the vast majority of Americans will be fleeced one way or the other. It is a zero sum game in which we the sheeple get the zero and Lloyd Blankfein gets the sum.

There is only one answer and it is to starve the beast. Opt out of the system, deprive it of its life support. Wall Street has turned the promise of America into the lie of America. I would hope that the intelligentsia on this site would at least grasp that fact. 

This is posted elsewhere on the site but I think it is worth posting again. It is an article by Matt Taibbi in Rolling Stone. He is one journalist who really gets it. 

http://www.rollingstone.com/politics/sto...

We are headed for the cliff folks. We can no longer continue BAU and expect not to go over it. It is not the fall that will kill us it is the landing. I for one do not expect Goldman Sachs to provide a parachute golden or otherwise.

V

ps Almost two hundred years ago the statement in my signature below was made. It seems the more things change the more they stay the same

 

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Reading some of the responses by Kmarinas reminds me of watching Maxine Waters (senator from CA) debate Bernanke on economic policy!

Kmarinas - you say  "Stock market crashes are tougher=[size*frequency] than bond market crashes"

The bond market dwarfs the size of the stock market.  The daily transactions in the bond market dwarf the equity market.  Therefore your equation of size * frequency is actually an argument to shut down the bond market in favor of the equity market.  Its backwards.

Other comments you make - like if we reduce the risk of each individual in a system, that doesnt mean the risk of the overall system is reduced.  Derivative markets, as a whole, dampen risk and volatility.  Where they go wrong and add risk is if they have no centeralized clearing, and where leverage is used.  Farmers hedging their future price risk on the inventory they anticipate having as a whole does not, cannot increase risk.  Derivative markets allow those in business, big or small, to take the amount of risk they are comfortable taking rather than forcing them to take more risk and run a higher risk of total failure. 

V - I appreciate your perspective and some of  your thoughts re the issues with our system (this is totally separate from the idea that ending equities and only allowing debt to continue).  One note of caution -  Taibbi has demonstrated time and again his lack of knowledge of the world financial markets.  He is entertaining, but has the financial background and knowledge one would expect of a Rolling Stone reporter.  While he has some interesting paragraphs here and there, some of his reporting on Goldman has been incredibly inaccurate.  I say that as a guy who cant stand Goldman too.

 

 

 

 

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Re: Capitalism without gambling: It's not only possible. It ...
goes211 wrote:

Leverage is what made the system unstable and susceptible to systematic risks.

kmarinas86 wrote:

"I don't think the problem is debt, equity, or even exchange traded derivatives.  The real problem is leverage and to big to fail."

Leverage and too big to fail are not even the cause of themselves; that's circular reasoning. The root of the fungus is extreme overvaluation and undervalution. Any philosophy that attempts to defend systemic risk by saying its consequence is a problem is shooting itself in the foot.

While these discussion are interesting, I believe they are based on a false premise, that the equity/bond/derivative markets are the root cause.  Until you get to the root cause, all other changes are simply band-aids on top of a giant gaping wound.  I believe the bond, equity and derivative markets are just fine as long as you have a sound monetary system under them, that is one that is not manipulated - ie. NO FED.

Instead of looking at how things are, you have to look at how we got here.  Cheap money through the manipulation of the interest rate by the Fed encouraged malinvestments.  That is due to the poor return on traditional savings and reduced perception of risk, people naturally took the path of greatest potential reward.  It happened at all levels: personal, corporate, government.   Without the cheap money and false sense of security (SEC,FDIC,PBGC,Fannie/Freddie/Sally)  provided by a government with endless borrowing capability, risk perception would be much higher and consumers, investors, and banks would not have played this game. If bailouts and all the other guarantees by government required direct taxation they would never occur.

So before we think about applying another band-aid we need to solve the root cause, then I suspect all these issues will resolve themselves.

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rickets wrote:

Reading some of the responses by Kmarinas reminds me of watching Maxine Waters (senator from CA) debate Bernanke on economic policy!

Kmarinas - you say  "Stock market crashes are tougher=[size*frequency] than bond market crashes"

The bond market dwarfs the size of the stock market.  The daily transactions in the bond market dwarf the equity market.  Therefore your equation of size * frequency is actually an argument to shut down the bond market in favor of the equity market.  Its backwards.

I'm talking about the size of the dips in prices and their frequencies. I'm not talking about the volume of trading.

rickets wrote:

Other comments you make - like if we reduce the risk of each individual in a system, that doesnt mean the risk of the overall system is reduced.

And...

rickets wrote:

Derivative markets, as a whole, dampen risk and volatility.

Am I supposed to believe the actions of derivative markets are not to blame for the bankrupting of banks? Derivates, by themselves, may theoretically reduce volitality. That says nothing about how the derivative markets are operated in practice.

rickets wrote:

Where they go wrong and add risk is if they have no centeralized clearing,

As in a government-owned banking system like Canda's? Or do you mean something similar to the federal nature of the US Postal Service?

You could not be possibly defending the current system.

rickets wrote:

...and where leverage is used.  Farmers hedging their future price risk on the inventory they anticipate having as a whole does not, cannot increase risk. Derivative markets allow those in business, big or small, to take the amount of risk they are comfortable taking rather than forcing them to take more risk and run a higher risk of total failure.

They allow them to take more risk, period. They get to choose how much risk they are going to add to operations. There is no such thing as a return with negative risk. You should look up the formula for risk. You will discover that having a negative risk makes as much sense as having a negative probability.

If you want to really reduce risk, reduce overhead. Increasing potential returns over costs has nothing to do with reducing risk. Risk does not mean inverse expected profits.

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kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: Capitalism without gambling: It's not only possible. It ...
rickets wrote:

Reading some of the responses by Kmarinas reminds me of watching Maxine Waters (senator from CA) debate Bernanke on economic policy!

I don't agree with their policies.

Your irrelevant recall of their inanities is amusing.

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kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: Capitalism without gambling: It's not only possible. It ...
G-Money wrote:

I don’t think that that there should be ANY restrictions on how a capitalist (or again, perhaps more precisely, an Entrepreneur) should be able to earn a profit UNDER ACTUAL FREE MARKET CONDITIONS.

So what if there are not "actual free market conditions"?

G-Money wrote:

The problem here is not the market for these exotic financial instruments (e.g. derivatives). The problem is the moral hazard caused by a government that facilitates the privatization of the profits, but socializes the losses of the banking oligarchy.

Under "free market conditions", the profits of banking ARE privatized. This does not actually happen because there is a corporate tax. Second, socialization of losses is not limited to the banking industry. Third, what difference of a moral hazard does it make if the people pay for these losses via interest on personal debt vs. taxes to pay interest on the national debt? It is not as though you would get rid of the moral hazard of lobbying. Lobbyists can get their losses socialized.

The lobbyists can get their way with the "zero-sum" game of derivatives by creating an artificial profit bubble which under a free market system would lead to a bubble collapse in that same industry of a similar amount. Such a bubble would have formed simply due to the fact that certain loans will be defaulted. The housing bubble accelerated the process of the bank bailout, nothing more. When Washington politics rules the land, bank bailouts follow from unaccountability of the losses followed by investors pulling out their money, so it does not matter that they were related to government manipulation of the housing market, except such manipulation simply accelerated the crisis that was already coming anyway. All the lobbyists have to do in order to "manage the losses" is to convince the government that the banking institutions which practice derivative trading are vital to our country (i.e. that they are "too big to fail"). The difference between the "profit bubble" of Enron, the "profit bubble" of our housing industry, and the "profit bubble" of the derivatives market is:

1) Enron's activities are recognized as fraudulent.

2) Those people who defaulted on their home mortgage can be blamed immediately.

3) The people to blame when it comes to "the fall in value of derivatives x, y, and z" cannot be determined inexpensively due to the obscurity of the market.

I predict the next series of bank bailouts will result from something resembling 3.

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kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: Capitalism without gambling: It's not only possible. It ...
rhare wrote:
goes211 wrote:

Leverage is what made the system unstable and susceptible to systematic risks.

kmarinas86 wrote:

"I don't think the problem is debt, equity, or even exchange traded derivatives.  The real problem is leverage and to big to fail."

Leverage and too big to fail are not even the cause of themselves; that's circular reasoning. The root of the fungus is extreme overvaluation and undervalution. Any philosophy that attempts to defend systemic risk by saying its consequence is a problem is shooting itself in the foot.

While these discussion are interesting, I believe they are based on a false premise, that the equity/bond/derivative markets are the root cause.  Until you get to the root cause, all other changes are simply band-aids on top of a giant gaping wound.  I believe the bond, equity and derivative markets are just fine as long as you have a sound monetary system under them, that is one that is not manipulated - ie. NO FED.

Review the Gilded Age. Crashes do not magically dissappear even when you have a gold standard. A gold standard did not prevent bank panics. Is a gold standard a sound monetary system? Any concievable fiat money system does not appear to be a sound monetary system either.

It appears that no matter how the currency is valued, it is always subject to the risk of theft by lobbyists. It appears that active involvement in the protection of a currency's value is necessary, whether it be backed by a specie, or none at all.

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