The Wall Street Casino isn’t playing with a full deck

Yesterday the market went into a wild tailspin- pulled out- then is back to swinging like a pendulum.

This isn’t anything about “investing” in companies- this is all about betting on horses- and that’s a stupid way to manage an economy.

Really- horses and stocks aren’t connected to a predictable financial reality- the one that’s supposed to guide investment. Company A- for Apple- has this product portfolio, this cost structure, a balance sheet, and a  track record and this customer base (I can’t say “market potential” because it would confuse the gamblers on the Street). That’s what I was taught to use to value a company stock.

Not anymore. How else do you explain that yesterday morning- the stock was worth $270 a share and today it’s at $240 (and at one point was at $200 a share). Figure out how many shares there are- and we’re talking billions vanishing in a day. Did Apple change the way they do business- do people not want an iPad today as much as they wanted one yesterday? Absolutely not.

This isn’t business- this isn’t even the weather in Dayton Ohio- this is larceny at a grand scale- driven by computer driven program trading and more arcane financial “instruments” than one can shake a stick at. It’s not investment- especially when we have people betting against companies- by “shorting” stock.

From the NYT:

The market volatility that marked the financial crisis of 2008 returned to Wall Street again on Friday.

After being down almost 180 points, the Dow Jones industrial average regained almost all of the ground it lost only to slip again. In late morning trading, the Dow was down 40.13 points, or 0.38 percent, while the Standard & Poor’s 500 stock-index declined 6.13 points, or 0.54 percent. The Nasdaq declined 23.28 points, or 1 percent.

The wild swings came as policy makers have sought to calm nervous investors who fear that Greece’s debt crisis will spread within Europe and beyond. The CAC-40 was down by 5 percent in late trading in Paris Wall Street took in a stronger-than-expected report on United States jobs growth, and all but pushed it aside. The Labor Department reported Friday that the economy added 290,000 jobs, much more than forecast.

via Wall Street Swings and Then Turns Lower – NYTimes.com.

All this while Rome fiddles. No calls from Congress to end this charade once and for all. No questioning the methods- these fools we elect are perfectly OK with sitting down to play poker with a partial deck.

It’s time to put an end to complex financial instruments. The only people who should be able to create “paper” is the Fed- or banks that have assets to back up their loans. It’s time to end program trading- put a halt to day trading, end options all together on stock- leave them in the commodities market where they are actually supposed to smooth things out- but- require actual possession of goods- to force “speculators” to have real skin in the game.

It’s also time to reel in the compensation of executives who fail- clawbacks, prison time, real responsibility. In fact- maybe it’s time to end all mutual funds, forcing the hand back to the single investors. Accountability is the only thing that will bring sanity back to the system.

These swings should be a rude awakening for some. And even if some of these measures are only put in place temporarily as a result of market swings- so be it.

Unless of course, you’re not playing with a full deck either.

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15 Responses

  1. Robert Vigh May 7, 2010 / 12:48 pm
    David,

    Why did the market have such a swing? Most of it seems to be on speculation of the possibility that greece would become insolvent. There is an honest reason to beleive this could lead to portugal and spain defaulting. Why are these countries in a position to have a bankrupt government? It is because government runs poorly. So the stock market reacts to powers of countries that could effect the flow of cash. maybe it’s time to end all mutual funds, forcing the hand back to the single investors. This would greatly diminish the ability to provide large investments to help direct the means of production. This woudl result in a reduction in the means of production and hence a reduction in goods and services to consumers.

    So, I am an apple share holder. I speculate that greece is going to cause monetary issues and that it would be better to have cash right now instead of stocks. Cash may be harder to come buy later because more people will want cash. My stocks .vs the value of cash would decline. A large group of people follow this and the stock and the market drops. Some hold steady, some sell etc. In addition, if it triggers the beginning of global monetary problem, demand for all products is likely to drop. The funny thing is you are blaming wall street markets for reacting to a governmental debt debacle.

    Lets look at some other things that you say: I underlined your comments.
    It’s time to put an end to complex financial instruments. Why? Many of these helps spread and diversify risk in order to allow safer investment of capital. The only people who should be able to create “paper” is the Fed- or banks that have assets to back up their loans. The FED has no backing for their paper. If we allowed banks to create paper based on assests (which I am in favor of), you might see the dollar have a lot less interest. The FED printing $$ with no backing is a large part of our economic woes. It’s time to end program trading- put a halt to day trading. This is like the AMA setting restrictions on student enrollment. It will artificially inflate the earnings of hedge fund managers and make it more difficult and complex for investors with less capital to get involved.

    It’s also time to reel in the compensation of executives who fail- clawbacks, prison time, real responsibility. Fraud and theft I agree, those are breaking laws. Mismanagement is not. Adding jail time to a CEO would probably have 2 major effects. 1) They would get paid a hell of alot more, because it is no longer get fired, it is go to jail. 2) It sets the foundation for a fascist state. The government would be able to wield such influence over companies, you might as well give it to them. Hence, why someone like Welsh already disagrees with sarbanes oxley.

    maybe it’s time to end all mutual funds, forcing the hand back to the single investors. This would lower the ability to pool large sums of money to guide the means of production for consumers. It would result in reduced means and hence reduced goods and services.

    Accountability is the only thing that will bring sanity back to the system. I agree whole heartedly. I just levy that statement at the government as opposed to wall street. Wall street is often reacting to government irresponsibility and mal-investment of capital. I am more inclined to blame the enabler and the source of the problem.

  2. Robert Vigh May 7, 2010 / 12:50 pm
    I was cutting a pasting some info and I goofed. Paragraph 1 from maybe its time………… through the end of the paragraph should be deleted.
  3. Ice Bandit May 7, 2010 / 5:00 pm
    The funny thing is you are blaming wall street markets for reacting to a governmental debt debacle. (Robert Vigh)
    As is his wont, Robert Vigh, the intellectual clean up hitter on Esrati.com, steps up to the plate and knocks one into the ionosphere. Mr. Vigh’s posts chronicle the impact of government on business not from an ivory tower or academic perspective, but that of an entrepreneur in the trenches. If anything, Mr. Vigh understates the deleterious relationship between an overbearing, overreaching and over-taxing state and the businesses that fuel our prosperity. Take for example, the recent housing collapse. A shrill and agenda driven media would like to place blame directly on banks or capitalism itself for this calamity, when in fact, it was government gremlins like Barney Frank and his pet legislative issue, the Community Reinvestment Act, that was the focus and reason for the housing collapse. A government that forces banks to lend to the unworthy, and then acts surprised and outraged when this financial house of cards tumbles, is beyond contempt. To add insult to injury, these same state saboteurs reach into the public kitty for bail out bucks. Furthermore, Frank and his toadies in the Black Legislative Caucus are making back-door attempts to get the failed program jump-started again, as if they are immune from the laws of economics. Keep the wisdom coming Mr. Vigh. You keep writin’ and we’ll keep readin’…
  4. truddick May 8, 2010 / 11:29 am
    Gentlemen: hogwash.
     
    When investment firms can purchase credit default swaps (which ought to have been called “investment insurance” except the underhanded investment firms didn’t want to be regulated like insurance) on investments THEY DON’T EVEN OWN then there is an underlying condition of gross deception.
     
    When Bear Stearns can encourage people to invest in stuff they are certain is going to lose money to increase Bear Stearns’ profits, that’s fraud.
     
    The people in the federal government who we should fault are the ones who deregulated.  Put this on the doorstep of DeLay, Armey, and Frist.  Clinton’s cabinet begged them not to remove the protections again this kind of Wall Street skullduggery and thuggery; those protections kept us solvent since the great depression.
     
    Note that Canada did not remove its laws regulating investment chicanery, and Canada did not suffer the sorts of financial meltdown that much of the rest of the world did.
     
    “Many of these helps [sic] spread and diversify risk in order to allow safer investment of capital.”  That’s clearly a misrepresentation of the nature of credit default swaps and other derivatives.  Most of the credit default swaps were taken by investors who had no risk in the first place–they essentially got to bet on a market collapse at some point.  When enough of the people who control a market have a vested interest in its collapse, why are we surprised when the collapse comes?
     
    We’ve seen this small-government, deregulation, tinkle-down theory implemented since Reagan.   It’s meant insufficient enforcement of existing law, it’s meant corporate malfeasance, and it’s resulted in a long-term decline in the quality of life for all except the wealthiest–whose life hasn’t exactly improved since they were already rich, meaning they already could afford anything they wanted.
     
    Law of supply and demand, gentlemen.  A person who has little surplus income will spend most of any extra that comes, thus improving the GDP.  A person who invests a lot of surplus income will, if given more income (lower taxes) invest the remainder.  This does not, counter to the Laffer (laughable) curve, increase business activity, since the middle class has no money to spend on goods and services and so the market does not expand.  Rather, it creates a predictable supply-and-demand effect in the stock market–stock prices go up because there’s greater demand but no increase in supply.
     
    Please rethink.  We need more cops, not only cops on the beat, but financial cops, environmental cops, and internal government cops to stop the Bernie Madoffs, the BP drill-babies, and the Tom DeLays of the world before they go too far with their mischief.  That means bigger government–but at the lower levels.  Deregulation only makes things worse–air travel, phone service, cable service, utilities, public education, banking, and finance are just a few examples of things that were better when government recognized that not all commerce obeys supply-and-demand principles.  Cutting taxes for the wealthy does not inspire them to use their greater wealth to maintain middle-class standards of living.
     
    Your theories don’t work.  You didn’t realize that when the S&L bailout was necessary during Reagan, and you don’t seem to recognize it now that the Wall Street bailout was necessary under Bush.  When will you recognize that you’re shooting yourself in your own collective feet?
  5. Dad May 8, 2010 / 12:01 pm
    Truddick is correct. Canada did not deregulate as we have been doing since Jimmy Carter and Canada has not paid the price we have had to.
    Let me quote Wikipedia on the Glass-Steagall Act, which we gutted:
    The Banking Act of 1933 was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms, some of which were designed to control speculation[1]. It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Carter Glass and Henry B. Steagall.
    Some provisions of the Act, such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act.[2][3]
  6. Ice Bandit May 8, 2010 / 4:32 pm
    We need more cops, not only cops on the beat, but financial cops, environmental cops, and internal government cops to stop the Bernie Madoffs, the BP drill-babies, and the Tom DeLays of the world before they go too far with their mischief.  That means bigger government–but at the lower levels. (truddick)
     
    “A cop for every citizen and a citizen for every cop.” Sounds like a campaign slogan, dear truddick. However, the one thing  the good old US of A ain’t lacking is law enforcement agencies. From the county mounties to the alphabet soup of FBI, DEA, ATF, OHP, ICE, BHS, CID, NCIS and a two-dozen more; that’s a lot of handcuff wielding pistoleros packing the power to throw you in the slammer. Throw in the regulatory agencies with police powers such as the IRS and not only do they have the wherewithal to make you a lifelong, non-voting  resident of Leavenworth, Kansas, but seize your property, clean out your bank account and shoot your pooch, fourth amendment be damned. And yet with all of these gendarmes, never has this country been more lawless and godless. Perhaps there should be a national re-evaluation of what constitutes a crime; reefer smokers, for example, take up lots of cop time, court time and jail space yet a pose a minimal risks to society. You might, dear truddick, find a taxed into serfdom public not totally sympathetic to spending even more coerced dinero on constabulary agencies, not to mention what impact all these cops would have on individual freedom. Furthermore, dear truddick, your examples of  hoosegow bait have the Old Bandito scratching his increasingly thinning scalp. Bernie Maddow was arrested tried and is doing more time than serial killers. And why do you want to jail Tom Delay? The Texas prosecutor who charged the Exterminator with campaign finance violations has jerked around for five years without bringing charges, which begs the question of why this is not prosecutorial misconduct…..
  7. Ice Bandit May 8, 2010 / 4:47 pm
    Oops. I meant Bernie Madoff, not Maddow, Don’t know who Bernie Maddow is, perhaps Rachel’s brother. But hey, since we’re throwing people in the slammer, let’s jail him too……
  8. truddick May 9, 2010 / 1:46 pm
    Ice Bandit (cool screen name, dude) rebutted:

    “’A cop for every citizen and a citizen for every cop.’ Sounds like a campaign slogan, dear truddick. However, the one thing  the good old US of A ain’t lacking is law enforcement agencies.”
     
    I didn’t claim I wanted more agencies.  If we followed through on the original Homeland Security proposal and combined a bunch of them, I’d be happier.
     
    What I said we needed was more cops.  In just about every enterprise we have too many administrators and too few actual providers, the old too-many-chiefs, not-enough-Indians conundrum.  I could draw a comparison with education (in higher ed today, there are more administrators than full-time faculty) or health care (hospitals that once were run by the medical staff are now run by an army of MBAs).
    “And yet with all of these gendarmes, never has this country been more lawless and godless.
     
    Godless has nothing to do with it.  And the lawlessness comes from capturing and convicting too few, too late.  Exactly why we need more “line workers” in all areas of law enforcement.
     
    “Perhaps there should be a national re-evaluation of what constitutes a crime; reefer smokers, for example, take up lots of cop time, court time and jail space yet a pose a minimal risks to society.”
     
    Excellent point.  We need to focus on protecting people from harm that’s not self-imposed, on protecting those who can’t protect themselves (children, the impaired), and quit trying to impose a moral code.  Where drugs are concerned, I’ve long thought that we need to break out the relatively harmless ones from the ones that turn people into sociopaths, legalize the first and eliminate the second.
     
    But the efficiency gained by eliminating the DEA and the Greene County Drug Task Force will not give us the personnel needed to catch the next Enron before they defraud much of California and rip off their employees’ pensions.  That’s something we need to cover.

  9. truddick May 9, 2010 / 1:53 pm
    And to answer your question about why I think Tom DeLay might deserve some time in a luxury white-collar hoosegow:
    http://en.wikipedia.org/wiki/Tom_DeLay#Controversies
    Note that I’m not a single-party lynch mob; Marc Dann and Jim Traficant both richly deserved their comeuppances, and I’d wager that there are more Dems who might be eligible for a good indictment or three.
     
    BTW, I’m voting “nerd” on your comments b/c even though we disagree on a few points, you make ’em well.
  10. Robert Vigh May 10, 2010 / 6:18 pm
    When did Canada have an upswing? Dont you have to have a boom to have a bust???!!! lol

    What is Canada’s rate of growth?
    What is Canada’s fractional reserve banking requirement?
    Where is most of Canada’s investment dollars parked?

  11. joe_mamma May 11, 2010 / 2:21 pm
    Sorry but deregulation is a myth.  There were plenty of regulators and agencies in place to prevent the financial meltdown.  They in fact enabled it. 

    Who controls interest rates? The Federal Reserve.

    Who controls the money supply? The Federal Reserve.

    Who dictates financial institution’s reserves, thereby determining how much money they have to loan out? The Federal Reserve.

    Who passes legislation demanding that banks grant loans to minorities and who dictates what factors may and may not be used to evaluate credit worthiness? The Federal government and the U.S. Congress.

    Who requires banks and mortgage companies to pass periodic reviews to insure the percentage of loan applications from minorities is the same as from everyone else? The Federal government.

    Who created the secondary market for the securities containing these subprime loans? The Federal government through the policies followed by government-sponsored entities Federal National Mortgage Association, the Federal Home Loan Mortgage Association and the Government National Mortgage Association.

    Who rated these securities “AAA” to anesthetize the financial industry against their risk ? The government-controlled, government-approved investment rating cartel.

    Who requires all financial firms to use the ratings put out by that cartel? The Securities and Exchange Commission.

    And why were these government-sponsored entities created? To insure a “sufficient flow” of credit into the housing market for the “needy” and the “uncreditworthy” — because those “selfish” and “greedy” bankers and mortgage lenders, left to their own devices, would not make such loans.

    Who filed 13 major lawsuits against major lenders charging them with discrimination in lending practices for not loaning sufficient funds to minorities? The Justice Department of the Federal government under the Clinton administration.

    Who regulates the home mortgage sector of the American economy? The Federal government, through the following agencies: The Department of Housing and Urban Development (HUD), the Federal Housing Finance Board (FHFB), the Federal Housing Administration (FHA), the Federal Home Loan Bank (FHLB) and the Office of Federal Housing Enterprise Oversight (OFHEO).

    Has any legislation been enacted dictating what policies and practices should be followed by all these regulators? Yes, including The Fair Housing Act, the Equal Credit Opportunity Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the National Affordable Housing Act, the Community Development and Regulatory Improvement Act, the Home Ownership and Equity Protection Act, the Updated Community Reinvestment Act and the American Dream Downpayment Act.

    Who issued a booklet titled “Closing the Gap: A Guide to Equal Opportunity Lending” to all U.S. mortgage lenders — a booklet that derides as “arbitrary and unreasonable” such traditional credit standards as a 20% down payment or a history of paying one’s bills on time or a steady job yielding reliable income — a booklet that includes side-bar reminders of the fines and jail terms that await any lender found to be deficient in fighting discrimination by lending to less-than-creditworthy applicants? The Federal Reserve Board.

    Who, in 2002, set a goal of artificially boosting the home ownership rate from 65% of households (the average for the preceding two decades) to a rate of 70% — and directed all Federal home loan regulators and agencies to communicate this goal to the market? The Federal Government, at the behest of the Bush administration.

    Who, after dropping interest rates from 6% in 2001 to 1% in 2004, publicly criticized lenders for making too many traditional, fixed rate mortgages, and declared that “many homeowners might have saved tens of thousands of dollars had they held adjustable rate mortgages”? Alan Greenspan, Chairman of the Federal Reserve Board.

    Who called a “White House Conference on Increasing Minority Homeownership” and then pledged to “use the mighty muscle of the federal government” to meet his goal of “increasing the number of minority homeowners to at least 5.5 million families by the end of the decade”? The President of the United States and Head of the Executive Branch of the Federal government, George Bush.

    Who, in 2004, following Bush’s lead, promised to “close America’s homeownership gap” via “underwriting experiments that redefine creditworthiness” and promised to create “six million new homeowners” over the next 10 years? Federal National Mortgage Association chairman Franklin Raines.

    Who precipitated the adjustable rate foreclosure crises by running interest rates back up from 1% to 5% in 2006? The Federal Reserve Board.

    Who believes that private mortgage lenders — free from any pressure from government — free from any rules or regulations dictating their lending practices — with no implicit government guarantees to make good on any loans that might go bad — with no government-sponsored entities to take risky mortgages off their hands — — with no government agency having the power bail them out if they failed — simply woke up one morning in this new condition of total freedom and decided to flush their money down the toilet by trashing lending standards and making loans in the blind, to people who had little long term chance of repaying it?

  12. Ice Bandit May 11, 2010 / 11:10 pm
     Say it isn’t so, Joe. Government the creator of financial mayhem, monetary malfeasance and fiscal collapse? Who knew? One of the baffling aspects of Esrati.com, Mr. Mamma, is the number of posts that bemoan a particular government imposed disaster, and yet the proposed remedy for said problem is almost always more government.  In fact, Joe, for many government has taken on an almost religious dimension; remember all that swooning over Obama during the campaign and Oprah anointing the Great Helmsman as “the One.”  Folks look at government as the omnipotent and omnipresent force that will deliver us not just from evil and protect us from ourselves. As the Old Bandito types a lady in Xenia is boo-hooing to a Channel 2 reporter because budget cuts are forcing a cancellation of the DARE program, despite study after study shows that such expensive and intrusive programs do little good. What we really need isn’t the religion of government but an exorcism…

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