Should government increase regulation of all financial markets to get back at the most successful hedge-fund investors? Given the assumption that these investors make literally nothing, the correct measure would be to expropriate their unearned income. FULL ARTICLE by D.W. MacKenzie
Source link: http://archive.mises.org/12642/do-capitalists-produce-nothing/
Do Capitalists Produce Nothing?
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Well, it used to be that the government was very happy with the well street system because they always got a cut of that printed up money too. However, that money not only financed government pork, but also led to massive bubbles and massive mis-allocations of capital on wall street, rewarding extremely unproductive and corrupt activities … which wasn’t a problem till the crashes started cutting into the government’s revenue too.
So now their goal is to keep printed up money from causing massive mis-allocations on wall street, while not shutting off the flow of printed up money to them. They intend to perform this “miracle” via regulation of the financial sector. God help us.
As an active investor, it is clear that very few people really understand the markets. If I was to sum up the current problems it all comes down to leverage. For example, if you buy into a company and continue to take large positions in it, you will push the price of the stock up. However, you ability to influence the price in the long run is in direct relationship to the amount of money you have. On the other hand you can purchase a covered put option on a stock and depending on your cash, you can influence the price downward, but again you are limited to your cash and the shares available to cover that position. Also, as you increase you put position, the cost of the put goes up as the number of shares available to cover goes down.
Here is the problem, naked shorts! It is a short position without aquiring shares to cover. This gives the investor an open book to short the hell out of a stock without any market restrictions and it is that movement that causes the price of the stock to fall without limits.
Now, don’t take me the wrong way, options are a good tool and do benefit the economy. If I have a target price I want to sell a stock I own, I will sell a call option and make some money now while the stock moves up. On the other side, if I have a target price that I want to buy a stock, I will sell a put option. The key here is I am always a seller of options, never a buyer, and always restricted by the number of shares I own or the cash to buy.
Again, the problem is leverage!
Increased leverage is the goal of monetary policy. See Bernanke’s academic work on the “credit view.” Investors often know very little about economics and misunderstand the actual process, that is, they fail to see the channels and the transmission mechanisms.
The problems isn’t naked shorts. The problem is financial firms not living up to their fiduciary responsibilities. It’s one thing to make a bad bet with your own resources due to lack of knowledge or luck. It’s quite another to knowingly make series of bad bets with other people’s money while pretending everything is perfect in order to increase personal gain.
The system moves too fast for this to be effective, the damage is done. Electronic trading allows us cause the market to move beyond normal limits and when someone can place an order without any restrictions, they could move markets and cause people to take losses. All you have to do is look what happen today around 2:30! This move had nothing to do with knowledge or luck.
Because other exchanges can trade stocks on the NYSE, they were able to blow through the safegaurds the NYSE has in place. Rules need to be in place and applied to all in order to prevent this from happening whether it was caused by a Citi employee placing a billion sell when he meant to place a million, or a hedge fund that is knowingly placing an order to move the electronic market.
As a small player in the market I don’t hide my head in the sand and say that no one can manipulate the markets, I realize that hedge funds do and you need to recoginize the signs and profit from them.
The end result of these abuses will be regulations.
Great column.I recently commented on Matthew’s comments here: http://bit.ly/asptr3
Even if capitalists produce nothing, socialists produce less!
If capitalists did produce nothing, there would be nothing for the socialists to consume or redistribute. On the other hand, it is true that if you give money to Wall Street, it will invest it overseas, where businesses are not subject to stifling regulations and taxes.
That’s the basic contradiction in statements like Matthews’ and other anti-capitalists – socialists want their cake and eat it, too.
Matthews should be frustrated at the lack of pure capitalism, but little does he know we’ve never had that in our history. I would like to suggest that if you had removed gov’t intervention in business than much of the current “old money” in this country would never have exhisted. They just couldn’t make a buck without the gov’t subsidy* or turning of a blind eye (Cantor Fitzgerald, GS front running). A current example would be W. Buffet’s stake in GS or people which made billions on the previously illegal CDS.
* Can be defined many ways such as Moral Hazard, Implicit Gov’t backing, Farm Subsidies, preferential tax treatment, etc.
“The good news is that Matthews merely expresses an uniformed opinion, one that likely has no real consequence.”
DW, I hope you’re right, but I doubt it. Uninformed opinions expressed by pundits like Matthews (and a host of others) are crucial to maintaining public opinion in favor of the further intervention that Obama (as well as W and a host of others) advocates. Even an accomplished demagogue like Obama can only go as far as public opinion allows.
What does Matthews expect? The government-banking complex creates (If printed the weight would be measured in TONS.) money and in a round about way gives it to the banking system. The banks take this and lend it under the conditions that the central bank and government are covering their losses. People jump into this mess and attempt to arbitrage the system and make a few billion bucks the easy way by mutating these loans into other securities. These are called investment banks. These mutant securities are extremely risky and absolutely tied to small changes in the default rates and the interest rates. So some fail but the central bank and government jumps in to save the investment banks as well. So what happens? Banks make worse loans, investment banks make riskier securities and tax payers get stuck with the bill ultimately.
But does Matthews blame the real culprit the creator of the money, no he blames the people making money off of their stupidity.
The amusing part is that Matthews wants government to keep the investment banks from mutating the bad loans of the banks into other securities. But the money already exists!!! So the banks can either sit on it or lend it. So Matthews who loves the Keynesian policies of government hates the human reactions to these Keynesian policies. But without the investment banks and their reactions, the regular banks will not be able to get rid of the risk of bad loans so they will just continue to pile up excess reserves. Eventually the government will force the banks will lend this money by guaranteeing all the risky loans (AGAIN) only this time without the rest of the market to buy off some of this risk. The results predictably will be higher inflation and a much larger tab for the tax payers to pickup in the future.
Reading this article, I really have to ask myself, just what has Chris Matthews produced?
Capitalists produce something alright, the economic mess we are currently in (according to William Fisher). In a piece from The Public Record, Bill, squarely places the crux of blame upon the “private sector” (adorning this with quotations as Bill’s definition seems to imply he’s never dealt positively with such a sector).
“What I hear are old canards like abolishing the Department of Education. Or cutting taxes and doing away with the IRS. Or vaporizing the National Endowment for the Arts. Or privatizing Social Security and Medicare – because the private sector has done such a splendid job of leading our economy off a cliff.” -William Fisher
Nice huh? I thought so, well, atleast to validate that someone shares Chris Matthews opinion. And here is the link, (I say this with the utmost sincerity) enjoy!
http://pubrecord.org/commentary/7595/think-just-bumper-sticker/
Very interesting indeed! Just read that article and it was a great read (all articles on Mises seem to be). Anyway, many thanks and all the very best to you.
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