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Source link: http://archive.mises.org/13382/turning-bread-into-stones/

Turning Bread into Stones

July 26, 2010 by

As Kevin Dowd and Martin Hutchinson chronicle in their wonderful new book, there’s been plenty of government regulation lately, and as regulations grow, financial booms and panics grow in step. FULL ARTICLE by Doug French

{ 13 comments }

brian July 26, 2010 at 8:45 am

“CDS owners jumped on this opportunity to profit by the new financial nonsense and the CDS market grew to $62 billion at its peak, while the entire market for home mortgages was only $12 trillion.”

should be $62 trillion, not billion.

Ohhh Henry July 26, 2010 at 9:25 am

Unfortunately, the Keynesians in the Obama White House likely aren’t asking for Messrs. Dowd and Hutchinson’s phone numbers: their program is to stimulate, regulate, and keep the zero rate.

You can say that again. Obama is clueless – but even if he knew what he was doing, he apparently attended a lot of leftist college seminars in his salad days in which “crashing” the capitalist system was praised as the best strategy for advancing socialism. Bernanke is married to his fantasy of escaping the laws of economics through the printing press. Obama advisers like Rahm Emanuel, plus the leaders of congress are a bunch of … [obscenity redacted] … who have detected in the growing chaos the sweet smell of opportunity.

Tom F July 26, 2010 at 9:35 am

So sad when Marxists are in power…

R. Thomas Harding July 26, 2010 at 11:20 am

In my (not too) humble opinion, credit default insurance (and that’s what it was originally) was a legitimate financial instrument that became another ‘trading toy’ on Wall Street in the form of CDSs and when SEC winked at the principal of it and gave them free rein to amass massive commissions on a device which should have been controlled by insurance laws, that signaled the end of any control of Wall Street. The new Financial Reform (joke) bill did nothing to control the damage form CDSs and will only react to more financial damage from these toys in the futre.

J. Murray July 26, 2010 at 1:27 pm

The whole focus on non-revenue generating financial products is a huge government push. People would be highly unlikely to even by stocks or CDSs had it not been for the gigantic tax benefit granted to that kind of activity. Buying the share of a company doesn’t exactly have any real benefits to our economic system. I don’t see why zero-sum game gambling houses like the DOW and NASDAQ have been given this massive economic priority by our government officials. Sure, IPOs actually generate something for business use, but any trade beyond that point has little economic value, even if you manage to find a share in the shrinking pool of stock that still pays out dividends. While the income tax system should be abolished, a change in the tax law that removes the sale of stock and sale of bonds (not the interest paid) from the coveted capital gains and into general income would put the breaks on government driven speculation. Stock and bond trading (again, not the payment of bond interest and repayment of par) should be taxed the same way as getting a lucky break in Vegas as it amounts to the same thing in the end.

Hoping someone will come along and buy a product you just purchased for a higher price than you did on some non-relevant factors completely independent of you purchasing or selling that share of stock is an amazingly ridiculous investment strategy. The tax treatment of stocks and CDSs have likely contributed significantly to the abuse and over reliance on the systems which, in a properly functioning economy, would unlikely be much more than an odd little game the super-wealthy play to keep from being bored.

greg July 26, 2010 at 2:11 pm

There is a difference between short term and long term capital gains and losses. High frequency trades are short term and taxed at your regular income tax rate, no special treatment.

Bennet Cecil July 26, 2010 at 1:49 pm

Both political parties want government control of the economy, central banking and perpetual deficit spending. The republican party is democrat light and will only change if primaries produce more libertarian candidates. Americans are reacting now to high unemployment, but if the economy revives the democrats might maintain control. Low interest rates and the sluggish economy are masking the money inflation created by the Fed.

High interest rates or a currency crisis will cause political change. Stagflation is slower but easier for the public to understand. A currency crisis with a run on the dollar would precipitate real change and a full blown depression.

J. Murray July 26, 2010 at 1:59 pm

It depends on who you ask, but we have technically been in a depression since 2000. Adjusted for inflation, the US economy has declined every year, with the exception of a tiny jump in 2004. Of course, I’m using those ShadowStat numbers not the bogus BLS creation that conveniently picks the least inflated products as substitutes when they see fit to do so.

greg July 26, 2010 at 2:26 pm

You are missing the reality of the business, it isn’t about the amount of gains or losses, it is about the volume of trades. Investments have evolved complex combinations that increase the volume of trades in order to protect your investments on both sides of the trade. Instead of buying a stock and holding it for 12 months, you are now buying and selling calls and puts resulting in 4 times the number of trades for that single stock. This works great as long as all parties can cover their options, but when they can’t, the whole system falls apart. In any case, the brokers have increase their income as the number of trades increased.

But the firms that handled the transactions made their money no matter what happens. Kind of like a Realtor that sold you your last house. They took a commission and it is not any of their concern that you have lost 40% in value. It is in their best interest to have people buy and sell homes.

Financial Regulation will not effect the actions of these people handling the purchase and sales of assets. The market will find a way to work the system to their benefit no matter how many pages they publish. And the business cycle will live on as long as business is being conducted.

HL July 26, 2010 at 8:23 pm

The authors also believe the destigmatization of bankruptcy has caused Americans to overborrow, lowering savings rates along with ethical standards.

What is wrong with bankruptcy? Sure, I admit the code is heavily biased towards creditors and denies many worthy debtors a true “fresh start,” but this does not diminish the importance of orderly liquidation nonetheless. I think everyone should try the cleansing catharsis offered by the code. If I was a bankruptcy judge, I would splash a little water on each debtor upon discharge/confirmation.

Matthew Swaringen July 26, 2010 at 8:42 pm

Yeah, all those debtors who were forced to buy things with a gun pointed to their head…

Obviously, creditors made their own mistakes by loaning to those without proper underwriting, but provided the debtor never intended to repay his obligation with his own work (planned to flip the house for profit/etc., as many did) he was taking the same kind of risk.

I guess I can feel some pity for those who didn’t understand what variable APR meant, or who never considered saving a necessity because the government and Keynesian’s talk about how evil it is (yes, I realize that Keynesians would say that they only mean saving is bad in aggregation, but for those who don’t understand variable APR I doubt this detail is retained).

James Morgan - Puritan Financial Advisor November 10, 2010 at 7:29 am

As Kevin Dowd and Martin Hutchinson chronicle in their wonderful new book, there’s been plenty of government regulation lately.

Locksmith Bournemouth November 27, 2010 at 6:13 pm

I get echos from this book of what has been happening in the UK. I think that all these things need to be understood from a bigger perspective and so should be tolerated more. Over regulation not only stifles people, it also gives too much power to the small minded bureaucrats. Painful!

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