The Evil that is Day Trading

Gelare · Post by **Gelare** » Fri Mar 13, 2009 7:59 am

FrankTrollman wrote:[*] The Stock Market? How about we eliminate it? All those guys who make their money facilitating gambling on the moment by moment perceived value of companies to other gamblers, how about we classify that shit as the anti-productive gambling that it is and just eliminate it from the economy altogether? Companies need to capitalize sure, but those really are long term investments, there's no reason for the American economy to support these short term pillagers.

-Username17

You know, Frank, I've seen you mention that idea before, and I've been kinda wondering about it idly for a while. You make it sound so completely obvious that the stock market is evil and bad, and when you call it the world's very biggest casino, where people churn money and effort around without actually producing a damn thing, it seems hard to disagree.

So I'm sitting here, somewhat sympathetic, and thinking to myself: why haven't I heard of this before? I won't buy for a second that it's some massive right wing conspiracy, that's just nonsense. Generation upon generation of highly educated person has had the chance to call out the stock market like you do, but to my knowledge precious few have, so my next question is: what does the stock market do that makes it such an important and massive institution? I mean, after the initial issuing of stock, the companies don't get any money from people churning shares around, so why does it exist? My guess so far is that it's a source of investment and liquidity, so that people who have one can trade and get the other. That is a very important and worthy goal.

Now don't ask me about the short selling and buying on margin and so forth, I've got nothing there, but if people have shares of x and want to trade them for cash in the amount of y, what justification do you give, exactly, for depriving them of their ability to do so?

Username17 · Post by **Username17** » Fri Mar 13, 2009 8:15 am

When people own stock, they theoretically own a portion of a company. And since a company is pretty much a capital asset it stands to reason that it would be something that could be bought and sold. But the fact is that stock really doesn't have very much to do with owning corporations any more. With the exception of very large stock piles of, well stocks (that magically allow you to instantly take over the company and take control of all its assets, something that is also bad for the economy in the form of corporate raiding), stock ownership doesn't really give one any meaningful input into the workings of the company. It's essentially just a bond, or even one of those CD bank accounts.

Which means that when someone sells it to someone else, they are trading in money. Person A is selling a bank account to Person B, when neither one of them actually knows what the exact contents of the bank account are. That's bad. Actually it's very very bad because the only real "use" it has is when one person or the other has access to asymmetric information and is therefore exploiting the other, or when one person or the other is using the uncertainty of value as a way to mask their own earnings: a process of reducing transparency in order to defraud the government called "money laundering."

If you print a separate currency and issue it and pay people in it within the confines of a sovereign nation, you are a criminal. People issuing stock for the purposes of trading should be treated no differently. If you want to invest in corporations you should have the opportunity to do so. But taking one's investment out should be a pact between you and the corporation, not between you and some third party purchasing the rights to your money. Bonds should not traded and sold. That activity serves no purpose save to reduce the transparency and legitimacy of our economic system.

-Username17

Gelare · Post by **Gelare** » Fri Mar 13, 2009 4:23 pm

FrankTrollman wrote:It's essentially just a bond, or even one of those CD bank accounts.

Which means that when someone sells it to someone else, they are trading in money. Person A is selling a bank account to Person B, when neither one of them actually knows what the exact contents of the bank account are. That's bad. Actually it's very very bad because the only real "use" it has is when one person or the other has access to asymmetric information and is therefore exploiting the other, or when one person or the other is using the uncertainty of value as a way to mask their own earnings: a process of reducing transparency in order to defraud the government called "money laundering."

-Username17

Now hang on, I think it makes perfect sense when you say that stocks are like bonds or CDs, and that when people trade them they are indeed trading in money, but you failed to mention that this is an extremely important and useful function in an economy. Because, of course, people aren't trading their ten dollar bill for your ten dollar bill, they're trading their long-term investment, which is currently tied up, for your short-term liquidity, which they happen to need for whatever reason. The trades don't have to involve asymmetry of any kind; even if both sides know full well the exact value of the stock, there are still gains from being allowed to gain access to the money tied up in one's stock investments. It's just like trading treasuries; if I don't want to wait for my 30-year bond to mature, I should jolly well be allowed to sell it off to someone else, and if I can't, that's actually a Very Bad Thing (TM), economically speaking.

Username17 · Post by **Username17** » Fri Mar 13, 2009 5:56 pm

No it isn't a very bad thing. The very bad thing is the part where people don't know who has all the fucking bonds and the result is that a lot of money gets laundered. A long term investment is a long term investment, and people should be able to count on them. If people are trading them back and forth at a dizzying rate, the long term investments can't be counted on because the lack of transparency created by trading the ownership of debt makes the long term future inherently unknowable.

75 year old people are left with 401ks that are worth nothing. Not because they did anything fancy or anything they should not have done, but because the inherent instability brought about by allowing people to gamble on the short term value of people's debts eventually collapsed when too many people wanted their money back simultaneously and the web broke. And the thing is that this is an inevitable outcome of reselling debt. A debt is held by two people the person who owes the debt and the person to whom the debt is owed. There are three parties that need to know of this debt: the debtor, the collector, and the Law. Any selling or reselling of that debt has to be done with the full knowledge of all three parties.

Otherwise this happens:

See, the koolaid we've all been asked to drink is the idea that the ability to transfer capital all to hell and gone is always good. It's not. While I think we can all agree that the economy would work faster and better if actual payments arrived as soon as they were sent, there's legitimately nothing gained by having the rights to the contents of a shipping container transferred twenty times before the box hits port.

The economy isn't just money moving around, and the current economic crisis is pretty much entirely attributable to people treating it like it was. The economy is money moving around in exchange for goods and services. Not the idea of goods and services, not future goods and services that may or may not exist, but actual actions and things. It takes 6 weeks for a container ship to make the journey between Los Angeles and Antwerp. And if a million dollars of goods on it get sold and resold fifty times in the interim, nothing has changed. The way that Wall Street has been tracking this stuff, they treat that kind of crap as if 50 million dollars got added to GDP, but the real change in GDP is zero. There are real goods on a real ship, but if ownership is transferred, nothing has changed.

Men in suits chasing paper means fuck all unless and until someone actually takes that paper and uses it to pay a real person to actually make, clean, cook, repair, or in some other way directly affect a real person or thing. Debt reselling does not improve the economy, it confuses the economy. It makes con artists rich and allows criminals to pretend to be poor. It would be better for everyone if that crap stopped happening altogether.

-Username17

TarkisFlux · Post by **TarkisFlux** » Fri Mar 13, 2009 7:04 pm

Gelare, you could accomplish the same thing by being able to sell it back to the company, who could then sell that piece of ownership to whoever they wanted. Ownership rolls, debt contracts, and wealth transfers are more transparent and much harder to hide. As long as there is some enforced process to purchase or redemption of debt or ownership stake in a company with the company itself, you still get to trade your long term profits for short term liquidity (assuming the company is liquid itself, like one would expect of an investment). We get to avoid the entire secondary market bullshit, and the speculation bullshit.

Frank, your example is weird. Where I work, we routinely transfer the contents of shipping containers before they hit port. We sell the individual pieces in to customers, who can do whatever they want with it because they own it at that point. Are you railing against the transfer of ownership, which in that example actually seems synonymous with the future transfer of goods, or bullshit accounting practices that fuck up the economy? Are you suggesting that we treat ownership stakes or debt of companies as fundamentally different than other goods and services that we own or pay for? Cause we let people flip homes and cars and collectibles and shit, why should pieces of companies be different?

Gelare · Post by **Gelare** » Fri Mar 13, 2009 7:56 pm

TarkisFlux wrote:Gelare, you could accomplish the same thing by being able to sell it back to the company, who could then sell that piece of ownership to whoever they wanted. Ownership rolls, debt contracts, and wealth transfers are more transparent and much harder to hide. As long as there is some enforced process to purchase or redemption of debt or ownership stake in a company with the company itself, you still get to trade your long term profits for short term liquidity (assuming the company is liquid itself, like one would expect of an investment). We get to avoid the entire secondary market bullshit, and the speculation bullshit.

I don't honestly care who you sell it to, it can be to some random person or back to the company itself, as long as you can sell it. Of course, if you could only sell it back to the company, I have no idea how you'd decide how much you'd sell it back for. And, of course, if a company is forced to buy up bunches of its debt because people are panicking and want liquidity, that can totally wreck their financial situation. All in all, an open market seems like the kind of way to handle that situation: it determines a price, the stock-issuing company doesn't have to worry that all of its debts will be suddenly called in, etc.

Frank, I'll be honest, I don't entirely understand what you were getting at just now. Let's talk examples. When the U.S. government issues a 30-year bond, someone - me, for example - buys that bond. The government now has my money, and the clock starts ticking and I get my coupons. Now let's say, just suppose, that sometime in the next thirty fucking years, I find myself in need of some quick cash that I don't have on hand. Seems reasonable. I should darn well be able to sell off the bond, which has an easily calculable value, for whatever purpose I want - starting a business, buying a car, paying off debts, whatever - and the way to do that is for me to go to market and find a buyer. If I can't do that, I can get in real financial trouble. The stock market as it is currently serves a lot of other purposes too, including crazy gambles all over the place, but you need - you really need - to have some system whereby people can trade long-term investments for short-term cash.

Username17 · Post by **Username17** » Fri Mar 13, 2009 8:51 pm

People should not be able to buy and sell my debt. It's a debt. I know who I owe it to, and who I owe it to. If that person or institution sells it to someone else, they are selling something that is mine to a third party. I suddenly don't know who I'm supposed to be repaying my debt to. This creates windows for fraud and destroys the transparency of the system.

If you want to trade off your long term growth potential of a bond, you are welcome to issue your own bond and use the fact that you are a bond holder as collateral to make people take your bond seriously. But you cannot sell the bond itself, because the bond is a contract between you and the bond issuer and the bond issuer didn't fucking sign a contract with whoever you are trying to sell the bond to.

If contracts mean anything, they mean that you cannot alter the terms of them without the agreement and knowledge of both parties.

The point on the shipping container is not that people should be unable to purchase the goods that are being shipped while they are en route. But that any purchasing of those goods does represent any actual economic growth until those goods are delivered. That is the core shell game that has brought our world's economy to its knees. The idea that the financial transactions of gambling on the future of potential production represent actual economic activity that should be included in the real production figures. And then used as collateral against loans.

Dollars aren't real. They are just abstract concepts that can be exchanged for goods and services. And the economy isn't dollars, it's goods and services. Dollars moving around is important, because it sends goods and services where they are desired and makes room for the creation of new goods and services. But dollars moving around is not itself an economy, and we have to stop treating it as if it was.

Financial transactions need to be secure, they need to be transparent, and they need to be fast. But they aren't worth anything in and of themselves. And that means that literally every single part of the economic system that encourages the empty transfers of financial numbers rather than the exchange of finances for actual goods and services is bad for the economy. Every single one of these empty transactions is money that is not being exchanged for goods and services. It is no different from money that is caught in a transfer hold. It's money that is not being used as demand and cannot be used as demand.

In my backward nation of Czech Republic, it takes 3 business days to do a bank transfer, which is how I pay my rent. During the three days my money is in limbo it cannot be spent by me, and it cannot be spent by my landlord. The potential economy has shrunk by my rent receipt for three whole days during which my crowns are doing nothing. And that's bad for the economy. And every single dollar tied up in derivative trading is just as lost to the real economy.

-Username17

Starmaker · Post by **Starmaker** » Sat Mar 14, 2009 4:53 pm

Authored by avanturist of auto.ru, translated by that guy, typos corrected by yours truly.

The United States of Absinthe, or The Origins of the Crisis.

"...I will explain to you in very simple terms what was the driving force behind the crisis.

Imagine that we - that is, me, you, and Chronoscopist (auto.ru forum regular -- SM) - were flying across the Pacific. During the flight we had too much absinthe, got drunk, started a fight and in the process tore the toilet door off its hinges. As a result, they threw us off the plane over into the ocean through the emergency exit. Fortunately, not too far from the landing spot there was a small unnamed Polynesian island.

When we reached the shore, we had a brief discussion and decided to treat the island as a new independent state that we called the United States of Absinthe (USA for short).

It goes without saying that when they were throwing us off the plane they did not give us our baggage. So, all tangible and intangible assets that we had consisted of only the toilet door that you'd managed to swipe. Moreover, despite the absinthe, you happened to be quite thrifty, since you had discovered in your wallet a $100 bill. Therefore, in our USA we had non-financial assets, that is the door, as well as financial assets, consisting of all of our money - the $100 bill. These were also all of our savings. Since we have nothing else, one could say that we had material goods (the door), backed by the money supply in the amount of $100. In other words, our door cost $100.

After we had sobered up a little, we decided that we should somehow settle down. It turned out that the quickest of us all was Chronoscopist who announced that he was going to establish a bank and ready to accept any money that the people of the USA may have into savings accounts at the annual interest rate of 3%; the guy simply could not sit idle.

You gave him $100, and he wrote in his notebook under the title "Liabilities -> Deposits": $100. But I didn't want to be a fool, - I didn't investigate financial pyramids and Ponzi schemes for so long for nothing, - I did know how to take both the door and the $100. I offered to lend the $100 to me with a 5% annual interest rate. Then I tore off a page from my notebook where I wrote: "Financial Obligation", and below it: "$100, 5% per annum". You felt that you got lucky, took the money from Chronoscopist who got really upset and gave it to me in exchange for the "Financial Obligation". I took the $100 and deposited it back to the bank, which cheered up Chronoscopist.

This could have been the end of our financial operation, after which we could have turned to something useful, for example, - looking for food. But you know me - I'm a restless financial genius, I'm not interested in diving for oysters or climbing the palm trees in search for coconuts. Instead, I went for a walk around our island, which was 50 steps long and 30 steps wide, and in the process I thought of a fantastic financial combination. I came to you and proposed to make an additional 1% out of thin air. The idea was to apply for a loan with 4% interest rate at the Chronoscopist Bank and purchase one "Financial Obligation" with 5% interest rate from me.

Following this operation, I immediately created a second "Financial Obligation" (simply by writing on another page from my notebook: "Financial Obligation", and below it: "$100, 5% per annum") and waved it in front of you. You didn't think long and ran to the Chronoscopist Bank and borrowed $100 using the first "Financial Obligation" as collateral. The money was there, for I deposited the $100 to the Chronoscopist Bank. Next, you gave me the borrowed $100 and stuffed the second "Financial Obligation" into your wallet. You became the owner of two "Financial Obligations" of mine for $200 total, while I deposited back the $100 to the Chronoscopist Bank, where I accumulated $200. Chronoscopist couldn't be happier - the lending/borrowing business began!

You think that was it? Fat chance, - I had already written up a third "Financial Obligation" for you. You ran to the Chronoscopist Bank and borrowed more money using the second "Financial Obligation" as collateral. Towards the evening, having run back and forth with the $100 bill and used up all the pages from my notebook, we had the following situation. You had "Financial Obligations" of mine worth $5000, while I had $5000 deposited into the Chronoscopist Bank. At that moment I felt it was the time to take over your door, and so I offered to buy it from you for $100. But you didn't wish to sell it so cheaply: there was only one door on the island. So you asked $1000 for it. Well, what could I do? There was only one door, so $1000 sounded like a fair price. Besides I had $5000 in the Chronoscopist Bank. So, I used up the last page from my notebook to authorize a transaction of $1000 from my account to yours and took your door.

If we let an American economist with a Harvard diploma analyze our transactions he or she would inform us that our USA had material goods (the door) worth $1000 and financial assets in the amount of $10000 in the form of "Financial Obligations" and bank deposits. Therefore the tangible assets had increased in value 55 times in the course of one day. On the other hand, someone less sophisticated and educated would say that we were three idiots, since we had one door and $100 at the beginning and nothing had changed after all those "financial transactions", - moreover, we should have spent our time looking for coconuts instead of running back and forth with pages torn off my notebook. You decide who is right.

Now you understand what is behind "real estate prices are going up", - be it in the USA, Japan or Russia.

Addendum by that guy.

If we continued our story and followed what happened afterwards, we would see that when it came to paying back the loans issued by the Chronoscopist Bank, it would turn out that you didn't have any liquid assets (cash, that is) and so couldn't pay them back. As a result all of the "Financial Obligations" used as collateral would have been taken over by the Chronoscopist Bank. However, since I also had no money, Chronoscopist got himself into real trouble, since all the "Financial Obligations" would be worth nothing because I defaulted on my obligations. In turn, the door would have been taken by the Chronoscopist Bank (unless it had already been used up as firewood). As a result we would have had the Island Financial Crisis with the only outcome that the only material asset on the island would have been taken away from its owner.

In conclusion, I'd like to point out that the GDP of USAbsinthe has grown by the end of the day from $0 to $1000. Moreover, if I managed to sell the door to Chronoscopist for $2000 the next day, the GDP of the USA would have been $3000, that is the growth of 200% overnight! And all this while not a single coconut has been gathered...

Crissa · Post by **Crissa** » Sun Mar 15, 2009 7:51 am

Also, you are not allowed to transfer US bonds to someone who isn't on their face.

-Crissa

Grek · Post by **Grek** » Mon Mar 16, 2009 2:28 am

For the selling bonds deal, I don't understand why that's not good.

Let's say it is January 1st, 2000. You purchase a 100$ bond which will mature into 150$ in 30 years. They issue you a peice of paper saying "This bond may be redeemed by the bearer for 150$ on or after January 1st, 2030." You have basically purchased 50$ worth of whatever it is the issuer of the bond plans to be doing to make money over the next 30 years. The issuer of the bond has to make a net profit of 50$ over the next 30 years so they can repay whoever cashes in the bond. It doesn't actually matter who ends up redeeming the bond for the 150$; they will have to either spend the 100$ to produce 150$ or use it to pay someone else that can, regardless of who they end up paying in 30 years.

Crissa · Post by **Crissa** » Mon Mar 16, 2009 5:56 am

It's not, in itself, bad to buy or sell bonds. They are used to break up really really big things into chunks that the rest of the market can interact with.

What becomes bad is the faith that those bonds will be repaid. Eventually, if Jack can't pay Jill, Jill can't pay Joe and Joe can't employ Jack. And so this multiplier can be for good or ill.

Another way to look at it is that if you owe your dentist some money, and they sell the debt to someone else... How do you 'prove' that you've paid the money at any point? Who do you prove it to? Why does some nth person saying you owe them money for some debt they bought have the right to see your dental records that 'prove' you paid it in the first place?

-Crissa

Grek · Post by **Grek** » Mon Mar 16, 2009 6:37 am

People do not normally issue bonds to their dentist in exchange for a root canal.

If they did accept bonds as payment, it would work out because they would have a physical object representing the debt that must be returned to get the money owed. You just pay out to whoever returns with the bond coupon.

Username17 · Post by **Username17** » Mon Mar 16, 2009 8:11 am

Grek wrote:People do not normally issue bonds to their dentist in exchange for a root canal.

Yes they do. Root canals in the United States are not covered by national health insurance, which means that they are quite expensive and often time-critical procedure. People pay some fraction of the total cost immediately (whatever they can pay at the time, which may be zero dollars depending upon the circumstances of the root canal), and they agree to pay the rest at some later point in the future. That agreement to pay is what a bond is. It happens every day. Bonds as payment for dentistry is completely standard practice.

If they did accept bonds as payment, it would work out because they would have a physical object representing the debt that must be returned to get the money owed. You just pay out to whoever returns with the bond coupon.

Lol wut?

Bonds are not physical objects. Bonds are agreements between two entities for one to pay a certain amount of money from one to the other at some point in the future. Bonds are not normally collected by having the holder take the clay tablet over to the issuer's house, exchanging it for the promised sheep and then smashing the clay - that went out of style with the fall of Sumeria.

Very trivially, you can't sell someone's agreement to a third party without their agreement and still have it really mean anything. And that's the problem with this reselling of bonds. Bonds are not money. They are not physical objects, they are contracts. And unless you sign away power of attorney with your issuance of a bond, you very specifically can't make a contract with some third party trying to purchase the holding of your bonds unless you actually talk to them at some point - at which point you're just issuing a new bond.

Debt purchasing is a criminal enterprise. Not just because it takes away the debtor's rights to understand their own debts, but because it takes away the ability of anyone to understand the debt structure of the financial system. And when the financial system is subject to a lack of transparency, it is subject to booms, busts, and fraudulent enterprises. It's genuinely bad. It undermines the meaning of currency, it undermines the meaning of contracts, and it undermines the fairness of taxation.

I shouldn't have to tell you why people printing their own shit and treating it like money is bad.

-Username17

Grek · Post by **Grek** » Tue Mar 17, 2009 8:23 am

I think we are using two different definitions of the word "bond". I am using the word bond in the very limited sense of a war bond or a bearer bond, ie. a certificate which the owner can redeem for a price higher than it's purchace price after some specified date. Basically, yes, a clay tablet saying the issuer owes you three sheep. Or a peice of paper saying the issuer owes you 150$.

That sort of arangement only works if the creditor goes to the debtor to collect rather than the debtor going to the creditor to pay. In the case of a dentist doing dental work on credit (where the patient pays at some point after the operation), the patient(the debtor) normally goes to their their dentist(the creditor) and pays them, so giving your dentist a bond certificate and asking them to come by your house and cash it in next Friday would not be appropriate at all.

If for some strange reason your dentist did accept bond certificates as payment for a root canal, it would be fine if your dentist used the bond to pay his mechanic for a car tune up and told the mechanic to come to your house next friday with the certificate and ask for money. But, for obvious reasons, neither the dentist nor the mechanic is going to agree to that sort of nonsense. Instead you use checks.

Let's say WWIII breaks out and the US government issues some bonds that are issued at 1000$ and redeemable for 1500$ so they can pay for the war. It would not be ok if the US government to agreed to give China 1500$ per bond issued and announce that people with bonds now have to fly to China if they want their money back. But Mr. Bob who owes a bond can sell that bond to Mr. Jones because both of them still know where to go to turn in the bond (as that information is written on the bond) and the US government knows it's a real bond (because it has a serial number that matches the serial number of the bond they issued).

If you're talking about something else, than that would be why I have failed to understand you and I am very sorry about that because it's likely my fault.

Username17 · Post by **Username17** » Tue Mar 17, 2009 8:53 am

Grek wrote:I think we are using two different definitions of the word "bond". I am using the word bond in the very limited sense of a war bond or a bearer bond

Bearer Bonds are a criminal enterprise and should be shut down like the Turks, Lichtenstein, and Jersey. They serve no purpose in the economy other than to launder money. Bearer Bonds are a method to make wealth disappear and then reappear elsewhere without intervening oversight.

If you print a Bearer Bond you should go to jail. If you buy a Bearer Bond you should go to jail. If you cash a Bearer Bond you should go to jail. No exceptions.

-Username17

Koumei · Post by **Koumei** » Tue Mar 17, 2009 10:19 am

FrankTrollman wrote: Bearer Bonds are a criminal enterprise and should be shut down like the Turks, Lichtenstein, and Jersey.

I'm suddenly feeling very small in the brain here. What is a Bearer Bond? Er, as in, what's the spin they'd put on it rather than "money disappears, it then reappears later somewhere else and no-one can keep track of it."?

And for that matter, the only problems I know of with Lichtenstein would be "People were using its banks for tax evasion, much like Switzerland" (until they were recently told, possibly at gunpoint, to stop the secrecy). How about the other two?

Username17 · Post by **Username17** » Tue Mar 17, 2009 10:40 am

Koumei wrote:I'm suddenly feeling very small in the brain here. What is a Bearer Bond? Er, as in, what's the spin they'd put on it rather than "money disappears, it then reappears later somewhere else and no-one can keep track of it."?

A Bearer Bond is essentially just like cash. It's a promise by a company or government to pay a specific amount of money on or past a certain date to whoever happens to be holding a specific piece of paper when it is handed in. What happens in between the issuance of the bond and its eventual cashing is between you and God.

The flaws in this system are obvious. Since the bond is essentially valueless, since it's just a promise rather than an accessible account, it can be sold to whoever for whatever price. Indeed, by their nature a Bearer Bond is not even tracked.

So let's say that I'm a Mafia Don and I want to get rich "legally" very quickly. I arrange to "purchase" some bearer bonds worth a few million dollars for say a dollar. That's perfectly legal, because there is no value on the Bonds themselves. Then I turn around and drop a few million bucks into the seller's offshore bank account. Now I have a few million in clean money that I can spend in-country and the other guy has a few million in shadow currency that he can only spend in Thailand, but he also posted a huge investment loss so he doesn't need to pay taxes on a bunch of his legitimate earnings because the red ink cancels the black.

That's an extreme example that would probably raise flags with the IRS, but there's nothing actually illegal about the money that I, the Mafia Don just popped into existence. So even if audited, I could still probably account for my mansion and my fancy cars. Much simpler and less egregious acts of monetary vandalism are done with bearer bonds every day. And the damn things serve no other purpose in the economy.

-Username17

CatharzGodfoot · Post by **CatharzGodfoot** » Tue Mar 17, 2009 9:52 pm

Wow frank, you're actually starting to convince me. Where can I find a smart, well-spoken Libertarian radical to restore my faith in the stock market system?

Lago PARANOIA · Post by **Lago PARANOIA** » Tue Mar 17, 2009 10:11 pm

Catharz, if you want to read a lot of the stronger arguments of libertarianism then look up the name 'Mike Huben' up on the Internet and read his FAQ.

*snerk*

Crissa · Post by **Crissa** » Thu Mar 19, 2009 5:35 am

Unfortunately, Bearer Bonds are like post-dated checks and the free-market system is addicted to them. For them and theirs with money, not for us, of course.

Of course, it's pretty easy to control cashier's checks, but that leads to banks like BofA's subsidiaries doing things like finagling it so that no other bank will do business with your name... It's illegal, of course, but one of those things they do because they can get away with it. At least, they did until class-action liability brought them down and BofA had to fold them.

-Crissa

cthulhu · Post by **cthulhu** » Sun Mar 22, 2009 12:39 pm

Starmaker wrote: If we continued our story and followed what happened afterwards, we would see that when it came to paying back the loans issued by the Chronoscopist Bank, it would turn out that you didn't have any liquid assets (cash, that is) and so couldn't pay them back. As a result all of the "Financial Obligations" used as collateral would have been taken over by the Chronoscopist Bank. However, since I also had no money, Chronoscopist got himself into real trouble, since all the "Financial Obligations" would be worth nothing because I defaulted on my obligations. In turn, the door would have been taken by the Chronoscopist Bank (unless it had already been used up as firewood). As a result we would have had the Island Financial Crisis with the only outcome that the only material asset on the island would have been taken away from its owner.

The problem here is obvious, it is just a refusal to recongise what you're actually trading in this sort of transaction, which is risk

If there are lots of people who want steady state returns at 5%, and lots of people who have risky business plans that promise 20% returns, facilitating both of those people is actually a valuable service - what you accept is risk that would otherwise be experienced by the people who want risk free 5% returns. You accept the risk, and in return make some money.

The problem is that the customers making the 5% have no way of telling if you have the capacity to accept that risk - which is why regulation is important.

Your example turns into a disaster for the same reason the US finacial industry did. There needs to be someone with a big stick (the regulator) who says 'nope, you don't have the capacity to accept that risk, thus you cannot write the loan' which prevents the entire chain of events from occurring.

Franks example again requires regulation, specifically regulation of gifts and transfer pricing. If I sell assets at substantially below market price in Australia (and indeed most countries), the ATO will just bill you as though you sold them at the market price for tax purposes. This shuts down the investment loss part of the example, and is indeed what prevents you from doing the same thing with shoes, rocks or whatever the hell else you want to do. The actual money laundering part of it (which could be achieved with diamonds or whatever) to is harder to stop, but again, you can with strong regulation and law enforcement.

The important thing here, and indeed the common theme is regulation - you need strong competent regulators to control the parameters of the market. Without government regulation, things are dicey.

Crissa · Post by **Crissa** » Mon Mar 23, 2009 1:23 am

Well, one of the big things about the collapse has to do with mark to market.

What that means, is that very few months, they 'test' to see if anyone will buy the product. Not that they're going to sell, but because the banks need to be kept honest else they'll mark things as being worth far more than they really are.

But right now there isn't any market for any of the mortgage tranches because there is no way to tell (in any legal sense) what the risk associated with them are. So the market is valuing them at somewhere south of 30¢ on the $ while they were growing in value before. But the majority of those tranches can't literally be worth 30¢ on the dollar - that would mean more than three quarters of all homes would be in foreclosure.

At the peak, we're at one in eight homes are facing foreclosure. That's seriously far from three in four...

So small money (and anything measured in millions is considered small in this market) won't buy, they don't want the chance they get the bad ones; and the big money, who do have these investments, are finding their books loaded with things that have no marketable value. Which means they then have no money to pay back their obligations, as they'd expected to do that based upon the value of these holdings (which also receive payments).

And since the banks can't loan money, it started snowballing into companies being unable to buy expensive things on credit - especially short-term credit. So governments weren't able to hire people to work on roads, etc. So one market freezing, broke down another, and then with people out of work, they aren't buying, they aren't buying, stores have inventory, so they don't buy from manufacturers, who don't make more, so they lay off their employees as well...

It's just bad.

And of course, right-wing nutcases are still comparing apples to oranges on statistics here: 'less banks failed now than the great depression!' - we have less banks now, like a thousandth of the banks. 'We have less unemployment!' - we count less people than we did then. By alot; using that era accounting we're up to 19% unemployment. 'There's no lines for food, blahblah...' We have unemployment and food stamp benefits, and we know more about markets and how to feed people than we did then. So yeah, it's not as bad on a personal level.

And yet, it really is that dire.

-Crissa

cthulhu · Post by **cthulhu** » Mon Mar 23, 2009 2:02 am

.............

cthulhu · Post by **cthulhu** » Mon Mar 23, 2009 2:02 am

Crissa wrote:Well, one of the big things about the collapse has to do with mark to market.

Yeah, but the current system was put in place to deal with what Enron did with mark to market. I'm not saying its perfect, but the FDIC etc isn't retarded.

But right now there isn't any market for any of the mortgage tranches because there is no way to tell (in any legal sense) what the risk associated with them are. So the market is valuing them at somewhere south of 30¢ on the $ while they were growing in value before. But the majority of those tranches can't literally be worth 30¢ on the dollar - that would mean more than three quarters of all homes would be in foreclosure.

Yup. But this gets back to the risk thing

And of course, right-wing nutcases are still comparing apples to oranges on statistics here: 'less banks failed now than the great depression!' - we have less banks now, like a thousandth of the banks.

To be fair, this is actually true. In the 1893 recession, which is the worst ever, the instituions holding 60% of Australia's bank deposits (and I think it was a similar number for the US) failed.

That is a huge number, and we arn't close.

'We have less unemployment!' - we count less people than we did then.

By alot; using that era accounting we're up to 19% unemployment. 'There's no lines for food, blahblah...' We have unemployment and food stamp benefits, and we know more about markets and how to feed people than we did then. So yeah, it's not as bad on a personal level.

And yet, it really is that dire.

-Crissa

Yeah, we have to do something, but Obama's current plan is a bit dim. The TARP is stupid. Why not just do what the FDIC has always done. If the banks are insolvent, the FDIC takes over, extends finacing, wipes out the stockholders, sells the book of business (and this is where the government can help, by extending finance to the buyers), and then trying to make the bondholders as whole as possible.

Currently you are getting lemon socalism - the TARP boils down to either

A) Buy the things are market values, which doesn't help the banks balance sheets at all

B) Give the banks free money by buying above market value.

Which is dumb, as we know the FDIC method works, so lets roll.

Crissa · Post by **Crissa** » Mon Mar 23, 2009 2:53 am

The thing is, nationalizing doesn't solve the current problem - they have assets they can't price - and it doesn't actually penalize the bankers who put us in this position. The assets would still be worth little and the other banks would still not be trading or loaning.

We either create a market value for these items - put money where our mouth is - or we figure a way how to outlaw the tranches without wounding the economy or grandfathering.

The FDIC is meant for banks, with depositors and creditors. These financial institutions don't have depositors insured by the FDIC and their creditors are merely other financial institutions.

It's basically what would happen if tomorrow we found out gold was actually poisonous. People who had piles of it in their portfolios would be worth nothing suddenly, and wouldn't be able to pay anyone. And it is very similar to 1893, when someone bought up all the gold and banks found themselves without the ability to get the cash value of things they owned or traded with, so they couldn't pay their depositors, who then panicked and tried to withdraw all their value from the banks...

...Except in this case instead of gold, the value is 'everyone's homes' and as such, is much larger; and instead of being something simple as 'print more money the banks to use' and 'arrest the guys responsible' the tranches and who owns them is a labyrinth of pieced out responsibility upon paper.

-Crissa