Speculators stuff up, put us all in peril

Written By: - Date published: 9:40 am, October 2nd, 2008 - 59 comments
Categories: economy, john key - Tags:

The formula to determine the fair value of a share is pretty simple – take the expected future dividends,adjust them using the discount rate, and add them up, there’s your fair share price. Of course, expectations on future dividends and people’s discount rates vary but it should all be pretty simple. It isn’t though because the kind of people who trade shares and other financial instruments are risk-takers who typically measure their self-worth by how much money they make. They are always out to find an extra way to make a buck for their bosses. Rather than trading on the fair value of shares and other instruments, they speculate on others’ demand, buying for more than fair value in the expectation that others will pay even more later. Of course, this a game of hot potato; no-one wants to be the one to take the loss when the music stops, speculation dries up and the instrument is only worth its underlying value.

Now, the music is teetering on stopping. The speculators have stuffed up so badly by fooling themselves into thinking they had created huge wealth trading in near-worthless mortgages that they could now drag the rest of us down unless taxpayers in the US and other countries bail them out (they won’t personally suffer, of course, this is capitalism and they are the agents of capital).  

The people who like to consider themselves the smartest guys in the room are now in such a panic that sharemarkets are gaining and losing as much as 7% a day as they jump from euphora to dispair over the US bailout plan. Nothing has fundamentally changed for the companies whose shares are being traded, some will be affected by difficulties they might find in raising credit but that, once again, is the fault of the speculators not the underlying economy.

Why do we organise our economy in such a way that we’re dependent on a bunch of greedy gamblers not stuffing up?

[on a separate note. Why is John Key setting up a blind trust for his shares (which is taking an awfully long time) if, as he said on Sunrise yesterday, he hasn’t traded any shares in public companies since 2003?]

59 comments on “Speculators stuff up, put us all in peril”

  1. vto 1

    SP I think your evaluation is simplistic. Discussing this with a highly successful businessman this morning we agreed the finger of blame cannot be laid on one type of person.

    The fingers of blame are numerous, and there are virtually no people around who have not taken advantage of the system that is now wobbling (temporarily(but not short term), tho painfully). There are all the people who bought a house for investment purposes. There are speculators of all sorts (btw, the dairy boom peaked about three weeks ago and is heading south at hyper-speed imo). There are greedy naughty exec.s who have pillaged. There are greedy depositors who lusted after the extra 2% from finance companies and completely ignored the risks. There are those who simply kept racking up debt of whatever type with no real thought of the consequence. etc.

    Speculation has been around forever – it is a part of the human character. Witness the tulip boom. Witness the price rises and falls of corn since 1300AD.

    I mean, if the answer is as you paint then surely it would have been simple for govts of the left to ban it. Isn’t that what Rowling did in the 70s. And Muldoon with his price freeze. Always failure.

    Wall Street followed the rules. The rules were set by the govts. The govts were elected by the people. The tainting spreads far and wide.

    The problem rests with we humans ourselves. This bust makes for an excellent study in the speculative nature of people. A great book I have just read is ‘Why You Win or Lose – the psychology of speculation’ by Fred Kelley written in 1930. Highly rated and very informative.

    Sure it makes for a great attack angle on the likes of Key, but it is truly not that simple.

  2. T-rex 2

    “Why do we organise our economy in such a way that we’re dependent on a bunch of greedy gamblers not stuffing up?”

    I think the answer has a lot to do with the fact that “we” are also greedy, and gamblers. Everyone who invested money in consumer finance groups because they had a higher rate of interest?

    But I see vto has just touched most of the salient points, so I’ll shut up and go to bed.

    Except to say that I still think the majority of the blame DOES lie with those who were charged with lending responsibly and totally failed to make a reasonably effort to do so. They should be rounded up and asset stripped.

  3. I didn’t blame anyone person – I blamed a system that puts such power in the hands of cowboys. Ultimately, the blame is not with the cowboys but with society, via the State, for setting up the legal and economic conditions for them to behave like this. They would be gamblers anyway, we needn’t put them in a position where they’re betting with our futures.

  4. Greg 4

    That doesn’t make sense SP. You claim that risk taking is a bad thing? Risk taking should be encouraged. Have you heard the saying ‘every successful businessman has been bankrupt at least once’?

    “Rather than trading on the fair value of shares and other instruments, they speculate on others’ demand, buying for more than fair value in the expectation that others will pay even more later.”

    Surely the ‘fair value’ is determined by the market. So paying a larger price because you expect demand to increase is fair enough?

    Given this whole fiasco was caused by government intervention in the first place, i don’t think you can blame it on the free market.

  5. vidiot 5

    “I’m moving to ensure that all of my investments in totality are managed in a blind trust where it’ll be totally blind. I’m establishing that at the moment.”

    http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10534474

    Like Helen (who also has a blind trust), John has other assets that are not shares in publicly traded NZ companies.

    And yes, speculators are evil, all of those people that have stuck all of their money in to NZ property are evil, as are the one sthe drive up the price of oil, cheese, coffee and ….

    [get beyond the language of good and evil. foolish, greedy, selfish – not evil. Key only went to set up this blind trust because of issues aroudn his sharetrading. SP]

  6. T-rex 6

    I recommend taking a look at this

    http://www.gmk.co.nz/pages/content.aspx?PID=95

    I think the problem is that people don’t know enough to be smart… and it’s totally unreasonable to expect them to. Clearly history is a poor teacher.

    I’ve got no faith at all that the state could come up with any better mechanisms to cover credit etc, no matter what level of regulation.

  7. r0b 7

    I really shouldn’t do this as I’m too busy to comment today, but: :Given this whole fiasco was caused by government intervention in the first place, i don’t think you can blame it on the free market” — ahhhh – what? Could you please explain this rather bizarre comment?

  8. vto 8

    T-rex and SP:

    Some more 2c on this topic which has occupied some brainwaves of mine for many years. T-rex you touch on it and I mentioned it a couple of weeks ago. The lack of responsible lending is the area to target. Banks.

    As mentioned previously, banks have had to be regulated in the past. They used to not just take a mortgage to secure a loan they used to take ownerhsip. That used to be required by the banks using the same language as today i.e. “it is our policy” or rather, take it or leave it. It took the state to require banks to change that – they would not change it alone.

    Exact same with repaying the loan early. Used to be that you could not repay early. That also had to be changed by the state.

    The state needs to get involved in this realtively small, but extremely important and powerful, area again today imo. Such things as the ability of a bank to call up a loan at any time and perhaps the ability to vary the interest rate are areas to target. And of course perhaps lending parameters? Many side/technical issues would of course arise but fundamentally some further state intervention is required. Would be interested to hear a pure marketeers perspective on such controls.

    I think the reason this intervention is required (and I am no fan of state intervention normally) is because of the importance of what money is. It is the means of trade. It is not the trade itself, merely the means, but the effect of that means disrupting what is a normal trade is excessively excessive.

    The effect of the means of trading should quite simply not be so great. After all it is the trade that is important e.g. swapping an hours work for a bag of potatoes.

    I dont know the detail of how such controls would or should work. But just look at history – banks required control in the past. Are we foolish enough to think that further controls would not be needed at some point in the future. History repeats on a regular basis.

  9. J Mex 9

    This guy seems to have written a letter for Steve:

    Long, but worth reading…

    An Open Letter to my Friends on the Left

    In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken……….

    Read more

  10. vto 10

    Having said all I have just said above, that only deals with leding and the amount of money in circulation. The problem of human speculation still remains.

  11. cha 11

    John Ralston Saul saw the writing on the wall sixteen years ago and followed up with The Unconscious Civilization.

  12. RedLogix 12

    JMex,

    I’ve just read the letter you quote from “Steve”. His argument is wrong for one simple reason; the nations most affected by this crisis are the USA and UK, both of whom have been ideologically wedded to lightly regulated ‘free markets’ since the time of Reagan and Thatcher. It has ended in tears, exactly as has been predicted by figures such as Soros and Galbraith for some time now.

    By contrast other nations with more regulated markets have fared much better, and in pure economic terms you really cannot go past the example of China, with it’s tightly controlled currency, banking and fiscal sector, it’s one party state which typically owns and controls around 50% of almost all commercial enterprises. According to the free market ideologs like Steve, China should be a basket case… but the results are quite different.

  13. milo 13

    Hmmn. That’s only part of the Story steve. Really that formula only works for a bond. It doesn’t capture re-investment of retained earnings, which is what the US share market is driven by. The theory being that the companies have better investment opportunities than their shareholders, so there will be a greater return if they invest the profits themselves, especially as their tax regime may be more favourable.

    Also, return is affected by the rate of growth. If you have a 7% return and expect 3% per annum compounding growth, you wind up with a 10% return (there’s apparently some maths that proves you can just add the growth rate to the original return). People invest in expectation of future growth – some are right, some are wrong, but the fact that they make this investment helps to allocate resources to the fastest growing areas of the economy – vital stuff for us all.

    Also, the sharemarket is a market. That means it is affected by supply and demand. So price fluctuations may be due to other investment goods becoming less attractive, or to an increase in the supply of money. We’ve seen a lot of that recently, with a huge supply of money around the world turning up the heat on many investment markets. This has been partly due to central banks, partly to super savings, and partly due to surpluses in growing economies.

    Not that I disagree with your underlying point about speculation. I’m simply saying there are other factors at work. Price fluctuations also reflect these other factors, and are necessary for the market to work and make up all rich (which it has). Some speculation is good – just as it leads to better estimates on iPredict.co.nz, it leads to better allocation of economics resources. But I agree the current system does seem to encourage excessive speculation, and that this can be damaging.

    Captcha – “goods marry”. You couldn’t make it up!

  14. Carol 14

    Then there’s this article that quotes various bits of research and reports, which show how corporate welfare (US government financial support of big business) has been a part of the US system for a long time:

    http://www.guardian.co.uk/commentisfree/2008/sep/30/marketturmoil.subprimecrisis?commentpage=2&commentposted=1

    “There is not and has never been a free market in the US.

    Why not? Because the congressmen and women now railing against financial socialism depend for their re-election on the companies they subsidise. The legal bribes paid by these businesses deliver two short-term benefits for them. The first is that they prevent proper regulation, allowing them to make spectacular profits and to generate disasters of the kind Congress is now confronting. The second is that public money that should be used to help the poorest is instead diverted into the pockets of the rich.”

  15. The joys of Capitalism…

  16. vto 16

    it would be quite good if everybody simply picked up where it left off and then slowly unwound the problems over a number of years. That way nobody would get burnt.

    Just have to appeal to people’s good, kind and understanding side.

    I reckon that would just about be a flyer…

  17. randal 17

    tricky one kids. markets always move. the thing is we have to be smart about this. when it slows down we have to use the media at our command to prepare for the enxt uptick. so no woe is me or class differentials because of access to resources and hogging them. Dig. present day conventions ask us to display our arrrays of cheap toys for status symbols only and to not know how to really use them. austerity is good for self discipline. yes indeedy. hehehehehe. Our size and mental agiity shoud be our advantage and not crushing conformity. time to jump up antoher wittgensteinian ladder. OK?

  18. Bill 18

    Companies are run on a model of growth. Economy of scale leads to advantage in a predatory market. To grow faster, a company needs to borrow against it’s assets. Debt counts as asset. Enter the shareholder and accumulating ‘assets’ to borrow on.

    Okay, that’s a hotch potch take on how it is, but it’s a serviceable picture of the reality.

    So in answer to the question of why we are dependent on gamblers not stuffing up…because the capitalist model demands growth. As soon as a company stops growing or grows slower, the shareholders bail.

    So, a viable company in any other scenario outside of a capitalist model is deemed a failure and bites the dust for no other reason than that it cannot increase it’s potential borrowing…shareholder confidence.

    And as we have known for years, production will always outstrip consumption…so eventually, shareholders get returns, not from manufactured goods and so move to speculation on more abstract investments…sub-prime etc.

    Every bubble bursts. Think Dutch tulips and wonder why we repeat the same old, same old.

    So the question is not why we rely on shareholders, but why we demand ever increasing rates of growth.

    We could have manufactured things to last a lifetime and mothballed a heap of manufacturing capacity instead of building in obsolescence and drip feeding product improvements in the name of profit and growth.

    Then we might have taken the time available to us to lead more rounded and fulfilling lives. Oh, well. So much for the ‘might have beens.’

  19. hello Y’all

    The systemic and unavoidable collapse of the entire western finance world we are going to experience with or without the 700 billion bailout is caused by the total deregulation of the banking world.

    This started under Reagan in 1987 (The year John Key started to work for the Banking Trust and one of the banks foremost involved in the bonds and derivatives trade as early as 1987)as Alan Greenspan took his place as the chair of the privately owned Federal Reserve and ended under Clinton with the repeal of the Glass Steagall act in 1999.

    This allowed for the investment and commercial banks to merge.

    And when Alan Greenspan reintroduced the bonds and Derivatives in 1987 as well we were back in the years leading up to the great recession.(The derivatives trade was suspended in 1933 because it was so dangerous)

    The Commercial part of the bank loaned out mortgages and sold them for the full price to the investment side of the bank who did it’s magic with them.

    That together with the unprecedented amount of fiat (fake unsupported by gold or other valuables) money pumped into the system by Alan Greenspan and the fact that the Commerce banks no longer had to be careful with whom the loaned money to because they could sell all of that crap of to their speculating counterpart is only the beginning.

    When all that was in place the party that had been on a slightly slower burner before during the last 11 years could begin for real.

    It was a beautiful model for fraud.

    Greenspan was a bubble builder and one of them was the housing bubble, but based on that bubble another bubble ensued.

    The derivatives bubble, a quadrillion dollar mountain of worthless paper. Money out of thin air and not only on top of the housing bubble but also on currencies, corporative debt, you name it they did it.

    The problems started when the housing market collapsed.

    It did so because Americans lost their good middle class jobs when the same scheisters running their banks and their corporations decided to out source these jobs to China, Mexico and other third world countries.

    With the issuance of cheap inflating dollars out of thin air the Americans (and judging by the time the housing bubble started here and in other western countries we were all suckers) were goaded into believing that they could consume even more based on second mortgages of their magically ever rising house values.

    The rise of the house values was based not on population growth, better income (In America wages have gone down) or more production of goods (only 12% of Americans work in factories or produce goods, 33 % works in the finance industry and the rest in the service industry which relies heavily on the availability of surplus cash people have to spend)but on more and more cheap money deflating the value of the dollar steadily.

    The collapse of that ponsy scheme is what is panicking the banksters and that’s why they want 700 billion dollars.

    Just imagine some 190 million home owners are at the risk of foreclosure. Give all of those families a million dollars to pay of their debt and there would be no more subprime crises. A mere sum of 190 million dollars would be all it took but the banks don’t want to solve the subprime crisis they want to solve their own crisis.

    The toxic sludge of derivatives that is threatening to drown them and of course to save their own hide above everyone else.
    And they want the bankrupted Americans to pay for their crimes and fraud.

  20. Greg 20

    r0b – see the link that J Mex put up. That explains my point of view much better than I ever could.

  21. jbc 21

    Redlogix, “According to the free market ideologs like Steve, China should be a basket case but the results are quite different.”

    Of the markets I’ve been following I’d say that Chinese equities have definitely suffered the worst over the past year. Makes the Dow look rock solid. Scary stuff.

    China may not have the same subprime debt problem but the share values that Dancer refers to seem to have the same gread/fear trends: amplified.

  22. The US has to borrow 2.3 billion dollars a day to keep going. That money was borrowed mostly from China and Japan. These countries lend that money to the US so they could keep on selling to the US. They have billions and billions of dollars invested in Fanny and Freddy the two mortgage houses. If the US goes, they go. The whole world goes.

  23. burt 23

    Steve P.

    Can you clarify your position on John Key setting up a blind trust? Is it, in your opinion, a good or a bad thing to have such a vehicle?

  24. Draco T Bastard 24

    Trav-eve

    Just imagine some 190 million home owners are at the risk of foreclosure. Give all of those families a million dollars to pay of their debt and there would be no more subprime crises. A mere sum of 190 million dollars would be all it took but the banks don’t want to solve the subprime crisis they want to solve their own crisis.

    190 million x 1 million = 190 trillion

    ——————

  25. r0b 25

    r0b – see the link that J Mex put up. That explains my point of view much better than I ever could.

    I read it. What an amazing pile of self serving nonsense it was. If that represents your point of view then you need to consider furthering your education somewhat.

  26. I stand corrected Draco,

    I just did my home work as I should have. My bad.

    According to this article of early last year some 2.2 million were at risk of foreclosure. Their houses although overvalued were not in the million dollar range as it is mostly subprime (poor neighbourhoods).

    According to the same article they stood to loose a value of around 162 billion dollars. Even if during this year the subprime crisis has doubled and more expansive houses had been in danger of foreclosure what if the losses where now up to say 500 billion. It would still be cheaper to pay off the jeopardised house loans. The bankers don’t want just 700 billion, that is only the amount that can be outstanding at every time. According to Bloomberg the total cost of the bailout could go up to 5 trillion and the total of unregulated derivatives could be as much as a quadrillion.

    So were do you start? help the people or help the banksters.

  27. rave 27

    Steve,
    Speculation is part of the business cycle, it cannot be separated from production except by eliminating the business cycle. Keynes tried this and the result was stagflation. Problem is that while investment decisions are made by capital owners, no government can force them to invest. Owners make their investments on the basis of profitability and that is determined by the amount of surplus-value they extract from workers.

    The current crisis exemplifies this. US profits began to stagnate in the 1970s due to both an entrenched labor movement, but also due to failure to retool industry to increase productivity. Capital export was more profitable. But excess profits still looked for a return, hence the rise of speculation in commodities and assets in the 1980s and 1990s. This wave was pushed along by military spending and cheap money. But the wave itself came from the seachanges in the business cycle.

    So this crisis appears to be about a loss of control by the market or by government, when its really the necessary devaluation of fictitious capital created by overproduction of capital, itself due to a falling rate of profit.

    The solution that the bosses are imposing is to put the costs of their devaluation onto the workers. The strategic response from workers should be to retain as much of the value and assets that they produce and take control of production.

  28. As we comment here the Congress of the US has just helped Paulson in power and given him a blank check to bail out the foreign investors condemning the US citizens to servitude.

    Awesome, the biggest heist in history just took place.

    Every already bankrupt American man, woman and child has to cough up $2000,- for this diddy alone and all to help the scheisters out of their pickle.
    If you still think that John Key is a nice guy that wants to give you a tax break think again. Those nice banksers just robbed every citizen in America to the tune of 2000,- and that is only the beginning.

    And all the while the scheisters are living it up in their mansions, with their private jets and their rich boy toys.

    Absolutely disgusting.

    And it gets worse.

  29. Greg 29

    r0b – “I read it. What an amazing pile of self serving nonsense it was. If that represents your point of view then you need to consider furthering your education somewhat.”

    I don’t understand this personal attack thing. Instead of arguing the point you resort to insulting me. Please explain why it is ‘a pile of self serving nonsense’?

  30. Conor 30

    Could the standard please reiterate the point regarding Jonkey only NOW putting his (portfolio) into a blind trust. This is a very salient point and needs some traction.

  31. r0b 31

    r0b: “I read it. What an amazing pile of self serving nonsense it was. If that represents your point of view then you need to consider furthering your education somewhat.’

    Greg: I don’t understand this personal attack thing. Instead of arguing the point you resort to insulting me. Please explain why it is ‘a pile of self serving nonsense’?

    Sorry Greg, didn’t realise yo were so fragile. It was an invitation to get better informed, not a personal attack.

    As to the point, I have no time right now for a nice big fact filled rebuttal. Do yourself a favour and Google: crisis deregulation. You’ll notice there’s a lot of people arguing very cogently is that the root cause of the crisis is deregulated financial systems allowing the creation of vast speculative bubbles of fantasy money. Insanity driven by greed. Those bubbles are now popping. Crisis. In this debate you’ll notice a few people trying to deny that deregulation is part of the problem. That’s where the debate is.

    Now the Horwitz piece linked to by J Mex, which defines your point of view better than you could, is arguing in effect the opposite, that regulation (not deregulation) is a main driver of the crisis. Horwitz is obviously aware that this appears to be an insane argument, because he keeps pleading with his readers to stay with him.

    And insane is what it is. He is arguing in effect that greed, and the deregulation that allowed greed to flourish, shouldn’t be considered as causes of the crisis because “Explaining this crisis by greed won’t get you far as greed, like gravity, is a constant in our world”. That’s just stupid. Sorry but it is. Gravity makes buildings fall down and engineers don’t get to ignore that just because gravity is constant in our world. Greed makes economies fall down and economists don’t get to ignore that just because greed is a constant in our world. Germs make people sick and doctors don’t get to ignore that just because germs are constant in our world. His whole argument is so totally lame that it hurts my teeth.

    Greg, if you hold an opinion you can’t justify it just by finding one other, or a small minority of people on the planet that agree with you. You need to evaluate the whole range of opinions, weigh the balance of the evidence. Let facts drive opinions not vice versa. Sometimes, very occasionally, the minority is right. Usually, not so much. I strongly suggest that you weigh up the opinion and the evidence on the causes of this crisis. Weigh up Horwitz – his argument holds no water at all.

  32. Greg,

    This what Nobel prize winner Stiglitz has to say about the bailout and the underlying speculative bubble.

  33. Simplistic to say the least.

    Try posting this on hotcopper or sharetrader and see what reaction you get.

  34. RedLogix 34

    Brett,

    Asking an addict who is still addicted why his life has gone to hell in a handbasket and you will get a litany of excuses, evasions and lies. He will blame anything and everyone else for his problems.

    Short-term speculative share trading is merely a form of addictive gambling. Asking share traders as to why their markets have turned to shite on them is futile…. all you will get is clever evasions and denials.

  35. Matthew Pilott 35

    Brett’s idea: ask the people who screwed up why it wasn’t them. Useful.

  36. sean 36

    Commentors here seem to think the US govt is planning to spend give away $700 billion on a bail-out. That’s not true. Their plan is to spend $700 billion on buying stuff. Stuff they will later sell.
    The govt may eventually make a profit out of the bailout, or a loss. So the cost to the US taxpayers is unknown (and unknowable) but it may be nothing and it will certainly be much, much less than $700 billion.

    What stuff do they plan to buy? Well that’s a large part of what they’re arguing about. They could buy up damaged financial firms – or parts of them (buy equity, add capital to the markets) or buy assets off damaged financial firms (add liquidity to the markets). That’s where Stiglitz, Krugman et al disagree with Paulson – they say the Treasury should get equity in the firms he’s saving.

    With the rest of this comment I just don’t know where to start. There’s so much to say…

    The guys claiming this was “caused by govt intervention” either have no idea how derivatives markets and investment banks work or have no desire to be honest about it. Sorry for those who want more cogent argument to that effect, but they’re just so off the planet – if you understand derivatives markets it’s obvious they’re talking tripe and if you don’t then I’d have to spend hours explaining the markets to you. You’ve seen finance companies collapsing like dominoes here in NZ, and NZ finance companies basically are unregulated banks – Wall St would be chaos if their big banks were as unregulated as our finance companies were.

    Most of those blaming lack of regulation appear equally misguided. Glass-Steagal doesn’t seem at fault here – the combined investment-commercial banks it created have weathered the crisis *better* than pure investment banks. Better enforcement of the current regulations may be more of an issue.

    In hindsight there are good arguments to be made about ways to improve regulation slightly – fair value accounting is obviously procyclic, so some sort of anti-cyclic changes to capital requirements may help slightly. But that’s just tweaking the details, not a fundamental change.

    The Stiglitz article trav referenced is good. Krugman’s said similar things. Fortunately the Paulson bailout has since been reformed into something more equity-focussed instead of liquidity-focussed, which is better though still not great.

  37. Hi Sean,

    This what one of my other favourite writers has to a href=’http://www.informationclearinghouse.info/article20915.htm’>say about it. Glad you liked the Stiglitz link.

  38. r0b 38

    sean – from my memory your comments are usually not up to much (sorry). But that was a substantive and interesting contribution, so you’re obviously capable of good stuff. I hope you’re going to bring the good stuff to the debate more often!

  39. vto: needed is a concentration or intensification of your search for what truly gives here.. the so-called diversified blame method will attain nothing of value – (which may be what you want) – thus allow me recommend our ‘curtains’ series which is doing the hard yards for everyone’s benefit..

    Greg: fv “determined by the market” – go see Enron to blow this cobweb away. Their monopoly gas supply made the market – Ken Lay and co made the mucho margins from those supply pipes.. shut down a pump, supply shorts, pump prices etc.

    cha: thank you for that.

    travellerev: “The problem started when the housing market collapsed”. True for the US, some others. But the lesson is simple physics: what goes up must come down (certainly upon our good earth with gravity etc). Thus, reliance on the no-down part is/was plain stupid. Also “ponsy” should read ponsi. Our guya laughed when they saw it, thinking you really poncy—so this corrects them too.

    sean: do you know of any prioritising by Hank Paulson.. viz who pays first.. or upfront.. or whatever.??

  40. Bill 40

    Remember how you were taught that dumb natives traded land and resources for beads and mirrors ‘back in the day’?

    Well, we got endless goodies in the pipeline kiddies and a deal. Here’s the deal. Give up your liberty, work for us that we achieve our goal of immense riches and power. If you conform and we don’t have to bash your head, then you get shiny whiz bang baubles with gee factors; you get to chase the consumer dragon in purpose built malls. It’s a deal so good, it sparkles!

    Leave us to take care of business and business will take care of you! And you don’t need to worry about what lies behind and beneath it all. Simply enjoy!

    And if it all seems a bit too shallow and it’s getting you down, then hey! We got pills for that. Lots and lots of gleaming little pills to make you happy again. 1 in 4 on anti-depressants? We can do that.

    A pharmaceutical nirvana to underscore your consumer heaven and take away the pain should you slip through the escalator in our shopping mall paradise.

    Did we forget to tell you that it’s all building castles in the sky?
    No worries. Those castles have real value as potential real estate. Look, see? The stock market indices are on the uppity, up, up! Rock solid investment. Underwritten by years of venerable cloud cover. Can’t fail. Invest now and secure a kingly future for you and yours.

    Fuck!

    Somebody say it’s raining?
    Somebody ask why we are wedded to our collective stupidity?

    Hey! New market opportunity! Make a killing in umbrellas shares today, don’t delay! Umbrellas are going up, up, up!

  41. Hi Jo,

    Thanks for pointing out the typo. My first language is Dutch so sometimes one sneaks past the spell checker.
    I agree with you on the up down part.

    Bill yep, nice way of describing the American dream. LOL.

  42. For those of you interested in how much the US citizens have been taken for a ride with this bailout bill this is just few of bits of crap that comes with it (450 pages). What has all of this has to do with the financial crisis I ask you

    Sec. 308 – Increase on limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands
    Sec. 309 – Extension of economic development credit for American Samoa
    Sec. 310 – Extension of mine rescue team training credit
    Sec. 314 – Indian employment credit
    Sec. 316 – Railroad track maintenance
    Sec. 317 – Seven year cost recovery period for motorsports racing track facility
    Sec. 319 – Extension of work opportunity tax credit for Hurricane Katrina employees
    Sec. 322 – Tax incentives for investment in the District of Columbia
    Sec. 325 – Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds
    Title IV

    Sec. 401 – Permanent authority for undercover operations
    Sec. 402 – Permanent authority for disclosure of information relating to terrorist activities
    Title V

    Subtitle A – General Provisions

    Sec. 502 – Provisions related to film and television productions
    Sec. 503 – Exemption from excise tax for certain wooden arrows designed for use by children
    Sec. 504 – Income averaging for amounts received in connection with the Exxon Valdez litigation
    Subtitle B – Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Act of 2008

    Sec. 512 – Mental Health parity

    Title VI

    Sec. 601 – Secure rural schools and community self-determination program
    Sec. 602 – Transfer to abandoned mine reclamation fund

    I also found a complete overhaul of the energy policy in there and Paulson gets total control without oversight and redress.

    Ladies and Gentlemen the democracy in the US is suspended, martial law is just a matter of time while American troops are poised to fight <a href=’http://www.prisonplanet.com/us-troops-in-homeland-crowd-control-patrols-from-october-1st.htmlcivilian unrest at home and the FEMA camps, over 400, are manned and ready.

  43. sean 43

    jo zinny,

    Sorry, don’t know. Everyone’s trying to not prescribe that too closely as it’s obvious that the Treasury will need a free hand to react to circumstances.

    trav,

    Yup, but that’s the US congress at it’s usual. Each senator who is wavering insists that their own hobby horse (which may be completely unrelated to the bill at hand) be included in order to get their vote. So all sorts of unrelated bizarre bits and pieces of pork get included bills. Makes me proud of our NZ parliament, really…

    BTW, Stiglitz has come out in favour of passing the latest bailout bill. Joining what Krugman describes as the “hold your nose caucus”: “Well, I think it remains a very bad bill But that having been said, it is better than doing nothing, and hopefully after the election, we can repair the very many mistakes in it.”

    I think Whitney’s complaint is a bit silly. The US Treasury wants the ability to fight off a financial crisis. Whitney wants to make sure that foreign investors don’t get any help, and suggests some bizarre conspiracy by the US Treasury to spend US tax money on saving the Chinese. First of all, putting that into the bailout bill is silly – in a forest fire you stomp out all the sparks you can see – don’t wander off into someone else’s farm but don’t stop precisely on the boundary-line either. Secondly, I believe in incompetence but I don’t believe in conspiracies.

    I’m with delong on this one: the failure here is a failure of the executive. In a crisis the US system should have a strong executive propose a bill, and congress sign on to it. But Bush’s political capital is just about zero and Paulson’s original plan stunk – 3 pages long, focussed entirely on buying toxic assets not on seizing a stake in firms it was bailing out, and insisting on no oversight. So it all went downill form there. Now the plan’s been improved in its fundamentals, but has all sorts of designed-by-a-huge-committee cruft attached.

  44. sean 44

    Some wise word from Brad DeLong:

    “Don’t call it a bailout or a TARP,” said DeLong of Treasury’s plan. “I recommend ‘seizure.’ It should be ‘the troubled asset seizure and forced bank nationalization plan.'”

    And in a Q & A:

    Q: What’s the most important thing an ordinary person needs to know about the bailout plan Congress was considering this week?

    A: It is not supposed to be a bailout plan. The idea is to make sure that the shareholders of banks and institutions that made stupid and unwise loans suffer enormously in terms of losses of wealth while still preserving the flow of funds through the financial sector to the real economy so that companies can create jobs.

    Q: So they will suffer?

    A: The CEO of Bear Stearns lost 95 percent of his personal portfolio in the forced merger of last March.

  45. Hi Sean,

    I appreciate your point of view.
    I want to do a bit more research but will get back to you.
    In the mean time you might want to check the Money masters out.

    Cheers

    Trav

  46. Sean,

    By the way why, can you believe in incompetency and not in smart people conspiring. I know from experience that conspiring is one of the easiest things to do? Shit, everybody does, it.
    I bet you do it.

    I don’t know you but let’s say you are a nice guy with a nice woman and two nice kids. One of these kids is having his birthday next week and all this kid wants is a car. You and your wife and his siblings ridicule him all the time while y’all have got his favourite car waiting for him and money enough to get his licence and on his birth day; tada, the kid crying, you laughing and the rest of your family really happy .

    Hello, that is a conspiracy.

    Now, if you are smart enough to organise a good thing than what makes you think that there are no evil people ready to organise their agenda?

  47. Sean,

    “free hand” – conjuror’s go long on those! In Hank’s case I think more likely to create indecision.. more especially now a majority of folks had Congress call his bluff. One hope would be how minions working for him wherever don’t read the hand that feeds them the wrong way..

  48. RedLogix 48

    Michael Moore has some constructive comments here.

    The figures he quotes in the first few paras are quite remarkable.

  49. Pascal's bookie 49

    Another point to note about the pork in this particular bill is that from my understanding, bills like this are supposed to originate in the House of Rep’s, then go to the Senate, and on to the White House.

    With the House’s failure to pass, the senate decided that they would have a crack, but because they can’t originate the bill, they essentially added the ‘bailout’ to one that they were already working on. So in fact, it’s a 700 billion dollar piece of pork that got added to all those other things.

    On Paulson’s original plan, it sure stank, but I wonder if it was partly because Paulson is more used to negotiating deals on Wall St than in DC. He may have been offering an opening position, expecting congress to come back with a counter offer. He’s not a big ego politician, he’s a big ego swinging dick. The psychology and experience are completely different.

    With that in mind, while I’m concerned about the lack of oversight being given to what is still the GWB administration, I’m not sure that Paulson will be a bad deal maker for the US taxpayer. The deals he makes for taking on pieces of the shitpile will reflect on him personally. His reputation as a tough deal maker is at stake and he personally won’t want to be seen to be getting shafted. Especially given his position of strength at the bargaining table.

    Given the all around lameness of the White house at the moment, duck and otherwise, I don’t think Mr 23 percent and his merry band of phuckups will be interfering with Paulson as much as they might have if this was happening a couple of years ago. I think he will be able to make deals fairly free from the political interference that this White House has infected most else that they’ve touched.

  50. Pascal's bookie 50

    addendum: When I say getting a good deal for the taxpayer, I mean in comparison to flushing the money down the toilet, setting it on fire, launching a war with Iran, or just giving it away to the already wealthy in return for a shitload of debt.

  51. RedLogix:

    Short term share trading is not like Gambling, that is an insult to anyone who has invested in the sharemarket.

    I consider long term trading to be around 10 ten years, and yest short term trading can be anything from a few months to a few years. The people I know who invest short term, do believe in the companies that they are investing it, they research the companies, they research the board, they research major shareholders, they analyze charts, trends.

    There is so much work involved, it is far from gambling.

    The people who invest are people like myself who just want to get ahead, and dont want to be working until we drop down dead.

  52. brett. a good gambler does research too. still gambling, it’s not done to make a better company. its done to make a quick buck

  53. Steve:

    Thats a bit insulting, investing is nothing like gambling, do you know how much research people do, before they even think about investing, its not about making a quick buck like with people who bet on the TAB, its about believing in a company the people in it, and yes its about making money for yourself, if more people invested in New Zealand companies, we would be a lot better off.

    Like I said its a bit insulting to compare it to gambling.

  54. Brett. We’re talking about short-term investing – that’s taking a punt on short-term movements in a stock price, it has nothing to do with a concern in the underlying company. The company gains nothing from me buying some shares one week and getting out two weeks later with a 10% profit – none of the money movements involve the actual company.

    “Krusty, gambling is the finest thing a man can do, if he’s good at it”

  55. Steve:

    But those day traders of share slaggers as they are called are few and far between, the majority of share traders would call short term getting out within two years or maybe a year.

  56. T-Rex 56

    Sean – thanks for the summary, excellent stuff. I have only read the original proposal which was god awful and seemed to almost by definition involve the US buying loans it almost certainly WOULDN’T see any return on.

    The present one, as you describe it, makes a lot more sense.

    Steve:
    “The company gains nothing from me buying some shares one week and getting out two weeks later with a 10% profit – none of the money movements involve the actual company.”

    I used to feel the same way: that the only point at which you really helped a company was if you bought shares off the COMPANY… and that the rest of the time you were just playing a zero sum game with other shareholders.

    However, that’s not true.

    It ignores the nature of investment in shares. The liquidity that short term traders create in the sharemarket is extremely valuable to a company, because it creates an environment that makes investment in shares a viable option.

    Let’s say you’re 30, and you’ve saved some cash. You don’t want to just put it in the bank, you want to invest in a company (as well you should, so long as it’s a good one). For arguments sake, assume you buy at the companies initial puchase offering. All simple so far. But this is where liquidity becomes important.

    You, as a shareholder, may have different long term goals to the company. You might not want all your capital tied up in those shares forever, just giving you the dividend return – say you wanted to put it into a house instead when you hit 36 or something.
    Without an open market and frequent sale/purchase of shares, it would be almost impossible to shift your capital from one venture to another.

    So, while I can’t stand the general philosophy, incompetence, and corruption (yes, they’re corrupt, look at company prices shifts vs market announcements sometime) they DO indirectly create value for a company by making companies a viable investment.

    All that aside Brett, to answer your question about how much research people do: SFA.

    Either that, or they do a lot and are bad at it.

    Day traders are not buying and selling based on any of the fundamentals you describe, they are buying and selling based on “feelings” and so called “technical analysis” (which is basically feelings combined with flaky maths). Very rarely do they beat the market in the long term, and I’m sure the present situation would illustrate that well. Derivatives traders who’ve picked terms of investment that don’t allow them to ride through these huge slumps (and by that I mean “almost all derivatives traders”) will be losing money hand over fist at the moment.

    Once again – they either didn’t do research, or they did and are bad. Pick one; though I think it’s pretty obvious it’s option 1.

  57. T-Rex 57

    “Steve:

    But those day traders of share slaggers as they are called are few and far between, the majority of share traders would call short term getting out within two years or maybe a year.”

    *COUGH*!

    Take a look at traded volumes sometime.

    For example, Mcquarie Group in Australia has relatively frequently (over the last year) traded in excess of 4% of it’s total shareholding in a single day.

  58. Trex:

    I can only speak for myself then, I dont believe in charts or trends or even market sentiment, I go by what I have read about a particular company and who else are major shareholders, I like stats and hard data from ceo’s and not emotional speeches.

    Judging from what i have read on various boards a lot of traders are now doing this.

  59. T-Rex 59

    I’m the same, but if you spend any time looking at share price fluctuations you’ll realise there are a significant number of people who can only be trading on the basis of anticipated short term changes. That’s what causes high volatility – companies profit/loss outlooks don’t really change that much day by day unless there are significant related events.

    “Judging from what i have read on various boards a lot of traders are now doing this.” – Might I venture to suggest that this has a lot to do with the fact that they all have (to use my mates fantastic bastardisation of a boratism) asses like wizards sleeves from, up until just recently, adopting the “surf the speculation” methodology.

    Also, do you really think anyone’s actually going to say “To be honest, I’ve no f*cking idea what I’m doing, I just buy something and hope like hell it goes up”. No one CLAIMS to do that… every investment statement you ever read says “dodgyinvestmentcompanylimited looks for assets with strong fundamentals, great underlying value, impeccable history, a strong record of adopting orphaned kittens, and zero risk”. I am prepared to bet money that you will find a correlation of approximately ZERO between recent market success and stated investment strategy. ACTUAL investment strategy is a different issue entirely.

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