Who actually runs our economy?

[Blue_Sargasso]

I heard the other day that before the oil problems of the 1970s, the financial world was 90% concerned with investment and 10% with speculation. Today, the proportions are reversed and the financial markets are 90% speculative. I don't know about you, but I find this one of the most remarkable statistics I have ever encountered.

Who allowed this situation to develop? How can any financial system be stable when it is predominantly based on speculative bets? Hedge funds do nothing but gamble. No part of their "philosophy" is concerned with investment, with sound economic principles. The world economy is now, quite literally, a casino with little or no connection with stable finance.

Only a tiny number of people, those working in Wall Street, the City, and a few other financial centres, benefit from this vast financial speculation. The Credit Crunch may end up costing one trillion dollars. This, to put it bluntly, is the price of speculation.

The "masters of the universe" are sunning themselves in the Bahamas on the back of the vast profits they made when the speculative bubble was inflating. It has always been thus. Who is picking up the bills now that the bubble has burst? - well, you and me, of course...the suckers at the end of the line. The masters of the universe don't have to pay back a penny. They've made their killing, and that's all they care about. The whole financial system is designed to line their pockets, not to allow sound economies to flourish, not to help you and me.

We're mad to allow it. 99.9% of us gain nothing from a financial system that is based on speculation. Why aren't we stopping it? We won't do a thing about it, of course, because we're lazy, apathetic, stupid cowards while the speculators are active, highly motivated and very intelligent crooks.

We deserve to be exploited because we're so pathetic.

Isn't about time we thought of changing things? Lesson One - you can't change anything by buying into the political systems that have allowed the creation of the very instruments that are used to torture us. Don't vote for any conventional party. Isn't it time for the Meritocracy Party, or some other new political force that has no connection with the powers-that-be?

Why don't we create a new political party on this forum? Would it be possible for a group of intelligent skeptics to actually agree on a political programme? Or will we squabble endlessly and pointlessly and change nothing while the speculators continue with their pyramid schemes that enrich them and bankrupt us?

 

[PixyMisa]

No-one runs the economy. That's why it works.

 

[balrog666]

Your "remarkable statistic" is as phony as a three-dollar bill.

 

[Almo]

I heard the other day that before the oil problems of the 1970s, the financial world was 90% concerned with investment and 10% with speculation. Today, the proportions are reversed and the financial markets are 90% speculative. I don't know about you, but I find this one of the most remarkable statistics I have ever encountered.

Where did this quote come from? I'd like a source. How can you tell the difference between a "speculative investment" and a normal one?

Who allowed this situation to develop? How can any financial system be stable when it is predominantly based on speculative bets? Hedge funds do nothing but gamble. No part of their "philosophy" is concerned with investment, with sound economic principles. The world economy is now, quite literally, a casino with little or no connection with stable finance.

I invoke Ian's Impenetrable Sphere of Wrongness. This paragraph is wrong in so many ways, I don't know where to attack it from. Weak attempt: stock prices are still tied to the performance of the company. At the very least, this part of it is not a casino, as you state.

Only a tiny number of people, those working in Wall Street, the City, and a few other financial centres, benefit from this vast financial speculation. The Credit Crunch may end up costing one trillion dollars. This, to put it bluntly, is the price of speculation.

A large amount of investment is done by the mega-mutual funds. Ordinary people benefit when the Magellan fund makes money.

The "masters of the universe" are sunning themselves in the Bahamas on the back of the vast profits they made when the speculative bubble was inflating. It has always been thus. Who is picking up the bills now that the bubble has burst? - well, you and me, of course...the suckers at the end of the line. The masters of the universe don't have to pay back a penny. They've made their killing, and that's all they care about. The whole financial system is designed to line their pockets, not to allow sound economies to flourish, not to help you and me.

I have to say I agree that it's unfair that some corporate leaders bilk their organizations out of a load of money then escape. Better regulation and accounting practices may help this, but it's not necessarily a fault of "the system." This problem stems more from innate human greed.

We're mad to allow it. 99.9% of us gain nothing from a financial system that is based on speculation. Why aren't we stopping it? We won't do a thing about it, of course, because we're lazy, apathetic, stupid cowards while the speculators are active, highly motivated and very intelligent crooks.

Being a speculator is risky. They risk large amounts of money because sometimes they get large payoffs. It's not all roses for speculators.

We deserve to be exploited because we're so pathetic.

Deserves got nuthin' to do with it.

Isn't about time we thought of changing things? Lesson One - you can't change anything by buying into the political systems that have allowed the creation of the very instruments that are used to torture us. Don't vote for any conventional party. Isn't it time for the Meritocracy Party, or some other new political force that has no connection with the powers-that-be?

Why don't we create a new political party on this forum? Would it be possible for a group of intelligent skeptics to actually agree on a political programme? Or will we squabble endlessly and pointlessly and change nothing while the speculators continue with their pyramid schemes that enrich them and bankrupt us?

Untrue. There are times when real change is effected through the current political system. Witness the big changes in civil rights in the 60's. No revolution or new political parties there.

 

[danch]

There are a lot of contributing factors to the credit crunch. One of them was the cheap money available. Short-term interest rates went down to just 1% after the dot-com crash. A few things then happened.

Banks started lending rather haphazardly, especially mortgage loans. Spurred by the easy money, people started putting their money into housing as it was seen as a relatively safe investment, something more reliable. So those who could ill-afford it in the first place went right in, believing that the good times will last, and they could refinance, with ease, and with favorable terms, when the initial loan terms expire. With more people buying, builders started building more, assuming that the demand will always be there.
That's the housing bubble.

But suddenly, the bubble burst. Supply went up, sales went down, and housing prices went down. The initial loan terms expired, and these borrowers ran into problem refinancing. So the default rate went up.

And this was when the derivatives came into play. Originally designed to spread the risks, they did it admirably. So admirably in fact, that all these counter-parties (hedge funds run by the investment banks) suddenly found themselves sitting on a whole bunch of these mortgage-backed securities, which really weren't worth a lot at this point.

So, seemingly, all of the sudden, the money that everybody thought was there, wasn't there anymore.

That, as far as I understand it, was more or less what happened.
Please correct me if I was wrong.

Personally, I felt that it is not fair to call speculators crooks. Speculators do have a role to play in the market, believe it or not.
They provide liquidity, and also allow for the transfer of risks from those who wants to decrease their risks, by acting as the counter-parties. Simply put, they take the risks so others don't have to.

Moreover, strictly speaking, in the financial market, anybody who buys and sells with the intention of making a profit, can be defined as a speculator.
That will include most investors.
And not all speculators profit from their activities.
There are those who dived in blindly, thinking that it's easy money, but ended up getting their fingers "burnt" instead.

Likening what speculators do to pyramid schemes, frankly, doesn't make any sense to me.

 

[Almo]

I see your low post-count danch. Welcome to the forum!

 

[dudalb]

I dont know who taught BLue Sargasso economics, but Blue needs to get his money back.

 

[balrog666]

I dont know who taught BLue Sargasso economics, but Blue needs to get his money back.

Maybe danch is available for tutoring.

 

[danch]

I see your low post-count danch. Welcome to the forum!

Hello! Looking to increase the post-count, with some meaningful posts along the way of course!

Maybe danch is available for tutoring.

You flatter me, I'm just a student, not nearly good enough to start tutoring anyone!

 

[madurobob]

Who allowed this situation to develop? How can any financial system be stable when it is predominantly based on speculative bets? Hedge funds do nothing but gamble. No part of their "philosophy" is concerned with investment, with sound economic principles. The world economy is now, quite literally, a casino with little or no connection with stable finance.

Thats exactly why its stable (in the long run). Assuming a relatively efficient flow of information, the price paid for a bit of debt or equity today is the discounted future cash flow expected from that investment. Sure, there is a risk that this future cash flow will not materialize. The greater that risk, the greater the potential upside necessary to attract investors. Thats about as sound an economic principle as I can think of.

Every investment is a gamble. Thats a fundamental tenet in every economy and is nothing new. All that has changed in my generation is the sheer number of investors. Corporate ownership is now massively distributed. In 1965 every IBM stockholder could attend the annual meeting and have a seat. Today there is no city in the world with enough convention space to even come close to seating all IBM stockholders.

As to a world-wide casino: Would you prefer a world where there was no risk taken?

 

[The Central Scrutinizer]

I heard the other day that before the oil problems of the 1970s, the financial world was 90% concerned with investment and 10% with speculation. Today, the proportions are reversed and the financial markets are 90% speculative. I don't know about you, but I find this one of the most remarkable statistics I have ever encountered.

Who allowed this situation to develop? How can any financial system be stable when it is predominantly based on speculative bets? Hedge funds do nothing but gamble. No part of their "philosophy" is concerned with investment, with sound economic principles. The world economy is now, quite literally, a casino with little or no connection with stable finance.

Only a tiny number of people, those working in Wall Street, the City, and a few other financial centres, benefit from this vast financial speculation. The Credit Crunch may end up costing one trillion dollars. This, to put it bluntly, is the price of speculation.

The "masters of the universe" are sunning themselves in the Bahamas on the back of the vast profits they made when the speculative bubble was inflating. It has always been thus. Who is picking up the bills now that the bubble has burst? - well, you and me, of course...the suckers at the end of the line. The masters of the universe don't have to pay back a penny. They've made their killing, and that's all they care about. The whole financial system is designed to line their pockets, not to allow sound economies to flourish, not to help you and me.

We're mad to allow it. 99.9% of us gain nothing from a financial system that is based on speculation. Why aren't we stopping it? We won't do a thing about it, of course, because we're lazy, apathetic, stupid cowards while the speculators are active, highly motivated and very intelligent crooks.

We deserve to be exploited because we're so pathetic.

Isn't about time we thought of changing things? Lesson One - you can't change anything by buying into the political systems that have allowed the creation of the very instruments that are used to torture us. Don't vote for any conventional party. Isn't it time for the Meritocracy Party, or some other new political force that has no connection with the powers-that-be?

Why don't we create a new political party on this forum? Would it be possible for a group of intelligent skeptics to actually agree on a political programme? Or will we squabble endlessly and pointlessly and change nothing while the speculators continue with their pyramid schemes that enrich them and bankrupt us?

Nonsense.

 

[geni]

Every investment is a gamble. Thats a fundamental tenet in every economy and is nothing new. All that has changed in my generation is the sheer number of investors. Corporate ownership is now massively distributed. In 1965 every IBM stockholder could attend the annual meeting and have a seat. Today there is no city in the world with enough convention space to even come close to seating all IBM stockholders.

It is however important to consider that different forms of investment have different levels of impact. Venture capital investments while very high risk can also have serious payoffs for the person and the economy in general. People who buy at the IPO are rather critical to provideing a payoff for venture capitalists and provideing money for further expansion.

Investing in a mature company (unless as part of a rights issue) is likely to have a lower benifit for the overal economy.

Heh an extreme example might be the old canal companies in the UK where the intial investors paid for the building of a transport network revolutionising the economy in a number of areas. If the canal got built and was sucessful people buying share later wouldn't be provideing much in the way of a further benifit to the wider economy. Particularly since one built canal companies tended to avoid cutting dividends to allow further investment in the canal even when clearly in their interests to do so (there were some exceptions particularly towards the end of the canal era).

 

[Francesca R]

Quite a generous drive-by helping of financial woo from the OP

 

[SaulOhio]

First of all, to the extent that an economy works, it is not run by anyone except the participants. People buying and selling, manufacturing good and providing services, people consuming those goods, and so on, are the ones running the system, all coordinated by a system of money, private property, and the profit motive. Its like a complex computer network, and the prices we pay are the signals which transfer vital information from one part of the system to another. When someone tried to run it, by setting prices and so on, thats when the system tends to break down.

A lot of the problems we see today are the result of attempts to "run" the economy. One problem is that banks have been giving loans to people who are poor credit risks, and this has been blamed on the "greed" of the bankers. Fannie Mae and Freddie Mac were founded by FDR as part of his New Deal to help provide mortgages to people that bankers refused to lend to, because they were poor credit risks! Government has had a number of other policies which have been actually intended to encourage banks to lend to people who had poor credit.

And now those greedy bankers are being blamed for doing what the government has been encouraging them to do all along!

The government tries to run the economy, it ends up mixing up the very signals that coordinate it, and things go wrong.

 

[quarky]

The divide between the ultra rich and the other 90% of americans is stunning, and its no accident. During the Eisenhower years, rich people paid a lot of taxes. It worked very well, even if the yachts were smaller.

Regulations have been undone.
Nader, amongst others, including Ron Paul, whom is a curse word here, have attempted to address the problem. It IS a problem.

Too bad you'll find scant empathy here, Blue S.
What you're saying will sound like a conspiracy, which it actually is.

 

[Almo]

Nonsense.

What? No ? I'm disappointed, CS.

 

[geni]

First of all, to the extent that an economy works, it is not run by anyone except the participants. People buying and selling, manufacturing good and providing services, people consuming those goods, and so on, are the ones running the system, all coordinated by a system of money, private property, and the profit motive. Its like a complex computer network, and the prices we pay are the signals which transfer vital information from one part of the system to another. When someone tried to run it, by setting prices and so on, thats when the system tends to break down.

Not really. Overuse of rescources due to failure to plan long term tends to cause that.

A lot of the problems we see today are the result of attempts to "run" the economy. One problem is that banks have been giving loans to people who are poor credit risks, and this has been blamed on the "greed" of the bankers. Fannie Mae and Freddie Mac were founded by FDR as part of his New Deal to help provide mortgages to people that bankers refused to lend to, because they were poor credit risks! Government has had a number of other policies which have been actually intended to encourage banks to lend to people who had poor credit.

Nope. Apart from anything else the lending has been international across goverments with various policies and secondly the sub prime stuff that caused the problem was defined as stuff Fannie Mae and Freddie Mac wouldn't touch.

 

[ServiceSoon]

Proof speculation drives our economy.

 

[SaulOhio]

Geni: I didn't say Fannie and Freddie were the only cause.

There is the Federal Reserve setting interest rates low, encouraging more people to borrow money. That affects markets everywhere, including Europe.

I am for laissez-faire capitalism, and one of the things government SHOULD do in a free market is act to prevent fraud. I believe that fractional reserve banking is a kind of fraud, which is actually promoted by government instead of criminalized. The bank is telling people they have money in the bank that the bank doesn't actually have. This is another easy money policy that encourages a vast amount of credit expansion. Fractional reserve banking is allowed almost everywhere.

Government sponsored deposit insurance such as the FDIC and bailouts reduce risk of lending. Its like you have a rich uncle that owns a casino, and promises to make good any money you lose gambling. How much are you going to gamble?

Local governments often impose all sorts of housing regulations, such as "open space" laws, which run up the cost of housing.

Antidiscrimination laws that take different proportions of races obtaining loans as descrimination encourage lenders to actually take race into account when lending money in order to try to not appear racist. They have to put less emphasis on relevant considerations like employment history, credit history and income, and, ironically, actually give preference to people of certain races (Talk about unintended consequences!).

All these policies encourage banks to lend more money than they otherwise would, to people who are poorer risks. And then people blame the predictable problems that result on the "greed" of the bankers, and ask for more regulation and intervention to control the problems caused by regulation and intervention.

ServiceSoon: Yes, our economy IS driven by speculation. It serves an important function. Its what makes people look to the future. (In fact, thats sort of what the word means.) In the article you linked to, people are concerned that a hurricane might damage our capacity to acquire oil resources, which would restrict supply. People are thinking and acting ahead, conserving and stockpiling oil for the future that might otherwise see a shortage.

 

[Francesca R]

I didn't say Fannie and Freddie were the only cause.

Explain in what way they are a cause at all. Aren't they just a symptom?

I believe that fractional reserve banking is a kind of fraud, which is actually promoted by government instead of criminalized.

It is not fraud. If you disagree with it, saying why you think it is unwise (and what would be better) is a better way to go than to incorrectly label it.

The bank is telling people they have money in the bank that the bank doesn't actually have.

No it isn't telling them any such thing.