YOUR MONEY

Saving Capitalism and the World Economy -- three straightforward solutions

Capitalism has lost its way.  Greed and the chase for ‘easy and quick fortunes’ have created a speculative casino-like environment to the detriment of ordinary investors and the public good.

Stock Markets

1)    Thanks to the miracle of computerized trading, millions of dollars can be made – or lost -- in seconds by manipulating legitimate electronic trading and ‘gaming’ the system.  Such clever market manipulation by investment companies, banks and the super wealthy has become too commonplace.  According to Maclean’s Magazine, July 16, 2012, p. 47 “Stock Market Hackers”, HFT (high frequency trades) account for 42% of all trading in Canda. By  using super-fast computers and programs that allow one to flood the market with buy or sell orders and then do the reverse in a second -- once ‘others’ have risen to the ‘bait’ – millions in profit can be made in less than 10 seconds.

2)    Thanks to the perversion that is today’s derivatives industry, an industry created to act much like insurance companies,  companies now play fast and loose with client monies and their own assets to make high risk exchange ‘bets’.
Just check out the JPMorgan Chase debacle, whereby the bank’s derivates traders lost up to $9 billion U.S. by ‘guessing wrong’ on the direction of the Euro currency. According to the G&M (July 9, 2012, B2) the bet was for $100 BILLION U.S.!!!!

3)     Thanks to the loosening of regulations in commodities, the markets for wheat, corn, soybeans, coal, iron, copper, oil and similar products have been opened up to speculative mania.  No longer are these products made available just to end users.  Instead, since the early 2000s anyone can put in a buy order on the futures market even though they have no intention of completing the deal.  With more bidders and buy orders, sale prices go up and the illusion of a ‘shortage’ of product is created.  Speculators then quickly flip their orders (which are not pre-paid in full) to manufacturers and end users who need the product -- at an artificially higher price.  In the end, consumers get fleeced and inflation goes up.
For example, according to oil industry experts, when the price for Brent (Europe) crude and West Texas Intermediate (USA) were over $120.00 a barrel, some 20% of that price was due to speculators ‘goosing’ the system for quick profits.

Currency Fluctuations and panics

Since the world’s governments went off the Gold Standard in the early 1970s, the value of a currency was ‘left to market forces’ to decide.  Put simply, this has transferred monetary policy and control from governments to the currency investment branches of major banks, investment companies, sovereign trusts and the super rich – who make thousands of ‘bets’ each day on the future value of the U.S. dollar, German Marks, Japanese Yen and all other currencies.
Canada, for example has had its dollar sink to mid-60 cents U.S. and rise to $1.10 U.S. more recently.  Currently, the Canadian dollar not only goes up or down in value by the minute on international markets.

What this means for the citizens of all countries is their savings can become almost valueless on speculative ‘bets’, and manufacturers and exporters and importers must find comfort in Rolaids or scotch --as their business models blow in the wind of international game playing.  Even a 1 cent change in the dollar is a massive change for any company that works on a 10% or less profit.  And not knowing what your goods will be worth next week or next month complications manufacturing and production decisions throughout the economy.
Put simply, people and business do not like volatility and unpredictability in their currency.

Governments also pay a huge price whenever there is a speculative run on their currencies.  To prevent a ‘collapse’ governments buy up their own currencies from the very speculators who have caused the crisis. Think bribe, and rewarding bad behaviour.

Solutions

Here are THREE simple suggestions that would minimize speculative greed and the quest for windfall profits that distort the marketplace.

1.     Restrict a purchaser’s ability to do a quick flip.  Institute mandatory ‘must hold’ times of 7 days to 30 days depending on the industry.

2.     Ban derivates firms from trading in commodities, stocks, etc.  Restrict them to the insurance end only.

3.      Return money to a gold standard backed by bullion.

While these 3 solutions will be hard for the world stock markets, money and government establishments to accept, nothing else will do.   We need a few simple   reforms to clean up the mess we are in today, to permanently alter the psychology of the market and government ‘players’.   

Greed is not good despite actor Michael Douglas; and Warren Buffett has it right when he advises to never buy a stock or investment you do not expect to hold on to for 10 years.  Long term should be the goal and norm – as of old,  not time measured in seconds.

P.S.    Fraud for a quick Buck

The above problems and manoeuvres are not illegal acts, just ‘smart tricks’ that are within the current rules.

Outright fraud is another matter and harder to regulate.  Crooks just don’t even try to follow the rules. Think Bernie Madoff, former head NASDAQ stock market, who went ‘rogue’ and bilked friends, celebrities and charities of billions!

Currently the headline story of illegal acts is the expanding Libor scandal. Barclays and some 11 other major international banks ( including Royal Bank of Scotland, Deutsche Bank, HSBC Holdings, UBS AG (Swiss), Citigroup, J.P.Morgan Chase) are admitting they colluded to make millions by regularly lying to the British Bankers Association and thereby altering the  official benchmark interest rate called the Libor --  used around the world. (See G&M, July 2, B5; from The Wall Street Journal).

Resignations at the top are nice to see as in the case of Barclay, but better yet jail time – 10 -20 years -- for those who plotted the crime and executed it.