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January 06, 2009

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My first comment seemed to be spiraling in suspended animation, so I hit the reverse arrow and hit "post" again -- sorry for doubling.

"A law stating that 5 times leverage or more meant thirty years imprisonment with no parole could have prevented most if not all of the financial panics of the last 100 years."

I take it you've never read Extraordinary Popular Delusions and the Madness of Crowds. Everyone should.

Tulip mania was an artifact of the early 1600s.

Anyway, to tediously explain a joke, the unique feature that made Selectrics so special was that you could change to any of a hundred or so fonts by changing the typeball. Typically users would use at least a handful at a given time, so they could italicize, bold, and so on.

But I guess you lacked balls, BTFB.

;-)

Yes, Gary, I just used it as a plain, ol' easy-to-use typewriter.

BTW, Gary, after being sufficiently schooled on the IBM selectric, your original joke/play on words was indeed funny -- and I can see how you won the thread:)

You don't think they had leverage in the 1600s?

In Holland in the 1630's, tulip bulbs became all the rage and were traded on the stock exchanges of numerous Dutch towns and cities. In one month, the price of one single tulip bulb rose twenty fold as a $1,000 investment turned into $20,000. People began selling or trading their other possessions in order to speculate in the tulip market! Seizing an opportunity, Amsterdam stock exchanges in 1636 started offering "option" contracts to the public which allowed tulip bulbs to be speculated upon for a fraction of the price of a real tulip bulb. The creation of options and the leverage that comes with it allowed people of moderate to lower income to join in the speculation. And join they did as mania and speculative excess became the order of the day.

The leverage with options on tulip bulbs, allowed a $1,000 investment to balloon to $100,000. At this point, it was commonly believed the tulip market was immune to crashing as prices would, "always go up." Unfortunately, leverage is a double edged sword and when prices began to slip ever so slightly, the option buyers investment would be lost. Or, worst yet, they might even owe money.

I'm not at all sure that 'weakly regulated financial environment' adds much to the argument.

My guess is that speculative bubbles may well predate money, and may in fact be endemic to markets.

Which is kind of my point.

Economic history is not my field, but what I do understand of the economic history of the US leads me to believe that a hands-off policy by the government is generally accompanied by relatively more severe economic instability.

Some folks make lots of money at those times, but net/net I don't think it's worth it.

Not an original or earth-shattering point, but my point nonetheless.

What I really, really think is that "the market" is more or less like "the weather". Sure, nobody can control it, or plan it out, or really make it do one thing or another. But only an idiot doesn't take an umbrella with them when the clouds roll in.

Saying we have to let the market do its thing without intervention is like saying we should stand on the beach, watch Hurricane Andrew arrive, and hope for the best.

My two cents.

The whole labor vs management vs ownership thing also seems stupid to me. All parties have a strong vested interest in seeing whatever enterprise they're involved in succeed. You'd think that would be a sufficient basis for finding common ground.

But here in the good old USA we seem love doing things in the most adversarial way possible. So labor is going to try to get the best deal it possibly can, and they'd be freaking insane to do anything else.

The CIA tells me that virtually all increase in household income since 1975 has gone to the top 20% of households. I don't have the cite in front of me, but apparently in one recent year, Citigroup allocated 5/6 of profits to executive compensation.

Five sixths.

If labor was serious, they would in fact be taking their pitchforks to negotiations. Shareholder should start keeping an eye on the store, too, for that matter.

That's all I'm saying.

Thanks -

My guess is that speculative bubbles may well predate money, and may in fact be endemic to markets.

Kind of hard to define speculative bubble, but to do real damage you need leverage.

Everyone goes out with cash and buys $1000 worth of tulips because the price of tulips only goes up. The next day the price of tulips goes down 2%. OK, some people lost 20 bucks.

Everyone goes out and uses $1000 cash leveraged 100 times to buy $100,000 worth of tulip options because the price of tulips only goes up. The next day the price of tulips goes down 2%. Everyone gets a margin call and is forced to immediately sell, there is no one willing to buy. The investors are bankrupt, the creditors are bankrupt and the price of tulips goes to zero.

Leverage is a weapon of mass destruction. The question is not whether to regulate it - not regulating it is insane. The question is whether to allow it all, and under what conditions.

The Dutch market where the tulip mania took place was the first modern market:

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know them"

And within a few years of that, look what happens...

Some people will never learn.

My guess is that speculative bubbles may well predate money

Well you would think that after the collapse of the Great North American Clovis spear point bubble of 10037 BCE people would have learned their lesson, but nooooo...

Lessons of prehistory, doomed to repeat, etc.

I hear some got in early on the Cambrian explosion, and then successfully sold short.

A crafty trilobite might have done well.

Well you would think that after the collapse of the Great North American Clovis spear point bubble of 10037 BCE people would have learned their lesson

That and mammoth futures.

Oddly enough, I was just reading about the Solutrean industry yesterday. Those dudes could bang a couple of rocks together and make a useable tool edge a couple of molecules thick.

Top that, Henckels!

Back OT, my personal opinion is that investment banking, and the financial sector generally, is at this point thoroughly, profoundly, and structurally corrupt.

It's no longer a matter of "bad guys", in fact it would probably take an individual of truly remarkable integrity to not engage in unethical practices given the way the game is set up right now.

And that person would probably soon find themselves out of a job for underperformance.

It's rotten, root and branch. And it's taking a lot of healthy stuff down with it.

Honest people and honest institutions don't need the law. Unfortunately, money in the sums that pass through the financial system appears to corrupt even those with the best intentions.

Time to put a lid on it.

Thanks -

gulo gordo: So whatever 'retro left' is, I think it has to start with unwinding, to the extent we can, that cozying-up to corporate power that remains the natural instinct of most of the media and far too many Democrats in office.

And we're off to a bad start with Tim Kaine as chairman of the Democratic National Committee. He's a corporate tool.

"Economic history is not my field, but what I do understand of the economic history of the US leads me to believe that a hands-off policy by the government is generally accompanied by relatively more severe economic instability."

And strong hands-on policies tend to lead to nasty periods of very severe economic instability too. See almost anywhere in Latin America. See Russia. See pre-new-way China.

It may be that economic instability is a thing that exists in economies. I tend to think that government policies which try to give information or promote transparency, without being too worried about controlling things beyond that tend to do better than any other type of regulation. If you want disclosure rules, I'm usually behind you.

Once the government tries to start actively messing with price signals and the like however, I'm not going to get behind you.

Once the government tries to start actively messing with price signals and the like however, I'm not going to get behind you.

You know, I started myself down the path toward a pretty good rant in making a reply to this. It was kind of fun, but I'm not sure how much good it would do anyone but me, so I rolled it back.

I don't really know what "price signals" are, or how the government might mess with them.

I'm all for disclosure and transparency, and we should definitely have as much of them as we can get, but in and of themselves they aren't enough.

They aren't enough because there will always be a coked-up greedy asshole in a suit who will sign up for any absurd level of risk you can imagine if it means he might get his $100 million.

And that guy will take you, me, and the rest of the country down with him when he crashes and burns.

Full disclosure alone will not prevent mortgage brokers from selling loans to guys claiming $100K+ in income from their mariachi band.

Full disclosure alone will not prevent investment banks from taking on 20, 30, or 40 to 1 debt to asset ratios.

If you gamble like that in the real world, lose, and then can't cover your debts, they break your legs. Or else they kill you.

If you do it in the financial industry, three quarters of million people lose their jobs in a month, and Congress gets your back with $700B in everybody else's money.

So f*ck that.

I'm all good with a market economy, but you can't put arsenic in a tube and sell it as toothpaste, even if you put "arsenic" front and center on the label.

Nobody should be allowed to sell mortgages that are virtually assured to fail.

Nobody should be allowed to assume levels of debt that they will be absolutely unable to repay if the slightest thing goes south.

Even if they're really clear that that's what they're doing.

The reason they shouldn't be allowed to do those things is because when the shit hits the fan, *we all pay*.

If I'm very lucky and I keep my job and don't lose my house, I personally will pay thousands of dollars a year, probably for the rest of my working life, to bail out a bunch of greedy, stupid, irresponsible m*therf*ckers.

If I ever meet one of those guys, I may well kick the shit out of him.

Stupid, greedy assholes. That's why disclosure alone is not enough. Because there will always be the guy who, presented with the opportunity to play chicken with the whole damned economy, will only ask where he can sign up.

I don't know what "price signals" are, but if government messing with price signals makes all of the above unnecessary, it would be really hard for me to see that as a bad thing.

And believe me when I say that this is not the rant version.

Thanks -

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