CNBC has been informative tonight. Right now Larry Kudlow is yelling about reinstating the uptick rule, something I had never heard of before. Apparently, part of the problem on the market today was short-sellers driving down the price of shares of good companies like Goldman, hoping the treasury will come in and “rescue” them, further deflating the vlaue of the stock and rewarding the short-sellers more.
It even has a name- “bear raiding.” What a mess.
*** Update ***
The Bush legacy:
Pressure is building on the pristine “AAA” rating of the United States after a federal bailout of American International Group Inc, the chairman of Standard & Poor’s sovereign ratings committee said on Wednesday.
The $85 billion bailout of AIG on Tuesday by the U.S. Federal Reserve “has weakened the fiscal profile of the United States,” S&P’s John Chambers told Reuters in an interview.
“Lack of a pro-active stance could have resulted in further financial stress and put pressure on the U.S. triple-A rating,” Chambers said. “There’s no God-given gift of a ‘AAA’ rating, and the U.S. has to earn it like everyone else.”
Whee.
4tehlulz
>>“bear raiding.”
HAWT
Also, Larry Kudlow and Jim Kramer should be condemned to being locked in the same room together for until heat death of the universe.
mikkel
Listening to Larry Kudlow on the economy/stock market is like listening to Sarah Palin on Russian energy policy.
Actually that goes for anyone that blames short sellers for anything as it’s been shown both hypothetically and in practice that short sellers decrease volatility and the rate of decline (look at Shanghai for a market that doesn’t allow short selling).
Back in the early 30s they pulled all the notorious short sellers in front of Congress and blamed them for destroying the country and then added all these regulations that hindered it…..and that was when the stock market really crashed.
Alan
The investment banks are just whining. It’s their fault no one wants to uptick their stock.
Jake
It can’t be a heckofa lot of fun to be an iBanker these days.
Last eight years, however? PAR-TAHY.
Jake
Obama today, on GODDAMN FIRE.
PC
Kudlow can eat a dick. He’s all “rah rah free market” until the bears start tearing down his favorite companies. Guess what Kudlow? That’s the free market!
Clown shoes.
John Cole
Sure as hell looks like they are taking advantage of the fear in the market to go after healthy companies to me.
jprice vincenz
Kudlow is such a nose-candy freak that all he does is yell on tv. Imagine how he yells when he’s off-air. John, I’d not take anything from Kudlow but the cautionary tale of what can happen when you throw cocaine into the kool aid.
Dan
Blast from the past:
“I think when people take a look back at this moment in our economic history, they’ll recognize tax cuts work.”
— George W. Bush, March 12, 2008
PC
I’d like to see the SEC to go after naked shorts first.
Keith
Hasn’t Sully been blogging about that for a couple of years now? I always thought it had something to do with beards and not bonds, though.
PC
Morgan Stanley and Wachovia, sittin’ in a tree,
K-I-S-S-I-N-G
In a just world this crap would destroy the Republican party. Alas, the wingnuts are already trying to blame this fiasco on a 31 year old law that doesn’t even cover a majority of subprime loans.
stevie314159
Cramer absolutely blistered the SEC Chairman (and former Repub Rep) Chris Cox today:
When the Milwaukee Brewers get swept in a four-game road trip to Philly, it was time for the manager to go. I am already hearing about the possible firing of NFL coaches after two weeks of losses.
But SEC Chairman Chris Cox, a man who is so over his head, stays. A man who by enforcing the ban on reckless short-selling (that was illegal since the 1930s) almost saved the system but then inexplicably did not extend the rules, gets to stay! This one-man wrecking crew, who just cost us $85 billion and is responsible for not enforcing the disclosure rules for outfits like Lehman (LEH) and AIG (AIG) , who didn’t re-institute the uptick rule because of some nonsense academic work that was done in boom times, is still running the joint.
This is almost Leninist in its destruction of capitalism. I can’t believe that this man has put the whole financial services sector in the hands of the shorts. I can’t believe he can’t see this. I just can’t believe it.
These rules would have made it so even a poorly run outfit like AIG might have been saved without a bailout. It certainly would have given Lehman some breathing room.
Nope.
We need those rules back, now. We need them to save the remaining institutions that we all know are at the brink.
If he lets us down again, then there really is a situation coming where there is another institution that is too big to fail.
Fire Cox. Fire him now.
JL
John, Has Kudlow blamed the CRA (Community Reinvestment Act) yet? That seems to be the new republican talking point. The law states that if banks take deposits in a community, than they also have to lend in the community. The law does not state they have to lend to people who can not afford loans and has been in effect since 1977. Bush loosened the lending laws in 2004 but even still after that 80% of the sub prime loans did not involve the CRA act. It’s the new repub talking point, blame the gamblers and the poor for greed.
Alan
I think the SEC did make some changes regarding borrowing actual shares to short today.
Regarding short sellers…when the market turns around it’s the shorts that will be driving the price up when they have to cover.
snarkout
Sure as hell looks like they are taking advantage of the fear in the market to go after healthy companies to me.
Well, sure, and this is the flipside of taking advantage of giddy two-hits-of-crystal-meth mania and making money pumping unhealthy companies. Spreading false rumors about a company to damage its stock is wrong, but people would have to be frigging insane not to notice that a bunch of supposedly healthy companies aren’t, right?
wmd
I’d bet Goldman Sachs made some money being short AIG. Hell I did albeit on a vastly lower scale. I wasn’t betting on the former CEO of my company doing a bail out though.
The Grand Panjandrum
Heh. Kudlow worried about the uptick rule? That’s fucking rich. Jesus Christ I’ve been sporting wood the past couple of days over the stock market tanking. Jesus! This kind of market is what gets me all hot and bothered because I know I will find a BUY OPPORTUNITY somewhere.
If a company is still fundamentally sound (although McCain has now confused THAT definition) then it is just following the market down and NOW is the time to buy. Jesus. This shit is simple, it just ain’t easy. Maybe Kudlow should grow a pair, eh? These Republicans other right wingers should buy stock in companies that make diapers and panties. Buy what you know is always sound advice to the novice investor. Mocking these fuckers as pantie wearing sissies just gives a bad name to all the pantie wearing sissies.
PC
Ya’ll wanna shit yourselves?
S&P says pressure building on U.S. “AAA” rating
JL
Although short seller should be reined in just as much as the oil speculators, you would be blind sighted to blame them for the meltdown. If the books weren’t bad, they would not be short selling. Wall Street was playing a ponzi scam and it was going to fall right along with the housing market. Bush preaching his ownership society and Greenspan preaching adjustable loans and don’t have so much equity in your house started the ball rolling.
Zifnab25
I’m a little surprised they didn’t just try to lay it all on Gerry Studds.
Mike in Denmark
If Kudlow says something you can pretty much count on the opposite being true. For more informed commentary you could do worse than Barry Ritholtz over at the big picture.
The Grand Panjandrum
OT: The Vast Left Wing Conspiracy lives!!!!!!!! MM is on a roll and her minions have their panties in a knot over Governor Palin’s attempts to circumvent the rule of law by using her email account for government business.
SHORTER MM MINION: The liberals are really mean!
I think I’ll do a drive by and make a lovely comment to those rat fuckers at MM. Hell I’ve got enough tequila left in the bottle to keep me going for a few more days.
AkaDad
I guess McCain is a magician. He made Carly Fiorina disappear.
Andy
I’ve been following stocks for more than a couple of years, and please be careful of Larry Kudlow. Good guy, but highly optimistic, very supportive of the full range of Republican economic polices (trickle down, deregulation, etc). He is Ben Stein-lite in terms of point of view. He is intellectually honest, but be aware of his point of view.
The changes today, as I have heard about them, are that they made ‘naked’ short selling security fraud.
This is regular short selling
1. You borrow 100 shares of company A
2. You sell those shares through your broker for $5 each
3. You deliver those borrowed shares to your broker
4. The trade settles – you get the $500 from selling A and someone else gets the 100 shares of company A
5. Later you spend $300 of the $500 buy another 100 shares of company A back at $3 , return the 100 shares to the party from who you borrowed, and keep the $200 difference.
In naked short selling, you tell the broker you borrowed shares, but you don’t really have then. The broker still makes the trade to sell them, but the trade can’t settle. That leads to “failure to deliver”s (google it).
It’s illegal and a problem, but it’s kind of a convenient scapegoat for people who don’t want to blame the current problems (which are a lot bigger than naked shorting) on the policies that caused them (see McCain, Gramm for the last 10 years).
PC
It would be a shame if Malkin popped up on Anon’s radar. A real shame indeed.
XYZ
Here is Kudlow lauding Paulson in Townhall on Monday. Paulson bailed out AIG on Tuesday:
What a maroon.
Xenos
I disagree with him, but he can be quite the hero sometimes. If he could find a time machine and erase her existence back to the time of her birth, I would be willing to vote for him.
dslak
Just when she was getting interesting, too!
JGabriel
Reuters:
Now is when the ratings agencies suddenly start to take their responsibilities seriously?
Who spiked their coffee?
.
Litlebritdifrnt
OT – I’ll call your Lady Baroness De Rothschild Pickalilli “I’m not an elitist but Barack Obama is” endorsement and raise you this dude Wick Allison:
“Every great cause,” Eric Hoffer wrote, “begins as a movement, becomes a business, and eventually degenerates into a racket.” As a cause, conservatism may be dead. But as a stance, as a way of making judgments in a complex and difficult world, I believe it is very much alive in the instincts and predispositions of a liberal named Barack Obama.”
Read it, it is poetry from the former publisher of the National Review no less.
(and if I fuck up this linky dinky please forgive me, trust me it is worth it)
http://www.dmagazine.com/ME2/dirmod.asp?nm=Core+Pages&type=gen&mod=Core+Pages&tier=3&gid=B33A5C6E2CF04C9596A3EF81822D9F8E
wasabi gasp
The market is all about speculation. Speculate up. Speculate down. Winners smile. Losers frown. Sore losers blame the bogeyman.
Litlebritdifrnt
Oh fuck, can someone please help me fix the link? John is gonna send me to blog hell.
The Grand Panjandrum
The Fed is a bunch of sorry ass fuckers. Most of them should be hanged or sentenced to watching repeats of Pittsburgh Steeler football games. Several private firms were willing to bail out AIG over the weekend but they wanted some control of the company. AIG said no. Fuck them. Sell the goddamn company for fuck sakes. (But they knew the former Cheerleader and his team of mavericks would rescue their sorry ass. I hope these motherfuckers DIAF.)
BTW I must have been blocked from MM’s site for previous offenses, so I can’t have nearly as much as I thought I was going to have. Oh well that’s life in the big bad blogosphere. No justice, no piece o’ …
Napoleon
I don’t have the time to research this now, but my theory has been for about the last year that the rating was going to be lowered if the Dems won, even without recent events. This is a totally serious comment. One of the ratings agencies was starting to make noise that that may happen if social security benefits were not cut (and the tell on how politically motivated this was it didn’t mention the possibility that a tax increase, or cuts in other parts of the budget). So my theory was if the Dems won and started to do something like health care reform you would see Moody’s or S & P suddenly threatenly a rating cut if the Dem didn’t gut the crown jewel of the New Deal and give them the SS cut instead.
In case this sounds tin foil hat territory, I hate Dennis Kucinich for many reasons, but the whole “Cleveland went bankrupt on his watch” was largely that type of deal. The bankers who were tied to a local private utility tried to get Kucinich to sell the local public utility to them, and when he refused they sent the city into default in an attempt to obtain that result. Stuff like this has happened in the past.
Stuck in the Fun House
Our economy is so fucked in so many ways. The republicans and GWB have replaced the foundation pillars with pipe dreams of the rich to get richer by borrowing, and borrowing some more for bogus war and Gilded lives for a few. Most of this all started with Reagan Revolution and willy-nilly deregulation demagogues. Somebody’s gonna have to take the economy by the throat and strangle out the rampant greed and set some tough ass rules of the road, that reinstates the founders intention of reasonable profit for business. If this doesn’t happen and happen soon, the Chinese loan sharks are going to pick our bones clean.
JL
Wachovia and Morgan Stanley are talking about merging. Then they will become to big to fail.
Stuck in the Fun House
And in the mean time a little TEMPORARY socialist sweat equity might be in order. Like Wexler said today about some public works projects to rebuild our crumbling infrastructure along with real compromise for fixing the SS train headed for us all. Of course, the American voter will have to purge the country of the party of rampant wingnuttery to get anything done. I won’t be holding my breath till that happens.
demkat620
Can’t we pay off our debt with moose? Sarah Palin ought to be able to handle that herself.
Ecks
Two ways to link: tinyurl.com (love it, use it), or for style points:
<a href=”http://whitehouse.palin.gov/enemies_list.html”>all text here will be pretty blue, underlined and clickable</a>
Fun.
wasabi gasp
There’s one more way to deal with long links: John can install the WordPress plugin that automatically shortens them.
Mike in MI
Kudlow is a water-carrying hack for Wall Street Republicans. But this is a stopped watch moment for him. The “uptick” problem is real and has greased the tracks for this financial clusterfuck.
BTW, I second the recommendation to watch Cramer on today’s Morning Joe. Cramer can be tough to tolerate sometimes, but he had an epic rant today:
http://www.msnbc.msn.com/id/21134540/vp/26754253#26754253
J. Michael Neal
John McCain is opposed to spending any money to research it.
J. Michael Neal
Short selling, in and of itself, isn’t a problem. Naked short selling is, and cracking down on it is a good thing. Rumor mongering is a real problem, and the SEC needs to start imposing the death penalty on some people.
rawshark
Weird. Yesterday was the first time I’d ever seen that quote from Marx and now it’s twice in two days.
rawshark
Marx? Who said anything about Marx?
I mean Lenin. Sorry.
Jake
So, what’s the word on the street tonight boys and girls?
Are we in the shit, or are we in the SHIT?
PeterJ
Spain is in the shit if McCain gets elected.
Louise
Did you all see where John McCain isn’t sure he can trust the Prime Minister of Spain? Can’t be too careful about unconditional negotiation with those furriners, doncha know.
Bomb, bomb, bomb
Bomb Barcelona….
PeterJ
Oops. I tried to post over at WordPress Error and somehow they ended up here. Twice. Sorry.
Ash Can
Off topic, but I’m betting that a lot of folks here could use a good laugh at this point:
Gramps McCain’t mistakes Spain for one o’ them South American banana republics.
And apologies to anyone who may have already mentioned this.
Ash Can
OK, that would be apologies to Peter J.
Ash Can
And Louise. Y’all are too fast for me.
Broken
The problem with naked shorts is the knowledge that the Fed will bail out any company judged “too big to fail”. The Fed will not bail out stock holders at all , but will bail out stockholderes completely. So, the game is buy the bonds of target distressed finance company and use those bonds as colateral to short the stock. Stock goes to zero, you make piles of money and can then sell the bonds now backed by the US treasury.
Pure piracy.
jcricket
I’m not so sure Ben Stein is intellectually honest. His boundless defense of Nixon and creationist conversion have, imho, destroyed any cred Stein might have had at one point. He’s so blinded by hatred for liberals and the “secular elite” that he sold his intellectual honesty to the devil.
JC
Short selling needs to be outlawed. It’s a bullshit practice anyhow. Either you believe in a stock and you want to hold it, or you never go near it. Providing an incentive for people to drive down the price of a stock against the will of the market is dumb idea.
Short selling is not a good thing. It provides a second incentive to pump-n-dump scammers, who can make money on both sides of a stock’s rise and fall. It provides folks an outlet for buying into bad news and turning a profit (remember the airlines sold short before 9/11?).
It is an all-around bad idea to allow any short selling.
Jake
McCain clearly had no idea who Zapatero is. That’s kind of the sort of thing one would brush up on before interviewing with the Spanish press, no?
Then there’s this from her town hall tonight:
Yeah, she’s a “quick study” alright.
mikkel
I agree fully and that goes for both bullish and bearish rumor mongering. For some reason most people only focus on the latter although the former is much more prevalent and causes larger losses recently. After all what major bearish rumor hasn’t been true, while the bullish ones cause a very quick jump up that lots of people buy into and then lose it all when it wasn’t true.
Stuck in the Fun House
This is what I was saying in an earlier thread. Mccain has so many doctrinaire wingnuts talking in his ear,{ in this case a slap down of a socialist head of state of one of our allies}, he doesn’t what he’s saying or what he believes anymore. He has to throw truckloads of right wing red meat to the clamoring Jackels who already who hate his fish eating guts, just to get them to vote and work to get him elected. It’s going to get much worse before it’s over, especially with the economy melting down under GOP governance.
jcricket
If there is any justice, which there isn’t, the reckoning over the Bush years that is written in some decade hence will be the apotheosis of the Republican party. The moment when the GOP seemed most ascendent, only to realize they were Wil-e-Coyote and drove their party off a cliff.
Stock market below where he started, mass destruction of jobs, lowering of America’s standing around the world, massive expenditures and loss of life in unnecessary war, torture of hundreds or thousands of innocents in the name of the GWOT, irresponsible fiscal policy, bogus abstinence education, cronyism, corruption, warrant-less spying on Americans. Is there anything that Bush could have fucked up that he didn’t, and spectacularly so?
PC
Ask PIMCO how that’s going…
NR
Hey John, are you going to phonebank for Obama again? It looks like it might do some good.
Will Hunting
Not sure if anyone took the time to listen to that Cramer link but that was a pretty good off the cuff explanation of the problem.
The comment above about greasing the skids was right too. The short selling is problematic, but in normal markets (i.e. properly regulated and properly prosecuted) that would not be a problem. There is way too much unregulated money out there.
It is imperative that the Dems win. It should be clear to all (I know it is not) that the people manning our federal agencies are worthless. That was by design. Unfortunately, the monied east coast elites and the nefarious “short sellers” will get the blame. McCain is already going there. It is a shame Democrats have on balance taken more money from wall street. The GOP will point to that unfairly because it will taint Obama.
Dennis - SGMM
The Bush legacy is that neither McCain nor Obama will be able to keep their campaign promises because the Fed is assuming so many liabilities that there won’t be a damned dime left and no one will want to even loan us the price of a pack of gum.
PeterJ
There’s an IHOP in Wasilla, so don’t question her grasp of international affairs. She’s well versed.
Jake
I can’t believe Palin said “You can play stump the candidate if you want to” in response to a softball question like that. She’s fucking clueless.
I’m hoping she continues to be the source of jokes for late-night comedians. Folks are going to hesitate to vote for a ticket consisting of a tired old man and his court jester.
John Cole
That cramer video is from August.
Martin
Ironically, my mom was on vacation in Alaska when Palin was announced and stopped in Wasilla for lunch one day. Visited both the WalMart and the Target across the street. Like every town in Alaska, she says it’s a shithole. That’s probably too harsh a description, but suffice it to say that Alaskans have a different sense of architectural aesthetics than most of the rest of the nation.
PC
Wasn’t Cramer saying to buy financials in August?
Jake
The Alaskan AG is going on vacation, to Kansas.
Isn’t that…convenient?
Daniel
Given that he went on to talk about Mexico, he likely confused Zapatero with Zapatistas. Who, as we all know, are arming Al Qaeda. I’m sorry. They’re arming insurgents. Not Al Qaeda.
DougJ
McCain clearly had no idea who Zapatero is.
I think he thought they were those spicy potato chips.
KT
That’s not a bug, it’s a feature.
The Other Steve
Well, I’m ok reimplementing the uptick rule.
But short selling isn’t the problem here. If anything short sellers have been the only ones in the marketplace who know what the fuck is going on.
The guys at Goldman short sold mortgage securities before anybody else realized it was going to go bust. Then some hedge funds started short selling Bear Stearns and instead of looking at Bear the SEC did an investigation of the hedge fund.
The Other Steve
Old boy network is McCain having a staff meeting. HAHAAHAAA!
jcricket
Cramer has pretty much proven himself to be worse than throwing darts at a board for stock picking. He’s entertainment, and he’s quite knowledgable, but his stock/trading advice should be avoided at all cost. Speaking of “professional financial advice”, this gawker article was pretty funny (How Magazines led investors to ruin)”
FLILF Hunter
This interview with Michael Greenberger on Fresh Air is the best unpacking of this crisis I’ve heard yet — and it’s pretty terrifying.
Guaranteed to loosen your sphincter.
Mike in MI
Just the first 30 seconds as an intro to the segment. Basically Cramer says “We are all communists now” as a result of the bailouts. Then he calls out Paulson, Bernanke and Cox (SEC chair) for not having the smarts to listen to people who saw all this coming or the balls to make tough decisions before their backs were against the wall.
ShouldKnowBetter
Remember the Maine!
Hell, remember anything you senile old bastard.
KT
Stepping back from the facts of the stock market as it exists now, why exactly do we even need it? I understand that, in principle, it allows companies to raise capital, but why is it better, in the big picture view, to allow stockholders to sell their shares for more than their purchase price? I understand that when someone buys a stock, they want to get more money back than they paid, but why not just build in a return rate at the time of sale?
For example: Say company A needs to raise $10,000,000 to do R&D for a new product that they estimate will take them 1 year to develop. Why not issue 1,000,000 shares at $10 per share with a promise to pay back $20.00 per share no later than 2 years after the product goes to market? The investor would get a guarantee that their investment would double in two years.
The facts of investing would become very simple and straightforward. Buy a stock at price x and in y number of years, you will be guaranteed to receive an y(x + n) return. Investing would become trivially easy. No more need to worry about timing buys and sells. No more worries about getting reamed from tanking stocks caused by the nervous reactions of other stockholders etc…
In it’s current form, we have the dual absurdities of getting no guarantee that the money we invest will earn us a dime (or even get completely wiped out in two years by the stock tanking) and truly bizarre financial phenomena, like Bill Gates, who “earned” $50 billion for doing absolutely nothing.
After the IPO, “investing” is really just an extremely complex game that allows people to prey on each other’s emotional responses to subjective interpretations of the health of a company and the country. It’s just buying and selling buzz. In the simpler “buy a stock and get x return in y years” investors wouldn’t need to worry about being preyed upon by the unscrupulous, they would actually be able to invest with confidence and with very little risk.
From where I’m sitting, the entire premise of the stock market just seems stupid.
liberal
KT wrote,
That kind of instrument already exists. It’s called a “bond”.
liberal
KT wrote,
That has more to do with “economic rent” in the form of so-called intellectual property rights.
liberal
The Other Steve wrote,
That’s what Dean Baker has been pointing out on his blog over at prospect.org. (He’s one of the few economists who accurately pointed out the housing bubble years before it burst; he also accurately called the tech bubble well before it burst.)
Had enough people seen the bubble for what it was and then sold financials short, we might not be in this situation now.
Xenos
Now THAT would be a funny sign to follow McCain around the country with, getting into the background of the news feeds and interviews, and so on.
‘Remember Jenkins’s Ear’ would probably be too esoteric.
liberal
JC wrote,
Wrong. It’s a very good idea when the stock price is high and built on BS.
Cf financial right before the current crunch; Enron; …
liberal
Napoleon wrote,
Wouldn’t be a problem if the Dems weren’t a bunch of pussies (viz, right way to deal with that is just punch right back, but you know our Dems…)
KT
Other than providing the fantasy that you can become an instant millionaire, I see no useful purpose to the stock market. It doesn’t actually create a dime’s worth of wealth, it just shifts money around between investors with absolutely nothing constructive happening.
The actual hard cash value of the stocks in the market is orders of magnitude less than the sum of their price on any given day. It creates the illusion of economic health and hardship based on nothing more than emotion.
We’d be infinitely better of in the long run if we just ditched thee whole thing.
Andrew J. Lazarus
I’ve gone shopping in Wasilla myself. Yes, it’s ugly. No, that does not describe Alaska in general. Homer is Alaska’s Berkeley or Victoria. Beautiful setting, great town. So I didn’t catch any fish.
Even such generally unattractive places as Seward had some charm. Wasilla looked like any tacky suburb except for the backdrop view.
On topic, my boss wants the uptick rule back. I suspect that post-decimalization it will have much less effect than when an uptick had to be rather substantial. The idea, I think, is to prevent a massive (naked?) short sale from starting a local panic.
KT
Can you elaborate? How does Gates’s $50 billion, driven entirely by forces outside his control translate to “economic rent on intellectual property rights.”
mikkel
KT you are right that in its current form the stock market has little rational foundation. However, the real point is supposed to be that companies give out dividends based on their profits and stock price increases reflect the expectation of dividend increases. Indeed it can be shown that over very long time scales dividends are the main driver of stock performance (like you need to look at a full secular bull and secular bear put together, which can be between 30-40 years).
Also what you describe is a bond and has no voting rights. The point of stock is to be able to share in profits and to own a stake in the company and have a vote in decisions. Bond holders do not get these.
There is a strong argument to be made that secular bull markets start from a strong foundation where profits flow out to shareholders and P/E ratios are low, but then become increasingly abstract and disconnected from reality until there are bubbles and people have forgotten the point of stocks. Then everyone realizes it’s a shell game (over 10+ years of negative returns) and things repeat.
rawshark
To me the stock market is like a football coach calling plays to satisfy the gamblers. At my company we seem to care about shareholder value than our products and customers. Unless we’re using them to enhance share prices. It’s all about this quarter.
KT
Why not just give bondholders voting rights for the term of the bond? I was only a casual investor for 3 years (and had such an amazing gift for investing that I managed to turn $35,000 cash into $4,000 in that short time) but it was my understanding that companies are under no obligation to pay dividends and don’t even need to heed shareholder wishes (particularly on the matter of executive pay)
I think it would be fascinating to set up series of a worldwide investing experiments to find out the real world behavior for engineered-from-scratch investment markets. One market composed exclusively of bonds. Another with voting bonds etc. That way we could figure out the best way to funnel money to innovative companies and could come up with rational investment strategies that would be guaranteed to work rather than just keep slathering lipstick on the current godzilla sized pig.
Jeff
New meme going around that McCain predicted the Fannie Mae/Freddie Mac deal is a facade. The Federal Housing Enterprise Regulatory Reform Act of 2005 actually would have eliminated government oversight and put it in the hands of an independent entity as well as reduced some reporting requirements.
Conservatively Liberal
The stock market works as a basic concept but the problem is people who later come along and figure out new ways to extract cash from the same old shit. They look for ways to make money that never existed before, and the ideas are really nothing more than elaborate Ponzi-type financial schemes. People who get in early cash out nicely and those who join later pay the piper when it all crashes.
With the right loosening controls, it made the markets vulnerable to exploitation. Free market nuts like to go on about how a truly free market will self-correct because people will not be in business long if they are bad at it. The problem with this premise is that they are assuming that every businessman (or woman) is going to be totally honest and want to run the best business they can.
This is not the case. Not even close. Many businesses start and fail every year, and far too many of them are designed to exploit some segment of the market, make bucks and then go out of business, stranding the customers and investors while the owner walks away with the cash. While some are legit businesses, far too many others are just money scams.
Like a locksmith told me once, Locks don’t keep crooks out so much as they keep honest people honest. A crook will do anything to get in and usually succeed. A lock deters the casual thief. Regulations are like locks. They will not stop real crooks, but they will help to keep regular people from becoming casual crooks. People who decry regulations only do so out of ignorance or greed, nothing else.
You know why they put a fence up next to dangerous coastal viewpoints? Because people are too stupid to stay a safe distance from a crumbing edge. Rules and regulations have a place in the world of humans because we have a need for guidance.
There are some real dumbfucks out there, and we need to protect them. Oftentimes, from themselves.
mikkel
KT personally (and I’ve thought about this as I hope to implement it one day at least for my company) I think the key is to separate operational rights from compensation. For instance I think that a company should have a set dividend (say 20% of profits) and executives should have delayed compensation. I’d have two classes of stock: one that has operational voting rights and one that has compensation voting rights. I’d even have two boards.
The operational voting rights are about company decisions and are basically what boards do now but dividends are like 1/5 of the compensation stock. The compensation board sets executive pay and must pass a resolution if the operational board requests a decrease in dividend payments for the quarter. It also can disperse special large dividends to the operational stock if it feels they are doing a good job. Employees of the company would be forbidden to own more than a small percentage of compensation stock.
There are very good legal reasons why bonds are treated differently and most bankruptcy and other laws would have to be changed if bonds started operating differently (bond holders are creditors while stock holders aren’t). Also you have to realize that bonds change in value too so your original concern would still be in place. If held to maturity you can’t lose on a bond (well unless there is default) but many people don’t for one reason or another. You should look up basic explanations about bond price/yield relationships to see what I’m referring to.
KT
I will read up on price/yeild but just off the top of my head, I would think a simple sale formula could be established. Say the bond term is 2 years and return is 200 percent. If the original purchaser decides to sell at 1.5 years, a buyer would only have to pay 150 percent of the term cost.
Investors still have complete freedom to exit the agreement at will and are guaranteed not to lose money they just won’t make the full return if they sell early. Also eliminates the kind of ridiculous occurrences, like Bill Gates earning so much on his stock holdings, that a middle class worker would have to start saving every penny they earned from the age when humanity was still in it’s australopithecene stage, to acquire as much wealth.
KT
Another problem would be hostile takeovers. Without monopoly constraints, big fish could just buy majority stakes in other companies etc etc until the world was owned by a single entity. At that point, the market ceases to exist.
TenguPhule
Spoken like a true idiot.
Trades work in two directions. One goes up. One goes down.
Or were you one of those that believed housing prices would rise forever too?
liberal
KT wrote,
I don’t disagree with that. Studies have shown that much of the time the stock market doesn’t create any net investment.
liberal
KT wrote,
Because Microsoft mostly collects rents, not profits.
“Profit” is a return to capital. To the extent that Microsoft’s profits (in the accounting sense of the word) are returns to investment in software research, they’re profit.
But IMHO most of Microsoft’s returns are due to government-awarded monopolies (patents and copyrights), combined with rents stemming from so-called “network effects”. (As in, you can’t use OpenOffice because work uses Microsoft Office.)
You can read about economic rent on Wikipedia. The classic example is land rent, the return to land sans its improvements (like buildings). The landowner collects the income from land even though the land was already there—he didn’t invest any capital to “create” it.
NonyNony
There are other problems with “self-correction” even if you assume that people are acting honestly in the market. For starters, self-correction can be very, very painful. The Great Depression was a market correction, after all. Part of the point of regulation is to smooth out the boom-and-bust cycle so that market corrections are not as painful.
This has the side effect of making the boom times less “boomy” – and so the guys with the money scream bloody murder about regulations when times are good (as in the 90s) because they can see that times could be even better if you’d just eliminate those pesky laws that are restraining us from reaching the highest heights. Like those pesky laws separating investment banks from commercial banks, as one example.
For the citizenry as a whole, regulation is a good deal. We still get an economic cycle, but it’s more predictable and less traumatic – both in the highs and lows. For the guys with the money, regulation is a lousy deal. They lose the possibility of making ginormous profits (instead of just huge profits) that come about during booms and they aren’t generally hurt as badly during the inevitable busts. So they chafe. And during the boom times demand that restrictions be lifted (and then during the bust times demand bailouts – because if they can “hurt some” or “not hurt at all” they’d rather not hurt at all).
gopher2b
Then it wouldn’t be a bubble, would it.
barkleyg
John wrote a GREAT article on McSHAMES quest to rid the government of earmarks. Here is the essence of the article, and the link to it.
“The total national debt, as I write this, is $9,679,000,000,000.00 (nine and a half trillion).
The Budget for 2008 is close to $3,000,000,000,000.00 (three trillion).
Our budget deficit for this year is going to range in between $400-500,000,000,000.00 (four hundred to five hundred billion, give or take a few billion).
The total value of wasteful earmarks in 2008 (according to CAGW) will be approximately $18,000,000,000.00 (eighteen billion).
In other words, when McCain talks about earmarks, he is talking about 3% of our annual budget deficit, .6% of our annual budget, and a number too small to even report when discussing our national debt. Or, put another way, he is talking about two months in Iraq, something he wants to keep going indefinitely.”
The way I see it, King George( I don’t remember congress voting on this) just gave 180 billion dollars worth of Earmarks” to keep companies afloat in the last week.
Rough numbers: 18 billion earmarks for “pet projects” in a YEAR vs. 180 billion earmarks for 4+ companies in 1 WEEK!
McSHAME is preaching reforms worth 18 billion, and King George earmarks 180 billion in 1 Week.
Let me say it. McSHAME is basing his campaign on pork and lipstick, or technically, lipstick on a pig
Here’s the link to John’s previous post on earmarks. A MUST READ
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