A Failure of Ideology

This financial crisis provides a clear example of critical flaws in pure economic libertarianism.

First, economic libertarianism fails to account for rapid dynamics of financial markets. Rapid changes can be so fast that theoretical counter feedbacks cannot even begin to reverse the excess.

Second, it fails to treat zero point problems, namely, that when a firm goes bankrupt, it collapses to near nothing. Reversal – recovery - cannot occur.

Third, the human emotion of fear is ignored in economic libertarianism. While even political libertarians recognize fear of violence as creating a legitimate governmental role, economic libertarians ignore this in financial markets.

Fourth, economic libertarianism assumes many small players acting in free markets, while financial markets often have huge pools of money that can directly influence prices with their own actions.

For these four reasons – rapid dynamics, zero point error, fear and big money pools – economic libertarian simply does not to provide a “Square Deal” for the common man without a central power to ensure fairness.

Here is an example:

A congeries of beefers use instant messages to pass false rumors that Bank X has huge hidden losses or has lost key customers. They start buying put options on Bank X stock and then all place large orders for credit default swaps of Bank X. Without securing real borrows on the stock, they sell short huge blocks of Bank X common stock, pressing it lower and lower with any uptick respite. Without natural writers, the credit default swap market in Bank X is overwhelmed and its spread blows out, increasing funding costs hugely. Fear for the credit of Bank X is inferred from this huge increase. Little cash is needed to buy these derivative and cause this fear.

More rumors appear in the financial press as the stock price fall is noted and people wonder why. The rating agencies, in search of credibility, put the firm onto credit watch because of its stock price, not for any fundamental reason. Fear grows and spreads.

Bank X soon cannot borrow funds are reasonable rates and begins to bleed cash and customers. The stock falls furthers. There is no time for management to get facts out, which are hard to present and understand by sophomoric financial press anyway. Soon the firm’s losses of customers and cash withdrawals become critical and …

All this could occur as beefers with trillions of funds can and do overwhelm normal market activity. Economic libertarianism permits these huge pools of money to act like raiding Vikings, plundering staid, defenseless monasteries with impunity. In 9th century Europe, no central government existed with powers to stop them. A century of havoc ensued across Europe from France to deep Russia to Sicily to Ireland.

And without some central power to hold back these raiders, massive economic turmoil can hurt the common man for decades.

The US SEC has completely failed in its core mission, viz., to regulate the markets. The SEC seems to have become the sandbox of economic libertarians to build castles in sand. Or perhaps they – the commissioners and staff – are simply corrupt, wanting to be loved by the beefers and law firms where they expect high paying jobs next year.

From news reports overnight, the US SEC may finally be acting. Certainly the new rules on short selling fraud will help. The resistance to this is almost ludicrous. Can you imagine how high stocks would go if buyers could “buy” stocks, not deliver their cash, and yet maintain the position? Yet until today, short sellers could do the analogous: sell short shares, never deliver the stock and keep the position. Incredible. That shows the power of the beefers over the SEC and its staff. Only a crisis is breaking this tangle of corruption and foolish ideology. Fools or knaves … knaves or fools ... or both ?

Actions by the UK FSA has led the way on short selling. Early this AM, the banks in the UK are having huge rallies in their stock prices. And there are reports the US SEC might finally do something to stop the raids of beefers.

Can anyone imagine how much the common man has been hurt by this SEC foolishness and / or knavery ? Honest John McCain is completely correct. The SEC Chairman should be fired.

Markets

Huge rally yesterday. I have no regrets on those sales on Tuesday, by the way. Without those, perhaps I would have sold all my stock on that huge fall on Wednesday. As happened, I protected my most important positions and was clear minded to make a quite profitable trade in MS. And if Hank the Tank had not acted to create a 21st century Reconstruction Finance Corp., that rally yesterday would not have occurred. One really must "Protect Yourself At All Times" in an aggressive fund like my Alpha Fund.

I closed out the MS trade with a fine profit. I suppose hindsight would say I should have held it as the stock will likely rise a lot more today, but ... a 25% one day profit is OK.

I will watch today and think. I want to keep my Alpha Fund size down as it was quite distracting for me recently. I didn't like having to watch it so much for the past few months - it has greatly interfered with my semi-retirement.

PS: “Free Trade” is another failure of economic libertarianism. The problems of rapid dynamics, zero point, and big money (in that case, other nations) cause its failure to provide promised benefits to the common man.

PPS: Babblevision reports that the SEC has prohibited short selling in 799 financial stocks until October 2. Beefers use of this tool to create fear now in abeyance.

Word of the Day

"Moloch" - noun [$10]
Moloch means 1a. (Moloch) a Canaanite idol to whom children were sacrificed; 1b. a tyrannical object of sacrifices; 2. a grotesque spiny slow moving Australian lizard.
Sentence: How many good paying jobs and savings of the common man have been fed to the moloch of pure economic libertarianism ? Honest John McCain understands this as he called for the firing of SEC Chairman Cox. Obama ... nope.