ON INVESTING

(This is too long to post as a comment under the GROVETON AND RECESSION VS DEPRESSION post)

To inspire application of homo sapiens full capacity, investing and the profit from investments of capital, labor, intelligence and land are the most useful incentives humans have found – at least so far.

But investing and profit have proven it inspire the use of full human capacity for good AND for ill. Those who suffer the most are at the bottom of the Ziggurat.

Fundamental changes including human literacy, instantaneous communications, technology of mass consumption and weapons of mass destruction require a far different distribution of resources and responsibility than existed when the pre-SuperCapitalism of A. Smith ascended or later when totalitarian states learned to harness the power of capital accumulation.

EMR will leave it to others to debate if Nader has ‘the answer’ – donations by the super-rich. So far those at the top of the Ziggurat have always used their wealth to protect their wealth and to grow their wealth, not to narrow the Wealth Gap to a margin that reflects a sustainable trajectory for civilization.

In The Shape of the Future , EMR documented that Fundamental Change (Transformation) of human settlement patterns was necessary to secure a sustainable trajectory for civilization. To achieve that a Fundamental Transformation there also must be a Fundamental Transformation of governance structure.

That is because democratic processes and a free (aka, well informed / intelligent) market must be harnessed so that the majority of the citizens can establish Agencies, Enterprises and Institutions to meet the needs of all humans. At the present those who enjoy the fruits of civilization are those who control Agencies, Enterprises and Institutions to the detriment of those at the bottom of the Ziggurat.

In TRILO-G , EMR documents the need to add Fundamental Transformations of economic structures to the two other Fundamental Transformations.

SYNERGY is working to articulate the details of the first two Fundamental Transformations.

Thankfully we are hearing more and more comments such as this one from Tuesday: “You know that seminar you did six years at the Community College? You need to present it again because now more are ready to listen.”

But not nearly enough citizens are REALLY ready to listen as the posts on this Blog document.

As documented in PROPERTY DYNAMICS, the majority are RHATC’s (pronounced “ratzzies”) who do not have time to consider the trajectory of civilization much less the ways to a achieve sustainability.

For this reason EMR and SYNERGY need to stick to the first two Fundamental Transformations and let other articulate the details of third.

There are some threshold ideas on the topic of ‘Investments’ that may be of help:

A good place to start is TMT’s tax on short term profits – perhaps the level of tax should be at 2 percent less than the profit realized, with a bonus one percent reduction in the tax rate for every year the investment is held?

There are the ideas of Robert Reich in SuperCapitalism starting with the fact that corporations are not people. In the Vocabulary of SYNERGY: Enterprises are NOT citizens. Make the citizens who own Enterprises accountable and taxable.

There is a crying need to start enforcing anti-trust and anti-competition laws.

Larry might agree that NO Enterprise should be too big to fail. There should be Critical Maximums for Enterprise size with automatic divesture at predetermined thresholds. Economies of scale benefit Enterprises not consumers when all costs are fairly allocated. Wal*Mart is a perfect example when the total Community scale costs are considered.

In general, Larry is more right on ‘investing’ than Groveton.

Groveton may make more money but, that is not the point.

He who dies with the most toys does NOT win – individually or in Households, Enterprises, Institutions or Agencies much less by Community, Region or nation-state.

Peter is right there is a need for incentives to invest. The important question is what should the incentives for investment be?

A basic rule of investing might be: “Know well that in which you invest.” In this context, location / proximity and transparency is key. Regional stock markets with Community sectors would be a first step.

Tax profits from investing outside ones home Region at twice the rate as those inside the Region. Make profits from investments inside ones home Community at half the rate of the Regional rate. Profits from Neighborhood and Village investments could be taxed at half the Community rate. Encourage impoart replacement at all scales.

The primary need is for innovation to improve is governance and civility, not increase consumption.

It is axiomatic that Agencies should be taxing consumption, not just profit. The use of Agency taxation might morph to tax consumption and EXCESS profits – short term, remote, speculative, etc. Further, move from taxes to fees for service.

Encourage conservation with increased rates for increased use of water and energy, not the reverse.

And of course Agencies must fairly allocate location variable costs instead of subsidizing wasted transport.

The only way to achieve profound reduction in consumption without loss of the amenity of a modern technology supported civilization is Fundamental Transformation of human settlement patterns.

Tax advertising, entertainment, salt, fat and sugar. Use caffeine, alcohol and recreational drug revenue to support Regional health care systems. If citizens cannot trust the medical perfession to contorl these substances civilization needs to revert to witch doctors.

All these strategies may decrease the short-term rate of growth but will increase the equity of distribution of growth and resource consumption and will help insure there are resources for future generations.

To bring the US of A into parity with the world need to cut per capita consumption of to one quarter the current rate.

Do not underestimate the need for Global equity and a fair distribution of true total costs that has become mandatory by human literacy, instantaneous communications, technology of mass consumption and weapons of mass destruction.

The bottom line:

There must be a new way to measure the value of investment and it needs to be something beyond gambling venue receipts.

PART FIVE of TRILO-G is titled NEW METRIC FOR CITIZEN WELL BEING.

EMR

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41 responses to “ON INVESTING

  1. "Groveton may make more money but, that is not the point.

    He who dies with the most toys does NOT win – individually or in Households, Enterprises, Institutions or Agencies much less by Community, Region or nation-state.".

    Bill Gates has done more to help the poor in the world than all of the liberal Democrats in Congress. The Bill and Melinda Gates Foundation is an exceptional effectrive charity. And it's a charity that would never have come into existance without the profits from a studied and historically successful investment in a little company called Microsoft.

    So, for Bill and Melinda Gates, the goal was not dying with the most toys. It is using the vast fortune they have EARNED to help those in need. And, in my opinion, they are providing more benefit per dollar than any agency of the US Government in the history of the US Government.

    I know EMR likes the book SuperCapitalism. So do I (with the proviso that Mr. Reich spends 99% of the book admiring the problem and 1% proposing solutions to the problem). I would also suggest a reading of John Gordon Steele's An Empire of Wealth as the companion book to Mr. Reich's screed. Steele is an accomplished historian who puts a lot of American history into an economic context.

    Finally, who built the US Public Library system? Was the Department of Health and Human Services? No, it was Andrew Carnegie. And old Andy had some interesting opinions, including:

    "More than a century ago, the steel titan Andrew Carnegie declared in his book Triumphant Democracy: "The old nations of the earth creep on at a snail's pace; the Republic thunders past with the rush of the express. The United States . . . has already reached the foremost rank among nations, and is destined soon to outdistance all others in the race. In population, in wealth, in annual savings, and in public credit; in freedom from debt, in agriculture, and in manufactures, America already leads the civilized world.".

    Annual savings? Freedom from debt? My, my. How far the grossly incompetent and culpably negligent politicians have taken us in just over 100 years.

    The ability to pursue personal wealth through capital risk is as fundamental to America as the Declaration of Independence or the Bill of Rights. Confiscatory tax schemes that effectively eliminate private capital risk are as intellectually bankrupt as suspending the right to free speech. America is an empire of Wealth. Eliminating the country's ability to generate wealth will surely destroy the country.

    If Robert Reich lived for another 1,000 years and wrote about economics 20 hours a day throughout that millenium he would not come within intellectual eyesight of Adam Smith.

  2. pretty good editorial from Groveton but methinks American Style Capitalism has clearly demonstrated that the blind pursuit of wealth generates significant collateral damage.

    so, in that vein, I offer the "cons" to Groveton's tilt.

    Not that I don't agree with some of what he said – but he is painting a less than pragmatic picture and we ought to balance that overly rosy philosophy a bit.

    Now is the rest of the world still talking about the US as a model for capitalism?

    And if we are so dang good, why is our "great" capitalistic empire now fretting about China owning our debt and Russia, China and the Oil barons shedding the dollar as the world standard.

    Groveton – you have to admit, we took a wrong turn somewhere.

    when a totalitarian nation with a centrally-managed economy boxes our ears and threatens to tell us how to do business.. we have screwed up.

    And blaming this on govt is laughable – as long as the corporate titans own our political process by convincing too many of us that bribes are "free speech" and tax their people to fight 2 wars off budget – and then blame govt for a lack of fiscal restraint.

    I love Wall Street. They drive the country into an economic ditch then they high five each other with business-as-usual bonuses and golden parachutes paid for by – who else -taxpayers.

    and you ought to admit – NoVa is an example – not of capitalism but the military industrial complex – sucking taxpayers dollars to deploy a "defense" force that is bigger than the next 10 militaries in the world.

    This is capitalism?

    This is the pursuit on personal wealth by going after military contracts instead of coming in 4th or 5th in truly capitalistic enterprises such as Civilian UAVs?

    I just love watching the folks on military payrolls spout off about being self-reliant as individuals and making your own way in this world – like NoVa does.

    NoVa OOZES Military Industrial Complex done, of course, off budget.

  3. EMR has to agree with Larry G here:

    Groveton wrote a good editorial. EMR also agrees with a lot of what Groveton says BUT:

    EMR would agree a lot more if ALL ‘the REAL fundamentals’ – settlement patterns, per capita consumption, wealth distribution, public and private debt, population and most key resources that support human life (potable water, top soil, total energy, terrestrial and marine diversity, mission critical elements, etc.) – were not on unsustainable trajectories.

    We have a copy of “The Wealth of Nations” and dip into it from time to time.

    At one point we were invested in one of Adams 18th century enterprises – a speculative sugar mill on a small Caribbean island.

    Our investment came 200 years after the Martin family invested but our research and experience taught us a lot about the context of Adams thinking.

    Our view is that if Smith was faced with the need for Global equity and a fair distribution of true total costs that has become mandatory by the growth in human literacy and instantaneous communications in an economy distorted by the technology of Mass OverConsumption and was facing the current distribution of weapons of mass destruction, then:

    Adam Smith would hold views that are a lot closer to those of Robert Reich than the ones he held in the late 18th century. In fact a careful reading of many of his chapters indicate he foresaw just what capitalism’s excess would yield.

    Bill and Melinda have done a lot for sick individuals and struggling healthcare systems. They have done NOTHING to forward the three Fundamental Transformations that will be required to achieve a sustainable trajectory for civilization.

    Warren’s additional money will not help.

    We are running Bill’s software and he is are running a great foundation but it is just an Institution (See THE ESTATES MATRIX.)

    Few can question the contribution to human literacy of Andrew’s libraries. But where is the contribution from those Wall Street ‘traders?’ Bill and Andrew made contributions to the economy AND gave (are giving) some of it back.

    Where are the Masters of the Universe? Dumping garbage over the side of their yachts to feed the other sharks off of Mustique, Mikonos or Morrea?

    Society must now rely on the NBA (which “cares”) to build learning labs and the NFL to muzzle Rush. Where is MLB and NHL much less the leaders of Enron, AIG, Lehman Brothers, Goldman and the rest?

    To survive humans need democracy, not oligopoly.

    Someone wondered if the Richest 13 would step forward to do something about the trajectory of the Richmond New Urban Region. Do not hold your breath. In the next post, Peter puts the finger on the myth of Institutional research and the role of Enterprise support.

    It is up to citizens to forge Fundamental Transformations.

    EMR

  4. "That is because democratic processes and a free (aka, well informed / intelligent) market must be harnessed…"

    Which is what I have been proposing. What we need to do is harness the democratic process to the free market.

    We do that in such a way that we stop making political decisions that make no financial sense and do it in such a way that minorites are equally protected.

    One problem with the democratic process is that there is no price involved. One suggestion that has been made is a $25 or $50 fine for NOT voting. I suspect that would change the political landscape drastically.

    RH

  5. Freedom from debt is a really bad idea that sounds good. The appropriate amont of debt spent on well chosen, long term, capital projects is a good thing.

    Without enough debt we canot grow as fast as we might, and with too much we face collapse.

    RH

  6. make people vote?

    geeze.. we already go folks voting that ought not…let'snot make it worse. 😉

    How about this. Before they can vote – they have to name the Gov, both Senators and their Congressman and if they get it wrong, they can't vote AND we fine them.

  7. "A good place to start is TMT’s tax on short term profits – perhaps the level of tax should be at 2 percent less than the profit realized, with a bonus one percent reduction in the tax rate for every year the investment is held?"

    ——————————–

    Suppose I invest $50,000 in a tractor and I drive it 1000 hours a year, and it returns me $2500 a year. You would have the government take $2450 of that and leave me with $50?. Then next year I'd get to keep $75 and so on.

    It would take me 60 years to recover my investment so I could buy the next new tractor.

    For the first ten years my IRR is negative 20%, and I finally get to a whopping +5% after 30 years.

    Would anybody make an investment under those conditions?

    You are basically limiitng the rate of growth of your busness to under 2% a year. And at the same time I $500 with my tractor the governement earns $2450, and of course we all want government making our investmeents for us, since they are so good at it and all.

    The no new taxes crowd will have a field day with this idea. This is a prescription for riots in the streets.

    RH

  8. let's do this. the longer you invest, the less your taxes are and the shorter your investments – speculation – the higher the taxes?

    In other words, we reward – now get this concept Ray – sustainable investment.

  9. make people vote?

    I didn't say that, all I said was that if you don't, it will cost you. Anyway, it wasn't my idea.

    Right now, people figure, "Why should I vote? It will never change anything."

    Under the new plan it would be "Why should I vote? I need the money for something else."

    The silent majority would suddenly go to the polls and speak. Losers would no longer be able to claim that their side lost because didn't turn out to vote. You would no longer have an elextorate that was 2 or 3% of the populace.

    RH

  10. "Before they can vote – they have to name the Gov, both Senators and their Congressman and if they get it wrong, they can't vote AND we fine them."

    We already made laws against that sort of thing – for a reason.

    The idea is to get people to vote, not to prevent them.

    How about this instead, we tie the salary of elected people to the ratio of debt to income above 10%?

    RH

  11. getting some people to vote is like offering a two year their choice of two dollar bills – one with 100 on it and the other with Micky Mouse where the famous guy's picture usually is.

    Having said that, I think Virginia needs the right of Citizen initiated referenda.

    it would eventually draw more people into the process and they'd want to know more about the issues – and they'd know – that at least on some issues – they could overrule these fellas that are influenced a bit too much by "free speech" money.

  12. "Tax advertising, entertainment, salt, fat and sugar. Use caffeine, alcohol and recreational drug revenue to support Regional health care systems."

    How about if we tax everything equally so that all property is protected equally: they guy who os the salt mine isn't penalized by other people who think they have superior proprty rights or superior knowledge. We let the market decide waht people want to buy and own.

    I think the British taxed salt in India and it was one of the things that led to their downfall.

    RH

  13. "And blaming this on govt is laughable – as long as the corporate titans own our political process by convincing too many of us that bribes are "free speech" and tax their people to fight 2 wars off budget – and then blame govt for a lack of fiscal restraint.".

    The NEA corrputs the political process just as much as any corporation. Ditto for AARP.

    No politician is corrputed by force by any of the special interests. They are not just complicit in the corruption they are active in the corruption.

    I personally believe that distributing political power out closer to where people live and work is a good idea. It's harder to be blatently corrupt at the county level than the country level. And for all of TMT's gnashing of teeth over the Fairfax County BoS the good people of Loudoun County threw out the "development at any cost" BoS and replaced it with a "smart growth" crew. When was the last time that the US Congress was transformed by the voters?

  14. I strongly support raising the cost of day trading and arbitrage, but not EMR's formula. Try 80% of the gain from sales of capital assets held less than six months. Fifty percent of the gain from the sales of capital assets held six months or more, but less than one year. Then keep what we have today, but all gains from the sale of capital assets held five years or more are not taxed.

    TMT

  15. re: NEA/AARP –

    ha ha ha

    that's like comparing a 2 dollar donation to a million dollar donation.

    Yes.. the NEA and AARP are represented but I bet you that they'd be among the first to agree to take money out of the process.

    Our system is broke.

    Our politics are polluted.

    We agree on getting politics closer to the people.. and yes.. you can still have corruption at the local level but it's harder to hide and easier to deal with.

    If citizens in Virginia had the right of recall – or citizen-initiated referenda we could get the rascals under better control.

    our State and National System is broke – it makes me sick to look at VPAP data and sicker when I realize that VPAP is much more transparent for this state that the national campaigns.

    We have to get money out of politics.

    As I pointed out before – the corporates get the money from us, then write it off on taxes and use it to essentially subvert OUR interests.

    So.. for instance, the banking industry uses money they got from us – to prevent laws that would hold them more accountable for some of their dirty dealing with consumers..

    that's what is so maddening… they're in essence charging us for their lobbying.

  16. Just so no one runs further down rabbit trails of sillyness:

    We suspect what EMR meant by the tax on "investment" it was the sale of stock — the sort of short term flipping of which TMT has been critical.

    I do not think he is so foolish as to propose that capital equipment for ones closely held Enterprise would be taxed.

    Over all, I thought he had a lot of good ideas, given that he is focusing on the other two Fundamenatl Transformations.

    RJM

  17. An investment is an investment. What is being complained about here is short term profits. Right now you can buy any kind of heavy equipment at big discouts because of the drop in building. I just saw a $30,000 bobcat for sale for $13,000.

    Suppose I buy that, sit on it for six months, and flip it for $20,000. Would I pay the short term tax, or not? I'm buying capital equipment for my closely held enterprise, no?

    Now, suppose that instead, I just buy stock in Ozark Tractor Surplus or Drillling Supply Co. which aree companies that buy, rent, sell, scrap, and junkyard heavy equipment. I know they are doing the same thing I would do if I bought the bobcat, and I expect them to make a bundle, soon. Six months later I sell the stock.

    How is that any different from buying and selling the bobcat? This investment would be subject tot he same problem my original example showed: no short term profits. So I repeat the question: How do you ever expect to get to long term profits, without the short ones?

    I made the tractor argument above silly on purpose. Of course you would not tax that kind of investment at that rate because then no one would make it.

    But it does not matter what the investment is.

    With those kinds of returns after taxes, no one would make the investment. Therefore the only reason to impose such a tax is to prevent investments.

    But not the tractor kind of investment, just these other investments that make money and don't do any work. Just the investments that don't pass your value judgement.

    All of a sudden you become arbiter of the free market and how long you have to own something, or for what purpose.

    The truly essential features of property are that property can be transferred, divided, and non onwers are excuded from interference. These attributes of "transferability" and "excludability" and "divisibility" characterise property rights.

    Put another way, those with property rights can control allocation and access.

    So what you are proposing is that I can own something but you control its transferability. not only that, but if I transper it "too soon" then you want a substantial piece of those nasty old short term profits!

    Now that is a silly argument.

    ———————

    This isn't about buying or selling or dividing property. those are features of property in law that are well established.

    What we are really talking about here is obligation, as in obligation to accept the risk that comes with your property: it might go down in value. when some really big property owners id not have to accept that risk, those of us who paid the bailout tab were justifiably upset.

    Why?

    Because we did not get equal protection of our property rights. this has nothing to do with short term profits: it has everything to do withthe fact that we feel cheated.

    Somebody stole from us, using government as an intermediary.

    Which brings us to public interest. There is no reason for government to do something that is not in the public interest.

    Public interest regulation has always been marginal in practical effect. But public interest ideology, reinforced by interest group politics, has prevented full realization of the market efficiencies that could be achieved from explicit recognition of property rights. The true “public interest” lies in removing obstacles to efficient use of the property and allowing it to seek its highest valued use to the public. Various kinds of public interest auctions may help to move us in the direction of a less burdened market system, but they are only a step, not the destination.

    So, if you want to control when and how something is sold, then you need to put some money on the table, in order to prove that your "public interest" is worth more than mine.

    Otherwise what you have is a property grab usually known as stealing.

    RH

  18. TMT's formual just throws a bias into the problem, which simply stated is to make as much money as possible as soon as possible.

    Why would government want me to make money later? So they can collect their tax later? So they can collect LESS tax later?

    It makes no sense.

    All that happens is that I get 5 months and 20 days into an investment, suddenly I find myself in the positon that if I hold it for ten more days I can make 30% more – in short term profits. Even if the asset declines in value by 25% in those ten days, I'm still better off holding it and paying a lesser tax on lesser profits.

    Now government is in a position of rewarding bad decisions.

    It makes no sense.

    RH

  19. it makes perfect sense to me.

    I don't have a problem with your BobCat.

    what I have a problem with is you "investing" in derivatives with taxpayer support.

    I don't think taxpayers should cut you any slack at all if what you are doing is essentially gambling …and the govt is staking you…

  20. what I have a problem with is you "investing" in derivatives with taxpayer support.

    Until this bailout crap, I've never gotten any governemtn support that I know of for investng in derivatives. Even then it is second hand suport. Go take a look at you 401k investments and see how much is in the major banks.

    You would have lost all of that, without the bailout. But if the banks survive and pay back the money, where is the big problem?

    RH

  21. "if what you are doing is essentially gambling …and the govt is staking you…"

    Investing in the market, is not gambling. It isn't anything like gambling, because in gambling there is no underlying company making stuff or doing things. Gambling always has a built in loss to overhead of the house, even if it is chips and beer for a friendly local game.

    It may seem totally crazy or similar to gambling to have futures based on the weather for example, and yet it is a real market. Just because you don;t understand it doesn't mean that the people participating are gambling. Wrestling and Australian rules football make no sense, either, until you understand the rules.

    RH

  22. the "problem" is that the economy almost dropped into a Depression and necessitated the TARP an the Stimulus to bring us back to "only" a worldwide recession and 10% unemployment and a structural deficit that is going to probably be a decade or longer – perhaps a generation getting itself sorted out.

    So .. yes.. there is a BIG problem with people who were essentially gambling… because at the end of the day – they were not investing in jobs or productivity or companies but basically making daily/hourly bets on which way different sectors of the market was going to swing.

    any kind of trading activity that has the potential to do the kind of damage that we have seen needs to be treated with great hostility.

    I agree with TMT – tax the heck out of it.. make it unprofitable and uncomfortable.

  23. "…there is a BIG problem with people who were essentially gambling…"

    Some people managed to screw up the system, but that does not mean the esential parts of the system should be tampered with as though the system caused the problem.

    Those people would not have been able to do what they did without the complicity of the ratings agencies, whose job it was to assess risk.

    Taxing "short term gains" is not the right answer, unless your goalis to put the brakes on the entire economy.

    You would have a situation where short term losses are deductible but short term gains are taxed to death. There would be no way to get the profits you need to invest long term.

    How would you ever get a lawn if you mowed down 80% of whatever tried to grow? You would have 20% left and then if IT tried to expand, well that would be shor term profit,and you would lop 80% of that off, too.

    This is not a recipe for growth.

    Oh, no, its only the REAL short term growth we are after. So you plant 100 grass seeds and you mow down 80% of what they produce. Some of them won't survive, so yu plant another hundred.

    When they come up you whack off 80% of them, but not the survivors from the earlier crop. Who is going to keep track? And who in their right mind is going to keep sowing seed under those conditions?

    I agree something needs to be done, but attacking short terms profits as if they were some kind of intrinsic evil, trying to label them as the ill-gotten gains of gambling, well, that is just irrational.

    RH

  24. "…they were not investing in jobs or productivity or companies but basically making daily/hourly bets on which way different sectors of the market was going to swing."

    HUH?

    They were investing in 30 year mortgages (and derivatives therof). How is that a daily or hourly activity?

    The homes those mortgages built are still out there, and someone is going to get a good deal, in the end.

    So, OK, one way or another Ihad stock in Citibank, Wells Fargo, Bank of America, and JP Morgan. They might have all disappeared and my stock would be worth zero.

    And yes, I'm going to pay part of the price for TARP, etc.

    Is that price greater than what I would have lost? I dunno. We will never know because we have only one economy: we can't run a controlled experiment.

    Citbank holds my mortgage (having bought it from someoen else). If Citibank went under, some other bank would have wound up with that asset, and they would get it at a song, because there is no way of knowing if it is toxic, or not.

    My mortgage is still good, so whoever got it would have made an instant profit. Would you then tax that at 80%? What they did would not be a bit different from me buying a bobcat at a (temporary) discount and flipping it.

    And it would not be any different from me buying stock in the bank that bought my mortgage or a company that flips bobcats.

    I'm sorry guys, Idon;t see that the argument against short term profits goes anywhere other than long term stagnation.

    RH

  25. " You would have a situation where short term losses are deductible but short term gains are taxed to death. There would be no way to get the profits you need to invest long term."

    oh Contrare! NO DEDUCTIONS for short term losses. Nada.

    In fact, if you try to claim them, I'd have you audited and look for other stuff to nail you on.

    I'd treat it like we do insider trading because it is just as scummy.

  26. " oh Contrare! NO DEDUCTIONS for short term losses. Nada."

    No deductions for losses and all your profits are taxed away. how do you expect to get away with treating this oe business different from every other?

    If I buy something, and essential attribute of ownership is that I can sell what I have.

    What you are proposing is that one class of property gets less protection than another. It is another way of claiming superior rights for YOUR property. It cuts into government's primary obligation which is to protect people and their property.

    What is being proposed is direct interference in the market which doesn't change the essential characteristics of the market (which is profit seeking) it only adds another level of tax avoidance as part of the profit seeking strategy.

    It leads to the condition where one might deliberately make bad business decisions because they are good tax decisions.

    It is patently crazy to think that this can lead to a net public benefit, and the government has no business monkeying around with buying and selling.

    Does the market need some kind of control to prevent the build up or layers of systemic risk? Yes, but what you are proposing is not the way to do it.

    There was nothing fundamentally wrong with the idea of bundling packages of mortgages and selling them as a security. "Here are a hundred mortgages that have a one year good payment history." We pretty much thought we knew what the risk associated with that was, and it was higher than the risk for a bundle with a five year payment history.

    What we didn't figure was what could happen if they were all located in Michigan and the autmakers went bust. the ratings agencies whose job it was to analyze risk were a) asleep at their job, and b) being paid off by those who created new kinds of risk.

    Had they done their job, the market would have done its job.

    ————————

    The only good thing about you rproposal is that buyers will know going in that they cannot sell for six months, which means that either they won't buy or they will offer lower prices to those who need to sell—no matter how long THEY have held the securities.

    You think you are penalizing the short term buyers, but you cannot do that without also penalizing the long term holders.

    It is a stupid idea from step one. It is politically and emotionally effective to say we are going to "get those speculators", but it is as dumb as toast. it is not going to do any of what it claims to do, and it will do a lot that was never mentioned.

    And, had it been in place, it would not have prevented our recent problems.

    RH

  27. "I'd treat it like we do insider trading because it is just as scummy."

    It is nothing like insider trading. Insider trading is inherently ethically wrong. But there is nothing wrong with buying something and then changing your mind and selling it.

    Say I have three priorities A, B, and C. I'd really like B, but I can't afford it so I satisfice for A. Suddenly the price of A goes up, such that if I sell it I can now get B which is much better for me.

    You gonna take that option away, just because I did not own A long enough?

    Jeez, if you claim to be in favor of free markets, I'd hate to see what the other option is.

    RH

  28. yes.. I was not clear. I'm talking about what I think TMT is talking about which is short term trading of "paper" that in and of itself has no value – like a "numbers" chit or a betting slip at the racetrack as opposed to a piece of paper that represents ownership of something tangible with a value that can appreciate or depreciate.

  29. different "classes" of property..

    you bet your bippy …

    the govt will reward you for buying and selling houses but not for buying and selling tractors or kumquats.

    ditto with business expenses for a car but not for non-business expenses for cars.

    ditto with being able to write off depreciation of some kinds of equipment and not others.

    is that what you mean by discriminating against different classes?

  30. "the govt will reward you for buying and selling houses"

    No they don't: yuo make money they tax you on the profit.

    And they don;t care if you woned it a day or a decade.

    The only rewrd in buying and selling is the profit you make, whether you are buying houses or tractors.

    RH

  31. "…ditto with business expenses for a car but not for non-business expenses for cars."

    Come on, you can fo better than that.

    Business expenses are deductible, private expenses are not. It has nothing to do with whether the expense is related to a car or a kumquat.

    Whether a business owns the car or you own the car, if it gets stolen you expect the same level of protection, whther you own it for a day or a decade, and whether it is an actual car or paper indicating ownership in carmax.

    And if you cannot expect equal protection then nothing else works, and no property is safe. If what you buy is not safe there is no way to encourage hard work, thrift, conservation, or diligent, responsible ownership.

    RH

  32. "I'm talking about what I think TMT is talking about which is short term trading of "paper" that in and of itself has no value"

    Of course it has value. If you had bought Euros with your dollars five years ago you would have traded paper with value for other paper with value.

    If the values change with respect to each other you make money.

    You won the money. It has value.

    You make a bet in a poker game and you have bought nothing, you lose you lose. You have toturn up your card.

    If you buy Euros and they go down, you still own the Euros. You don't have to sell them. What is the difference if you buy Euros, or gold, or bobcats.

    You won't get the gold, what you get is a piece of paper saying that you own gold: we used to call it currency.

    RH

  33. You won the money. It has value.

    I meant to say that you OWN the money, not that you won it.

    Very confusing in this context.

    RH

  34. "…where there is no underlying cash market that both parties to a "…derivatives transaction may observe, then the derivative has no true economic “basis” in the markets, and is entirely speculative. Where there is no cash market, there is, by definition, no price discovery. A derivative that is created without the benefit of an actively traded cash market is essentially a deception. "

    Precsely my argument.

    You have to have a market to discover what things are worth. My problem with the environmental argument that something is worth an infinite amount, because ther is no market in it is exactly that it is essentially a deception, as noted above.

    The promoters of such regulations pretend that a model can serve as a substitute for a true cash market basis.

    Now, what has that got to do with short term holdings?

    RH

  35. "Regulating the speculative activities of US banks in the OTC derivatives markets and banning all OTC derivatives for which there is no actively traded bash basis market will effectively solve the problem of systemic risk."

    I agree, and again no mention of short term trading.

    Notice that all of my examples and comments apply to markets with and actively traded cash basis.

    RH

  36. "and truly hideous effects of OTC instruments such as CDS is that they equate true “owners” of assets with speculators who create ersatz positions in these assets via derivatives; that is, they “rent” the asset with no accountability to the owner. It could be argued that such activity amounts to an act of thievery …"

    Much like holding someone ELSE's land off the market, for personal gain and no accountablity to the owner.

    The only difference is the case in point is that this is upported by federal bank reuglators, and the land situation s actively supported by local regulators.

    They have allowed and encouraged non-ownere to take erstz positions in other peoples assets by accepting the argument that this is acceptable because not doing so affects someone else's assets.

    I have argued that the way you solve this is to reate an actual underlying cash market.

    Thanks for arguing my point, Larry.

    RH

  37. This is what happens when you shoot for short term profits:

    How Moody's sold its ratings – and sold out investors

    " A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.

    Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets." "

    http://www.mcclatchydc.com/227/story/77244.html

    then take a few minutes to read this:

    " The Banks Are Not All Right"

    " But there’s an even bigger problem: while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not. Key banks remain financially weak, and their weakness is hurting the economy as a whole."

    http://www.nytimes.com/2009/10/19/opinion/19krugman.html?_r=1&ref=opinion

  38. Look, Larry, there was nothing in the article you posted taht sasi anything about short term profits or trading, only that there must be an actual market underlying derivatives.

    Now you are pointing at the rating agencies, which I already mentioned. moddy's wasn;t engaging in chasing legitimate short term profits: it was engaging in fraud.

    RH

  39. CNN on today's gambling venue performance:

    "The downgrade in the middle of the day to a major bank caused the speculators to jump," he said.

    Saluzzi said that the abrupt turnaround in direction is reflective of that fact that day-traders and other Wall Streeters with a short-term focus are driving the market right now,

    AND ALWAYS

  40. why do we give certain business activities tax breaks, incentives, grants, etc while not doing that for other businesses?

    Why are we considering tax incentives right now for job creation?

    My point here is that the govt has the ability to enact favorable policies for those activities that are deemed in the greater interests beyond individual short-term profit and they have the ability to enact policies that are unfavorable towards activities deemed not in the best interests of the wider community beyond the individuals who might make a short term profit.

    I think a majority of people do not believe that short-term, profit-chasing "paper" that does not actually represent a tangible good but rather what boils down to a "bet" (like hedging) is not in the best interests of most of the community – and we know – for a fact – that if done as a concerted activities can and does cause harm.

    If we think this – then we should make it an uncomfortable activity like selling cocaine or preying on the poor with high interest loans.

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