I was thinking about that today, when I heard about the settlement on APM Marketplace.
This could easily turn into an election-year "get tough on Iran" issue, where the DOJ (at the request of Holder) refuses to consider any plea bargains in the Standard Charter case that do not contain an admission of guilt. Bonus points for "friend of Israel" brown-nosing, especially in light of moar saber-rattling this week from Netanyahu.
Quote:
Israel Plans for Iran Strike as Citizens Say Government Serious
By Calev Ben-David - Aug 14, 2012
Dozens of Israelis crowded in front of a storefront at a Jerusalem shopping mall yesterday to pick up new gas masks, part of civil defense preparations in case the military strikes Iran and the Islamic Republic or its allies retaliate.
“Our leaders seem to have gotten very hawkish in their speeches and this time it seems they mean what they say,” said Yoram Lands, 68, a professor of business administration, who was picking up new masks for himself and his wife at a distribution center in the mall.
Prime Minister Benjamin Netanyahu told visiting U.S. Defense Secretary Leon Panetta on Aug. 1 that time “is running out” for a peaceful solution to Iran’s atomic program. The Tel Aviv-based Haaretz newspaper reported Aug. 10 that Netanyahu and Defense Minister Ehud Barak are considering bombing Iran’s nuclear facilities before U.S. elections on Nov. 6. Netanyahu spokesman Mark Regev said government policy is not to comment on media speculation.
It could also take some heat off Eric Holder specifically, with regards to the hyped-up "Fast and Furious" issue in Congress. Going after Iran sanction-busters and money launderers could shore up his credentials with right-leaning moderates and undecideds.
I don't know how much Eric Holder can influence the specific prosecutor-on-the-ground in the case, however.
__________________ In the land of Mordor, where the shadows lie...
William B. Harrison, Jr., former CEO and chairman of JPMorgan, offers a NYT op-ed about how big banks shouldn't be broken up and a general defense of too-big-to-fail-banking in the US.
Quote:
BANKS aren’t always popular even in the best of times, but the anger of recent years is unprecedented. The anger, while understandable, has fueled the misguided idea that we should break up the nation’s largest banks.
The argument is simple and sound-bite ready: In the years before the crisis, greedy bankers used their political muscle to grow from small, specialized banks into giant, all-purpose financial institutions. This transformation led to the financial crisis because banks became too big to manage and too big to fail. If we break them back up, we will eliminate the risk of future crises.
The problem is that every part of this argument is based on a fallacy.
Commentators point to the inordinate influence large banks have on the political process. They fear that regulators are cowed by a large bank’s position and power. These critics seem to believe that regulators are incapable of making independent judgments. In the real world, this is just false.
Go read Neil Barofsky’s book Bailout or Frank Partnoy’s extremely well documented Infectious Greed for counterevidence. And you see proof every day. Just look at the brouhaha over Benjamin Lawsky’s order against Standard Chartered. The federal banking regulators still haven’t gotten over being shown up, and are continuing a campaign in the press against Lawsky, arguing that banks won’t cooperate with investigations. Huh? That’s an admission that regulators are so captured that they don’t know how to investigate any more.
And the banks — hard to believe in a time when we're facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.
JPMorgan cheerleader Harrison attempts to argue that the TBTF banks receive no subsidies or advantages over other banks- and again this is shown to be false with empirical arguments by the director of financial stability for the Bank of England, Andrew Haldane. He shows how ratings agencies rate TBTF banks differently, as a result of the financial backing of the governments, and how banks use this implicit backing to their benefit. Here's Haldane, quoted in the same piece at Naked Capitalism:
Quote:
It is possible to go one step further and translate these average ratings differences into a monetary measure of the implied fiscal subsidy to banks. This is done by mapping from ratings to the yields paid on banks’ bonds;6 and by then scaling the yield difference by the value of each banks’ ratings-sensitive liabilities.7 The resulting money amount is an estimate of the reduction in banks’ funding costs which arises from the perceived government subsidy.
Table 4 shows the estimated value of that subsidy for the same sample of UK and global banks, again between 2007 and 2009. For UK banks, the average annual subsidy for the top five banks over these years was over £50 billion – roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $60 billion per year. These are not small sums.
Table 4 also splits UK banks and building societies into “Big 5”, “medium” and “small” buckets. As might be expected, the large banks account for over 90% of the total implied subsidy.
I'm getting really tired of all these banking CEOs telling us how their greed, mendacity, and breathtakingly irresponsible behavior had nothing to do with the economic crisis.
__________________
“The greatest way to live with honor in this world is to be what we pretend to be.”
Bank of America round-up:
Bank of America agreed to a settlement of $2.43 billion, to put to bed accusations of misleading investors about the merger with Merrill Lynch. It was of course a settlement where they admitted no fault. Two billion, four-hundred and thirty million times.
Turns out the whole Merrill Lynch merger and Countrywide acquisition have been a mixed bag, especially with that whole Oops! Those giant bonuses Merrill executives are paying themselves as part of the merger deal for a bank losing $16 billion a quarter? Let's not say anything to our shareholders!
Quote:
Bank of America later paid $150 million to settle a Securities and Exchange Commission lawsuit that contended the bank did not tell its shareholders about big bonus payments Merrill had approved before the merger closed.
Merrill Lynch & Co.’s top four bonus recipients received a combined $121 million just before the firm was acquired by Bank of America Corp., according to New York Attorney General Andrew Cuomo.
In all, Merrill “secretly and prematurely” awarded $3.6 billion in bonuses, with Bank of America’s “apparent complicity,” Cuomo said in a Feb. 10 letter to Representative Barney Frank, the Massachusetts Democrat who heads the House Committee on Financial Services.
So obviously B of A has been pretty busy. As per the first link:
Quote:
The bank has spent billions of dollars to defend lawsuits related to Countrywide’s mortgage business. In the second quarter of 2011, for example, the bank reported an $8.8 billion loss, mainly related to a settlement with mortgage investors.
Earlier this year, Bank of America and four other banks agreed to a $26 billion settlement related to their foreclosure practices. That deal evolved from an investigation of the mortgage servicing practices by state attorneys general that was begun in 2010 amid mounting fury over revelations that banks evicted homeowners from their residences with false or incomplete documentation.
The report is the first update on how the five banks are doing in meeting the terms of the March settlement with federal agencies and state attorneys general. The settlement was meant to resolve allegations that they mishandled foreclosures, and the banks have three years to meet the requirements or face penalties.
Unlike its competitors, Bank of America did not modify any first-lien mortgages to reduce the amount of money the borrower owes, and it also did not complete any refinancings by June 30, according to the first report by Joseph Smith, the official monitoring the agreement.
It is understandable, what with Bank of America being so busy offering loan modifications if the recipients promise to not say negative things about Bank of America or about the loan modification: Businessweek, Feb 2012:
Quote:
Bank of America Corp. is impeding an investigation of its loan modification practices by negotiating settlements with borrowers who must agree to keep them secret and not criticize the bank in exchange for cash payments and loan relief, Arizona officials say.
Bank of America offered the couple a chance to modify the loan on the Jones Street house they’ve owned for 10 years in order to make payments more manageable, but only with conditions that include essentially agreeing to a gag-order when it comes to the deal and the financial institution. That means keeping quiet about opinions of the bank on Facebook, blogs, websites and in the media, and taking down any existing postings — something that may be unexpected in a document relating to a financial matter.
Nope.
At least it is a good thing bank crime doesn't pay, since we have regulators all regulating and stuff. Bloomberg, June 2012:
Quote:
Bank of America Corp.’s Merrill Lynch wealth-management unit was fined $2.8 million by the Financial Industry Regulatory Authority for overbilling customers by $32.2 million over an eight-year period.
Best estimates on that deal is that B of A profited, even after the fine and returning money. Surely banks have learned their lesson and shall not undertake profitable-overbilling-even-when-caught again. They might have to not admit wrongdoing, or make fake promises and double-dog pinky swears. Again.
So part of the whole story of banks and finance is a theme that keeps cropping up: regulatory theater. The public wants the government to do something; the political powers want to have their war chests filled with political donations via bank lobbyists; half the upper echelons of power (and their staff and advisers and the regulators) have or will work for the financial industry; and government wants to look like it is doing something, but not really be doing something. So you get captured regulators.
The big deal earlier this year was NY attorney general Eric Schneiderman who was going to go after the big banks on mortgage fraud, and was holding fast and NOT getting aboard the federal mortgage relief plan. That was the plan where the big banks all get protection from state prosecution of their frauds, and the banks will maybe possibly over three years provide mortgage relief to homeowners as a gesture of (fake) contrition. But then Schneiderman caved to a butt-load of pressure, and signed up for the thing, with the condition that he be put on a Justice Department task force to really dig, and if there were crimes by the financial institutions to prosecute them. It looked like Schneiderman maybe thought this would still allow him to go after banks, but in reality from the moment he signed NY on, the Obama Administration has taken every effort to snub, limit, and undercut Schneiderman.
Yesterday, the New York attorney general filed a thoroughly unimpressive lawsuit against JPMorgan Chase & Co. over allegedly fraudulent sales of subprime mortgage bonds by Bear Stearns, the securities firm that JPMorgan bought in 2008 with help from the federal government.
The allegations track those previously made in private litigation by former Bear Stearns customers suing for losses, including Dexia SA, the French-Belgian bank that got a government bailout last year. No individual who worked at Bear Stearns was named as a defendant in the civil lawsuit. There were no new revelations. Schneiderman’s office seems to have done little of its own investigative work.
Some of the allegations in the 31-page complaint look like a clip job, including quotes taken from the Financial Crisis Inquiry Commission’s report in January 2011. Nor does the complaint accuse JPMorgan itself of engaging in any misconduct after completing its purchase of Bear Stearns.
You have to wonder why Schneiderman -- one of five co- chairmen of a Justice Department working group on mortgage- bond fraud -- bothered at this late date. It would surprise nobody to learn that Bear Stearns committed fraud before its near-collapse in 2008. But this suit doesn’t seem to be about accountability. If it were, it would have named some individuals as defendants. You can’t have a fraud without fraudsters.
It is noted as well that only NY via Schneiderman's office is bringing this suit- there are no suits on the same forthcoming from the Feds, at least so far.
Oh, and the mortgage settlement appears to be once again an opportunity for banks to commit fraud- this time to lie to the government and mortgage holders about erasing debts that were already erased, and then tally that on their books as to how they have held up their end of the bargain. The regulators appear also to say the way they will know that the banks are compliant is by looking at the books the banks will present to them, and there you go Bob's your uncle.
Anyway, I expect nary a peep from regulators or the Obama Administration about much at all between now and the election.
Today's news was Bank of America getting a $1 billion dollar suit by the US government, because the mortgages sold to Fannie and Freddie through Countrywide (that BofA bought) were some seriously suspect low-grade, we-lowered-our-standards-knowing-there-would-be-a-high-rate-of-default-but-why-would-we-care-because-we're-selling-it-to-these-rubes-before-that-happens kind of mortgages.
Quote:
The government said in the complaint that Bank of America “systematically removed every check” in the issuance of mortgages and then sold the “flawed” mortgages to Fannie Mae and Freddie Mac. (FMCC) Both relied on Bank of America’s assurances that the mortgages they purchased complied with their standards, the U.S. said.
According to the complaint, Countrywide initiated “the Hustle” in 2007 just as mortgage loan defaults were increasing nationally and Fannie Mae and Freddie Mac were tightening their loan purchasing standards to reduce risk. The Countrywide program did just the opposite, the U.S. said.
Speed, Volume
“The goals of the Hustle were high speed and high volume, where loans ‘move forward, never backward’ in the origination process,” Bharara said in his statement. “To accomplish these goals, the Hustle removed necessary quality control ‘toll gates’ that could slow down the origination process.”
Also today, a federal judge in Manhattan unsealed a so- called whistle-blower lawsuit filed on Feb. 24 against Bank of America over the same program. Edward O’Donnell, who worked at Countrywide as an executive vice president, said in his complaint that he “personally objected to the ‘Hustle’ on numerous occasions” because it was leading to an increasing number of early mortgage defaults.
This article considers the cumulative effect on prices when one considers that interest from many points along the way to the purchase all add to the final price.
In the 2012 edition of Occupy Money released last week, Professor Margrit Kennedy writes that a stunning 35% to 40% of everything we buy goes to interest. This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP. That helps explain how wealth is systematically transferred from Main Street to Wall Street. The rich get progressively richer at the expense of the poor, not just because of "Wall Street greed" but because of the inexorable mathematics of our private banking system.
__________________
Chained out, like a sitting duck just waiting for the fall _Cage the Elephant
But here's another reason, and a big one, as to why it pays to be an 800-lb gorilla in the economy: NYTDealBook, Dec 10, 2012:
Quote:
State and federal authorities decided against indicting HSBC in a money-laundering case over concerns that criminal charges could jeopardize one of the world’s largest banks and ultimately destabilize the global financial system.
Instead, HSBC announced on Tuesday that it had agreed to a record $1.92 billion settlement with authorities. The bank, which is based in Britain, faces accusations that it transferred billions of dollars for nations like Iran and enabled Mexican drug cartels to move money illegally through its American subsidiaries.
That's right. Not that banks get much more than a slap on the wrist, and have to lose a little of their profits from their past malfeasance; but now here's the government just coming out and saying it: if you had been a smaller bank, we would have indicted you. But you're too big! So here's a fine; and off you go.
So why would you ever want to be a small bank? This is an actual incentive toward further consolidation of the banking industry into the hands of a few legally untouchable behemoths, with their own gravity and rules. And what is your incentive as a big bank to not take massive risks that yield massive rewards, and then every once in a while get another slap on the wrist?
It is worth noting, as a matter of scale, that $16.8 billion is higher than the GDP of Senegal, or Iceland, or Namibia, or Mozambique; it is more than twice the GDP of Nicaragua, or Laos, or Haiti, or Cambodia.
I whole-heartedly believe that regulation has to start with setting caps on the size of banks. The banks that were considered too-big-to-fail during the housing bubble collapse, are all now bigger. Huffington Post, Sept 15, 2012:
Quote:
By one important measure, the risks to the financial system of a bank collapse have only grown. That's because the banks themselves are even bigger than they were four years ago.
Wells Fargo, for example, doubled in size when it swallowed Wachovia. It now serves 70 million customers and manages one out of every six mortgage loans.
Bank of America's assets have increased to $2.1 trillion from $1.8 trillion in 2008.
JPMorgan Chase, the biggest U.S. bank, with $2.3 trillion in assets, is nearly three times as big as it was in 2002, and intends to stay that way. "There are huge benefits to size," CEO Jamie Dimon said this week. "Big banks have a function in society."
That function is to hold the economy captive unless they get their way, and get special dispensations and government subsidies besides.
The Government gave HSBC $3 Billion+ when they were crying about mismanaging their money. The 'fine' they get for helping cartels isn't even asking for all the money back.
__________________
Cēterum cēnseō factiōnem Rēpūblicānam dēlendam esse īgnī ferrōque.
“All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.” -Adam Smith
The “money-laundering” scandal about British bank HSBC is a mixed picture. On the one hand, bank officials laundered money for Mexican drug cartels, allegedly knowingly, which only pond scum would do. Still, the cartels are only in business because the US government irrationally opposes legalization of innocuous agricultural products such as marijuana (the US goes to bat for Big Alcohol all the time, and actively pushes exports of sure-to-kill-people tobacco products, but if 64,000 Mexicans have to die in Washington’s “war on drugs,” too bad).
On the other, HSBC’s dealings with Iran and Syria were not illegal in the UK and only “illegal” in any sense because the United States is, as Felix Salmon rightly says, is taking advantage of the dollar’s position as the world’s reserve currency to bully third parties into a financial blockade against countries it doesn’t like, such as Iran.
If the RICO statute ought to apply to anyone it should surely apply to HSBC and every single one of its executives. That is surely some organized crime right there, that is.
__________________ Old Pain In The Ass says: I am on a mission from God to comfort the afflicted and afflict the comfortable; to bring faith to the doubtful and doubt to the faithful.
I don't know about HSBC, but Sarbanes-Oxley applies picture perfect to Jamie Dimon over at JPMorgan-Chase; CEOs and CFOs sign off on what their company does, and are supposed to be culpable if, for example, the London Whale does some seriously dodgy shit with no internal safeguards set up to watch for someone say, losing $6 billion dollars. But the regulators are captured, JPMorgan is politically connected and massive, and the SEC brass have a habit of getting hired on with the regulatees and their ancillary legal firms as they exit the SEC.
JPM was forced to disclose that it relied on its traders to provide honest and accurate valuations for its financial statement disclosures. That’s like putting the foxes in charge of not just the henhouse, but the entire farm. Much to its chagrin that was a costly choice. Note that was not a mistake, but a conscious choice.
That Stone Age policy has been extinct for a generation at every financial institution that signs a SOX internal controls certification. Oops, I’m wrong there. AIG relied on their trader marks too, but their external auditors finally had had enough and forced them to disclose ‘material weaknesses’ in internal controls. The stock dropped like a stone with that revelation.
Every firm that I’ve worked at has an independent valuation unit that resides outside the business unit. In JP Morgan’s case it seems that unit reported to the business, which is a serious deviation from good practice. (There is a remarkable new story up at Bloomberg which has former JP Morgan executives acting as if there was nothing amiss about having traders mark their own positions or having the valuation unit for the CIO sit within the CIO. This is in fact a troubling sign about the acceptance at senior level in JP Morgan of deficient controls as “normal”). History has shown that staffers preparing the valuation will be subject to pressure from the unit leaders, particularly if the business has losses that the producers hope can be reversed. Additionally, most major trading operations have a valuation committee that includes the corporate CFO to challenge (and memorialize the analysis of) the valuations and the valuation process. The activity of this committee is generally reviewed by (and in many cases attended by) the external auditors, especially since the beginning of the crisis.
It appears that JPM is attempting to make the case that rogue traders, with criminal intent, mismarked the books. That may be so and relevant criminal charges against those traders should be pursued. But that strategy does not protect management. If there was mismarking, especially to the extent that occurred here, it is the responsibility of management to know or have procedures in place to alert them to the potential for fraud. Step one in that control process: Don’t let your traders mark their own books. If you do you have no excuse. Your controls are worthless and as CEO, you are responsible for ignoring that fundamental control gap. Full stop.
I have to confess I still don't really understand what happened, but then I haven't put much effort into trying to understand because I figure it's likely just to depress the shit out of me, so it's probably my fault.
__________________
Cēterum cēnseō factiōnem Rēpūblicānam dēlendam esse īgnī ferrōque.
“All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.” -Adam Smith
Goldman Sachs made more than a quarter of a billion pounds last year by speculating on food staples, reigniting the controversy over banks profiting from the global food crisis.
I honestly don't understand the commodities markets and why speculation like that is allowed. To me it seems logical that you buy something, add your profit and sell at that price until you run out and buy the next shipment. The fact that prices on gasoline can change by a massive amount in a single day when the station did not receive a new shipment baffles me no matter how many times people try to tell me it's the futures market that determines the price.
__________________
"freedom to differ is not limited to things that do not matter much. That would be a mere shadow of freedom. The test of its substance is the right to differ as to things that touch the heart of the existing order."
- Justice Robert Jackson, West Virginia State Board of Ed. v. Barnette
Speculation is important. If you couldn't buy futures etc. then you can't prepare for future changes in supply or demand as easily. Money is a solution to the goods distribution problem, and counter-intuitive as it might sound, I'd prefer that a shortage of a good (or predicted shortage of a good) leads to that good rising in value (and yes, forcing me to pay more for it - and yes, including food). The alternative is you end up with the goods being distributed horribly inefficiently - potentially (if the goods actually run out) at random or on a first-come, first-serve basis.
Example: today the supermarket was out of bagels. This annoys me. I would rather the supermarket had predicted the increased demand at 4.30pm and raised prices beforehand (i.e. speculated!) to ensure that only the people who really wanted bagels would buy them at an inflated price. I would certainly have paid a bit more for bagels than their standard price. Potentially I might have declined too high a price rise, but because of the failure of the supermarket to price their bagels perfectly, I didn't even have that choice. The last bagels were distributed essentially at random, not based on who was prepared to pay what for them (potentially you could argue it was on a who-could-get-there-first basis, but that still is a stupid way of good distribution). Capitalism fail!
Ideally they'd price their bagels so that the last one sells at the very end of the day (assuming they can't just increase their supply of bagels, which would be better for everyone).
(And yes, it's different if people are starving: but that's a failure of how this goods distribution model works, not speculation. If the only food source were bagels, and there were a shortage, and nobody (including the supermarket) didn't anticipate supply shortages by raising prices, then the people who got bagels would be determined at random (or first come, first serve). That's no better. I'd rather see bagels divided up and shared in such dire situations. Oh, look, socialism.
__________________ The miracle of the appropriateness of the language of mathematics for the formulation of the laws of physics is a wonderful gift which we neither understand nor deserve. -Eugene Wigner
I don't buy the premise that peoples willingness to pay more for something somehow measures their objective need for that something. Willingness to pay more is more likely just a measure of their disposable income. First come first serve is just as arbitrary as folks with the most cash get what they want and folks with the least are lucky to get what they need. Hell I could argue that they guy who got up early to make sure that he got a bagel before they ran out wanted it more.
Speculation is important. If you couldn't buy futures etc. then you can't prepare for future changes in supply or demand as easily. Money is a solution to the goods distribution problem, and counter-intuitive as it might sound, I'd prefer that a shortage of a good (or predicted shortage of a good) leads to that good rising in value (and yes, forcing me to pay more for it - and yes, including food). The alternative is you end up with the goods being distributed horribly inefficiently - potentially (if the goods actually run out) at random or on a first-come, first-serve basis.
Example: today the supermarket was out of bagels. This annoys me. I would rather the supermarket had predicted the increased demand at 4.30pm and raised prices beforehand (i.e. speculated!) to ensure that only the people who really wanted bagels would buy them at an inflated price. I would certainly have paid a bit more for bagels than their standard price. Potentially I might have declined too high a price rise, but because of the failure of the supermarket to price their bagels perfectly, I didn't even have that choice. The last bagels were distributed essentially at random, not based on who was prepared to pay what for them (potentially you could argue it was on a who-could-get-there-first basis, but that still is a stupid way of good distribution). Capitalism fail!
Ideally they'd price their bagels so that the last one sells at the very end of the day (assuming they can't just increase their supply of bagels, which would be better for everyone).
(And yes, it's different if people are starving: but that's a failure of how this goods distribution model works, not speculation. If the only food source were bagels, and there were a shortage, and nobody (including the supermarket) didn't anticipate supply shortages by raising prices, then the people who got bagels would be determined at random (or first come, first serve). That's no better. I'd rather see bagels divided up and shared in such dire situations. Oh, look, socialism.
I may be way off base here, but I think there's a difference between what you're talking about and speculation. Raising prices in the face of reduced supply or increased demand isn't speculation. That's just ordinary price setting. Speculation is a bet on the future change in price of some commodity. In your example, speculation would be, say, if I had signed a contract with the supermarket stipulating that they had to let me purchase X number of bagels from them at their current price at 4:45 pm so that, when they projected reduced supply at 4:30 and raised prices, I still got to buy my bagels at the lower price, and could then turn around and resell them for a profit.
I've always read that the theoretical positive purpose of the commodity markets that enable speculation is price stabilization. So, say, if I run a bakery, I could hedge against variation in the price of grain by betting on higher grain prices in the future. If grain prices drop, I have lower production costs and make more money, but some of that increased profit is offset by my having lost my bet. If grain prices go up, I have higher production costs and make less money, but some of that decreased profit is offset by my having won my bet. Either way, I'm insulating myself, and my customers, against wild swings in the price of the commodities that I need to run my business.
__________________
"Trans Am Jesus" is "what hanged me"
I've always read that the theoretical positive purpose of the commodity markets that enable speculation is price stabilization. So, say, if I run a bakery, I could hedge against variation in the price of grain by betting on higher grain prices in the future. If grain prices drop, I have lower production costs and make more money, but some of that increased profit is offset by my having lost my bet. If grain prices go up, I have higher production costs and make less money, but some of that decreased profit is offset by my having won my bet. Either way, I'm insulating myself, and my customers, against wild swings in the price of the commodities that I need to run my business.
Agreed, though a more accurate model is between the producer of grain and the buyers (A large enough bakery can lock in a contract to buy wheat from a mill or a grower, but these are generally six-month contracts on wheat already harvested- it is neither futures nor speculation). A farmer is planting a crop but does not know what the price will be when the crop is harvested; it could be high or low, depending on everything that happens between planting and harvest. So the farmer could set up a futures contract where she can sell the grain at an agreed upon price; then unless the crop fails, the farmer has income guaranteed and insulated from sharp price declines; if it was a year of scarcity and the price would have been very high, the buyer is insulated from very high prices on the grain and can sell at a profit.
When an investment bank steps in, they are simply investing in futures markets to make a profit off of a transaction (or investing in derivatives only vaguely/ tangentially based on futures, and these get byzantine and ridiculous quickly). They are by no means the only ones, but when you get a large number of speculators in, this can make prices much more volatile and less expressive of supply or demand.
I think this article has some good points.
Quote:
Finance textbooks suggest that speculators are useful because they provide liquidity, which simply means they increase the number of orders in a market, which in turn increases everyone’s ability to trade. In so doing they are thought to enhance the process of rational ‘price discovery’ in markets by allowing the balance of supply and demand to effectively express itself in clear prices based on fundamental considerations.
...>snip<... It may be the case that a market with 30 per cent of activity accounted for by speculation might work well, but what about a market with 60 per cent? What about 85 per cent speculation? These are not linear relationships – a market does not inevitably get more and more efficient as more speculators come in, and it is easy to imagine that there’s a tipping point where too many speculators destabilise prices rather than help them. Most speculation is short-term trading for short-term profit and it works if it’s done amidst a market concerned with long-term fundamentals. But what if it’s done amidst a market that’s already largely constituted by speculators? That’s speculation on speculation, and that’s how bubbles form.
...>snip<...
... an informal subset of this debate is actually found in the financial trading world, rephrased in terms of the distinction between fundamental and technical traders.
A fundamental trader is a speculator concerned with speculating on supply and demand of commodities. A technical trader is a speculator concerned with speculating on market patterns formed by the actions of other traders. Fundamental traders are worried that the increasing number of technical traders is increasing the randomness and ‘noise’ found in markets. If technical traders base their decisions on other traders, and their numbers are increasing, the market becomes circular and self-referencing and runs the risk of disconnecting from supply and demand concerns altogether.
I don't buy the premise that peoples willingness to pay more for something somehow measures their objective need for that something. Willingness to pay more is more likely just a measure of their disposable income. First come first serve is just as arbitrary as folks with the most cash get what they want and folks with the least are lucky to get what they need. Hell I could argue that they guy who got up early to make sure that he got a bagel before they ran out wanted it more.
Yes, to the first part, but not to the second. Having more disposible income (to buy more bagels or at a higher price) is a result of supplying a good that is in great demand: it's (in principle) a result of shoring up a gaping hole in goods distribution. The incentive for distributing goods efficiently is to to be able to pay more for bagels. Markets are efficient because they don't just distribute according to need, but provide rewards/penalties at the same time, with the very same mechanism. First-come-first-serve (or distribution at random) ruins all this. Folks with the most cash getting what they want is not arbitrary at all, it's the point of cash. (Incidentally, outside of idealised scenarios, people tend to be stuck doing what they're doing: I think most people who are rich are lucky, not noble pioneers who constantly move around to find the best way to provide a needed good to the population).
And of course rolling all benefits and rewards into one distribution mechanism is great, but also has problems. If very few people are far more wealthier than others, everything gets a bit silly, as (as you point out) the utility a person gets from a bagel becomes divorced from the fraction of disposable income it costs. If people need a certain good (food, housing, healthcare) and the costs outstrip potential to pay, it goes really badly wrong. And so on. You know this stuff.
And yes, you could make the argument someone who gets up early is effectively paying a higher price for the bagel in terms of time if not coin. I don't really want to get into those details, as I think we both get the points each other is making without doing that.
__________________ The miracle of the appropriateness of the language of mathematics for the formulation of the laws of physics is a wonderful gift which we neither understand nor deserve. -Eugene Wigner
I may be way off base here, but I think there's a difference between what you're talking about and speculation.
I think that's true. The principle (the ability to set prices however I want, including announcing or agreeing set prices for the future) amounts to the same: you more efficiently distribute goods by setting prices (now, or later) in anticipation of changes in supply/demand. The supermarket is probably a bad example as there isn't a constant stream of bagels entering, so you really do run out of them at the end of the day. So with just two players, that was the best example I could come up with. Yours is better, and I wish someone had speculated yesterday so I could have bought those bagels from him.
And yeah, as chunksmediocrites posted, too many speculators and it goes wrong.
The housing market in the UK is hugely driven by speculation, I suspect. We're all effectively subsidising the banking sector because everyone takes out a mortgage at a huge price because everyone pays a huge amount for the house because everyone expects prices to rise, and prices rise because everyone expects people to take out huge mortages because everyone expects prices to rise...
Great if you sell mortgages! Which brings us back on topic: banks.
__________________ The miracle of the appropriateness of the language of mathematics for the formulation of the laws of physics is a wonderful gift which we neither understand nor deserve. -Eugene Wigner
Re: Official fuck the banks thrad
Linear Mode
