From Bloomberg:
Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.
“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in Tokyo today in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”
The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said…
You see, we really did need financial reform in the wake of the 2008 meltdown. Unfortunately, liberals are running our government so all we got is a lot of hot air about hitting the fat cats while those same fat cats (who are, often, heavy donors to liberal causes) wrote a financial reform bill which did nothing to address the underlying problems.
There is nothing wrong with buying and selling stocks and bonds. Nothing wrong with trying to work out an investment strategy to maximize returns. There is something wrong, however, in a nauseating mish-mash of government, quasi-government and private actors working together to create financial instruments of no known provenance or worth and then selling and re-selling them in a game of “greater fool” until some piece of financial chicanery called “derivatives” is worth more than all the GDP of the world. I think Mobius is right – we’re going to have another crash. I had thought it would have happened, already. I am astounded they’ve held it off as long as they have…but it will crash. It can do nothing other.
Now, what should we do? Not much we can, at present. With Obama in the White House and Reid running the Senate, genuine reform cannot be enacted. But we should come up with a plan for financial reform which we can run on in 2012…and it would tremendously useful if, come 2012, we have both “I told you so” and “here’s the fix” if the crash happens between now and November of 2012.
The most important part of the fix is to shut down the casino on Wall Street and return it to investing. You might have noted that the economic news was garbage today – and yet the Dow rose 1%. Why? Because the European Union is working out a way to screw the taxpayers and bail out the bankers over Greece’s financial crisis…this pretty much means, at the end of the day, more money printing and this, in turn, caused people to bet on stocks today in hopes of an even higher rise as this goes forward. But we need investors, not gamblers. Investors carefully weigh risks – both long and short term – and try to figure out the way to protect and grow assets. Gamblers look for a quick killing – and they can do it, for a while. Eventually they bet wrong and the whole thing falls apart.
My solution to this aspect of the problem is not to get down in the weeds and, say, ban derivatives or what not. Anyways, even if you did them some gambler would just invent something else to gamble on. The best thing, I think, we can do is to punitively attack the up-and-down, all-through-the-day buy and sell like mad aspect to the markets. Lay a punitive tax on capital gains if a financial instrument is held, say, less than 24 hours. Progressively lower the tax on capital gains the longer it is held. Essentially, you’d force people to think…force them to cease being gamblers and start being investors.
Other things would help. Don’t allow mortgages to be sold; this would force banks to actually underwrite loans because they wouldn’t be able to push the bad paper off to a “greater fool” (which, as it turns out, almost invariably winds up being Uncle Sam). Forbid interest rates greater than 20% on credit cards; this would price out “non prime” consumers…they simply wouldn’t be able to borrow money on credit cards; might piss them off a bit as they can’t buy the new TV, but in the long run it protects them and protects the rest of us. Break up investment and regular banking, as we used to. Also, break up the big banks…a little good, old fashioned Populist GOP trust-busting would be a good thing, here.
The main thing is to understand that our problem is not the free market, nor is it in the fact that some people get rich buying and selling stocks. Our problem is that people were permitted – nay, encouraged! – by government to create all sorts of economic scams which led to the 2008 crash and which are leading us right back there. In order to just pile up personal wealth, some in the financial industry and in government took us for a ride…a ride which ended up at the poor house. If we want to get out of it, then we’re going to have to think about what we want, and then demand it be done…because you can lay bets on it that the banksters and bureaucrats will never do it voluntarily.
HAT TIP: Zero Hedge
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