الثلاثاء، سبتمبر 30، 2008

Financial Chaos: Vegas at Large


Gambling Made Legal Everywhere


Our global financial system is seriously flawed. Flawed is not the right word, it is fundamentally screwed up. Simply because it is built on rewarding speculation not hard work. People are encouraged to borrow and spend beyond their means. Banks lend money and they know that the borrower can not pay back. Banks think, or pretend to think, that their loan is guaranteed because they have the house as a collateral. But the house price is 10 times inflated. The higher the price, the bigger the loan, or mortgage, the higher the interest revenues earned, the happier the bank!


But what happens when people can not pay back their loans and banks end up putting their hands on thousands of houses? What happens when banks need money to pay their bills and they can not give employees salaries in "living room", "stairway" or "basement" tokens? Banks then have to sell. But when everyone is selling, prices plunge. And when prices plunge the collateral's selling price becomes 50%, 25% or less of the original loan value. Trillions of dollars, value which never existed in the first place, evaporate in thin air.

In our global financial system, brokers, rather than producers or service providers, are rewarded by making the big bucks. This is good in a gambling casino for a weekend in Vegas or so, but can not be the basis of a solid financial system to govern the lives of 6 billion people and many trillions of dollars.


Speculators make their profits not from "dividends", which represent a variable percentage of the profits earned by the economic enterprise they had invested in. No. They make their profits from capital gains, achieved by inflating stock prices rather than earnings or dividends coming from actual operations, on P/E ratios in the hundreds or thousands when they should be in the range of 5, 10, 20 or even 30. These capital gains happen as a result of stock appreciation, created by demand being more than supply, again as a result of the growing market of speculation, as everyone seems to enjoy gambling. The stock market has thus become the biggest legal "Get-Rich-Quick Scheme" on Earth.

The stock market is no longer a place where companies wishing to erect plants or expand operations can raise capital to finance purchase of assets, fund new production lines, spend on research and development of new products or technologies, marketing or distribution channels. The stock market is and has been for a very long time Vegas at Large. Where everyone can gamble, win and eventually lose, legally, all year round and often at tax-payers' expense.

The kind of correction needed, requires major change of mind. I do not think that it is even going to happen this time ... but it is going to be painful as hell.

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