Are We Our Own Worst Enemy?


Irwin Kellner declares, "We have met the enemy and he is us" (Oct. 27, 2008). How so? Kellner, MarketWatch's chief economist, says we wanted to kiss a frog and turn it into a prince. Like children in a fantasy world we demonstrated credulity. We bought into the Wall Street lie that high risk securities made from subprime loans (sows' ears) could be spun into silk purses. We wanted money to grow on trees! Well, Wall Street showed us it could grow money on trees and eat our free lunch, too! Now we have to pay for ‘sweet little lies’ made viable by ignorance and greed. How else can we explain buying into Wall Street claims that "yield" can be divorced from "risk," and market prices can levitate above real value as long as people keep playing the game?

Studies show that the majority of stock market capitalization exists independent of corporate capital needs. In other words, stock markets no longer serve the primary function of generating venture capital for innovative enterprise. The bulk of today's market cap exists as a tax shielded betting pool.

Traditional measures of corporate performance are no longer the primary considerations in determining stock valuations; thus, equity markets have evolved into little more than derivative markets. Stocks are increasingly priced by sophisticated speculators on factors extraneous to real share value — the same basic approach used in derivative markets. Historic considerations like corporate health and the intrinsic worth of products have been supplanted by considerations such as market psychology, fund flows, sector rotation patterns, insider buying activity, technical trends, chart momentum, capitulation rubrics, rumor prospects, hedge fund activities, shares available for shorting, and the probable activity of big betters. In other words, what Warren Buffett is buying becomes more important in pricing a stock than the role a corporation plays in the well-being of the economy. Everything has devolved into bets on money dynamics, leaving financial elites as the best positioned to gain power in our system.

In a single day, yesterday, American stock indices jumped an average of 10%, recovering for the moment over 10% of their losses since the market top in 2007. The magnitude of the event is made all the more stunning when one considers the absence of any breaking news or fundamental change worthy of such an adjustment. Granted, the FED is supposed to release an interest rate decision today, but the market supposedly priced that in last week. A leading hedge fund founder, Ken Griffin, acknowledged that hedge funds need regulation, but everyone has known that for months. The only landmark news that broke was that U.S. consumer confidence had plunged to a 41 year record low in October (as reported by Ruth Mantell in an Oct. 28 MarketWatch article). It is possible that the announcement holds a clue about the mega-rally.

The consumer confidence index fell to 38 from a revised September reading of 61.4. Speculators of a contrarian bent may have looked at the October number and figured that overwhelming discouragement could cause the general public to be tardy re-entering any snap-back rally. The prospect that some professional shorts would try to book profits on such news creates an imperative that other traders break rank and try to optimize profits on the first wave of the reversal move. By mid-afternoon this change in order flow resulted in downtrend lines being breeched on the upside, triggering an avalanche of computer trading programs. Thus began a full hog rush to the trough where stocks are repriced on bounce expectations, every greedy trader pushing and shoving in hopes of besting his neighbor.

If our children behaved so badly at school, they would lose their privileges at home. But not in the nation's gambling arenas. Instead of focusing upon productive work, millions of Americans now addicted to speculation spend their hours searching for rumors to game. We're not embarrassed by the idea of riding prices up to bizarre levels, then dumping our holdings on someone who arrives late. We've been socialized to this ‘morality.’ We laud this technique as an important institutional dynamic in finance capitalism. In fact, many of us have our retirements staked on the ability of professionals to out-perform in this game of financial musical chairs.

We don't care if prices are irrationally high as long as we are winning, but if those prices become irrationally low while we're still holding on, we curse at the short sellers. We despise money changers who enrich themselves from ‘market pops,’ but we hope to get some ourselves. It’s not that we're bad to the bone, but our ideas of propriety and justice have been dragged through the mud as opinion leaders put badges of respectability on investment practices unworthy of democratic capitalism.

It is time to look in the mirror at what the liquor of speculation has made of our nation. As a people we are bedraggled by covetousness, materialism and greed. We know in our hearts that we're not on the high road but when we're high on the speculation drug we can't find the will to say no.

Many of our nation's leaders have personal or political stakes in hedge funds. Using quiet techniques they've worked for years to keep hedge fund activities unregulated. As MarketWatch's David Weidner reports, government does not monitor hedge fund trading activities, holdings or debts (See "Regulate hedge funds now", Oct. 28). Our leaders have consciously chosen not to know the extent to which hedge funds exploit financial markets. Hedge funds don't even have to register with the S.E.C. This is as amazing as it is revelatory about corruption of the soul among those with an addiction to fast money. It short, the whole society wants pleasures beyond what it can earn.

We've ignored propriety and justice so long in our financial markets that we cannot stage an adequate debate about needed reforms. We don't know what to talk about. We don't understand the key issues in restructuring market rules, so there is little reason to hope that new regulations will get the job done. Besides, regulations are merely window trappings when people still lust for unmerited gains. Capital markets cannot be fixed without national repentance.

Michael Brush advances 5 ways to fix Wall Street (Oct. 24, Moneycentral), but like his colleagues fails to address the core problems that need reform. Admirably, Brush wants to see financial criminals prosecuted, CEO pay reigned in, accounting standards toughened, regulatory sub-systems coordinated, and credit default swaps held to new standards. But these reforms can be enacted without much progress toward justice in capital markets. There are root problems that need to be addressed first. Money supply inflation in the fractional banking system is a root problem. This inflation guarantees that the gap will widen between the working class and financial elites as long as capital gains taxes on speculation remain low. Unfortunately, most elites do not want to fix systemic problems any more than they want to change the 1977 congressional mandate to the FED that essentially demands economic growth at the expense of societal justice. What this means is that we've met the enemy and the enemy is us — at least until we change enough to elect leaders who put financial propriety and justice ahead of monetary gain.