Sound Investing and Peaceful Sleep by Ben Stein in the NYT 10-14-07

Sound Investing by Ben Stein NYT 10-14-07

ABOUT a week ago, I was swimming in my pool when I had serious difficulty breathing. "Uh-oh," I said to myself, "now I am about to die." My wife was upstairs reading, way out of earshot and, anyway, if I were about to have a lethal heart attack, I wouldn't be able to scream.

It turned out to be a nasty but short-lived bronchitis, and as I was lying in bed recovering, I thought, "I will die someday, and before I do, I would like to share with you the best possible thoughts I can, in gratitude for the many insightful letters I have received over the years from my readers."

DON'T SMOKE It is a filthy, disgusting, life-shortening, cancer-causing habit.

DON'T DRINK TO EXCESS It robs the mind of motivation, reason and health. Someday I will write about all of the bosses I've had who were heavy drinkers and whose lives were wrecked by it.

GET A BIG DOG And have that dog sleep in your bed with you. Dogs know nothing of mortality, and they share that peace with you.

INVEST FOR THE LONG HAUL If you are a smart long-term investor, do not pay any attention to short-term developments. They are often reported by people whose motivation may be to scare you (screaming about the subprime "crisis") or to make you giddily greedy (screaming about that one certain stock you should buy to retire rich).

Some articles may scare you into selling, or not buying, at the wrong time, because the worse things are, and the worse the mood of speculators, the better the time to buy. Or some may motivate you to buy in excess - sort of like drinking in excess - at exactly the wrong, "irrationally exuberant" time. The people who write some of these articles often know very little about markets, are way too young to have learned much, have no money to invest anyway or just like to act like big shots with your money.

In the very long run, stock prices plus dividends (in the postwar period) have rewarded patient, long-term, careful accumulation of broad indexes, mutual funds, exchange-traded funds and variable annuities (with a careful eye on fees). They have not rewarded short-term trading. Such trading based on tips seen on television shows - even shows whose hosts are true comic geniuses with bald heads - or read in magazines can be potentially disastrous. The short term is no place for the ordinary investor to trade.

AVOID INDIVIDUAL STOCKS The data on this is as clear as a bell, and has been compiled by high-end thinkers ranging from Nobel laureates to the best friend the ordinary investor has ever had, John C. Bogle of Vanguard. Basically, you and I cannot pick stocks, except for Berkshire Hathaway. I was recently on a panel with the stock guru Ray Lucia, who offered overwhelming data about how impossible it was to pick stocks, trade in and out of them and fare as well as the market. His data was terrifying.

The people on Wall Street do many questionable things. They reward themselves extremely well. But they have, in the last couple of decades, made it possible for almost anyone to get good results in stocks: buying very broad-based mutual funds, index funds, exchange-traded funds and (with an eye on fees) variable annuities and holding them for a long time. The evidence that this form of investment does better over long periods than trying to pick stocks is simply staggering.

Yes, maybe some gurus at a hedge fund can do it for a while. Maybe your cousin claims that he has done it. Don't try to do it yourself.

Wall Street, and especially Morgan Stanley, with its fine exchange-traded funds, and Fidelity and Vanguard, with their super-low-cost index funds, have made it possible to be a really good investor. So have many other companies with broad-based mutual funds. You can buy domestic funds, foreign funds, foreign developed markets funds, foreign developing market funds - all at amazingly low transaction costs.

Just for my own bad self, I suggest the Fidelity Spartan Total Market Index fund (FSTVX), a very broad index fund of domestic stocks; the iShares MSCI Emerging Markets Index fund (EEM), an exchange-traded fund that invests mostly in developing countries' markets, and the iShares MSCI EAFE Index fund, for Europe, Australasia and the Far East (EFA),which invests mostly in highly developed in Europe, Japan and Australia. This has allowed the rank amateur to take advantage of the long fall of the dollar because the stocks are priced in foreign currencies that have appreciated against the dollar.

If you feel like throwing around money speculating on individual stocks, go for it - but only after you have several millions in index and other mutual funds and exchange-traded funds and variable annuities. Just as you might stop to gamble $300 as you pass by the craps table at the Mirage on your way back from the meeting to your room, feel free to take a flier on a few stocks just for laughs. But keep it limited.

KEEP A BUCKET OF CASH Have a good chunk of cash, or near-cash, in a place like an ultra-short bond fund. Markets do fluctuate. Sometimes they fluctuate horribly on the down side for a long while. This may coincide with the time you're fired from a job or have a child starting college or are buying a second home. It is painful to have to sell stocks into one of these down slopes. It is much better to be able to live off your cash reserves. It is even better to be able to buy during those down periods. Ray Lucia calls this approach "bucketizing," as in keeping a bucket of cash for emergencies and opportunities.

KEEP IT SIMPLE, STUPID There are supersharp traders using computers and leverage who claim to be able to make vast sums based on strategies that will work during up, down or flat markets. They use derivatives and complex arbitrage and exotic instruments like subprime mortgage pools. (Hey, did I just say that?) Don't try this at home. Let the Mississippi riverboat gamblers gamble. You play it safe unless you are one of those gamblers. And if you are, don't come crying to us ants when you start to freeze in the winter.

KNOW THY LIMITATIONS Be aware that there are almost no investment geniuses. The only ones I know of are Warren E. Buffett and John C. Bogle and Jim Rogers. If you want to buy Mr. Buffett's individual stock, be my guest.

KEEP IT IN PERSPECTIVE Beyond an amount necessary to live in modest comfort, money is not that important, and often more of a burden than a pleasure.

GET SOME KITTIES And let them crawl all over you.

Now you have my best advice. And I can go back to swimming alone with a clear conscience.

Ben Stein is a lawyer, writer, actor and economist. E-mail: Next Article in Business (10 of 32) » Need to know more? 50% off home delivery of The Times. Ads by Google what's this? Gov.-Backed CD Paying 13% Plus 19 more unusual money secrets revealed by America's rich retirees Top Mutual Fund Picks Free Report, Learn the Top Mutual Funds to Own Now! Sign Up Today Warren Buffett's Stocks Provide your email to receive a FREE copy of our Buffett report. Tips

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Comments 24 comments

livelonger profile image

livelonger 9 years ago from San Francisco

Great read. I like Stein's sage advice and wry sense of humor!

Ralph Deeds profile image

Ralph Deeds 9 years ago Author

Thanks for the comment. Stein is a favorite of mine. Years ago I had dealings with his father Herb Stein when he was research director of the Committee for Economic Development. Later, he went on to become chairman of Nixon's counsel of economic advisers. He was a moderate Republican and quite a nice man.

ledefensetech profile image

ledefensetech 7 years ago from Cape Girardeau, MO

Ben Stein is a very smart man. What his advice boils down to is "unless you know what you're dong, you're gambling, not investing". The one issue I have is his assertion that people running the models know what they are doing. Apparently their models didn't take certain things into consideration.

Ralph Deeds profile image

Ralph Deeds 7 years ago Author

Apparently not, especially the ones on subprime mortgages.

Stein is a Republican whom I respect. I had some dealings years ago with his father Herb Stein when he was research director for a business group and I was the GM contact on a paper he was writing entitle "Free Collective Bargaining: Toward a Better Balance."

ledefensetech profile image

ledefensetech 7 years ago from Cape Girardeau, MO

I'd classify Stein as a libertarian rather than a conservative. The problem with the mathematical models is that they only model data, that data doesn't take human decisions into account, which is why they can't predict things like the busting of the housing bubble.

The two pound organic processor between your ears is still the best computer out there.

Ralph Deeds profile image

Ralph Deeds 7 years ago Author

Stein is a social libertarian and a believer in democratic market capitalism. But I'm not sure it's accurate to call him an economic libertarian. He recognizes the need for sufficient economic regulations to keep capitalism from self-destructing. The only argument is over the extent of regulation needed not whether it's needed. I'm pretty sure he supports Social Security, unemployment compensation, the FDIC, the SEC, etc.

ledefensetech profile image

ledefensetech 7 years ago from Cape Girardeau, MO

I'm not so sure. The problem with all of those programs is that it prices the American worker out of the labor market. Why do you think we've been hemorrhaging manufacturing jobs for the last few decades? You do realize that it was the Community Reinvestment Act that set the state for the subprime mess, don't you? That's hardly an example of lax oversight causing our problems, it's more like an example of how government interference in the market causes our problems.

Ralph Deeds profile image

Ralph Deeds 7 years ago Author

Social security and unemployment compensation are not what "priced the American worker out of the labor market." What priced the American worker out of the labor market was the blind, doctrinaire belief in free trade which meant American workers were competing against Chinese child and other labor working long hours in unsafe and unhealthful conditions in polluting factories for under a dollar an hour.

Here's an example of what would be the rule rather than the exception under unregulated markets:

Hedge Fund Executive Is Charged With Insider Trading

October 16, 2009 , 10:27 am

Update | 5:11 p.m. Raj Rajaratnam was ordered to post a $100 million bond as part of his bail conditions, though prosecutors argued for no bail because he posed a flight risk. Anil Kumar was released on a $5 million bond.

The founder of the Galleon Group, a big New York hedge fund, was charged on Friday with insider trading in the stocks of several companies, including Advanced Micro Devices, Clearwire and Akamai, earning about $20 million in the process.

Federal prosecutors for the Southern District of New York accused Raj Rajaratnam, 51, with illegally obtaining and trading on information on these companies, which also included Polycom, Hilton Hotels, Google and People Support. He was charged with four counts of conspiracy and nine counts of securities fraud. (Read the complaints after the jump.)

The prosecutors’ case is built on both statements from an unnamed cooperating witness, who has agreed to plead guilty, and from the recording of four conversations between the witness and Mr. Rajaratnam. The unnamed witness began conversations with the Federal Bureau of Investigation in 2007, which led to the phone taps.

At a press conference Friday afternoon, law enforcement officials described the case as a sign that the Justice Department, the Federal Bureau of Investigation and the Securities and Exchange Commission were stepping up their efforts against white-collar crime. Preet Bahara, the United States attorney for the Southern District of New York, compared the investigation to those used against the Mafia and drug cartels.

“This case should serve as a wake-up call to Wall Street and to every hedge fund manager,” Mr. Bahara said. “These people were privy to inside information, but they didn’t know one secret, that we were listening.”

Others charged by prosecutors include Mark Kurland, the president of New Castle Partners, another large money manager; Danielle Chiesi, a former Bear Stearns executive who now works at New Castle; Rajiv Goel, an executive at Intel’s treasury department who supported the company’s venture capital arm; Anil Kumar, an executive at McKinsey & Company; and Robert Moffatt, an executive at I.B.M.

All six were arrested Friday morning. Five of the six are set to be arraigned in federal court in Manhattan Friday afternoon. Mr. Goel is set to be arraigned in California.

According to the complaint, the witness first approached Mr. Rajaratnam in mid-2005 about divulging nonpublic information. That led to a scheme that ran from January 2006 through July 2007 involving insider information about three companies — Polycom, Hilton and Google — in which the hedge fund executive garnered about $12.7 million in profit. Mr. Rajaratnam reciprocated by supplying inside information about other technology companies.

Mr. Rajaratnam partnered with the likes of Mr. Goel and Mr. Kumar, who supplied information about their portfolio companies or clients, and in turn made profitable trades for these associates. The unnamed cooperating witness is alleged by prosecutors to have also obtained insider information, including from an analyst at Moody’s Investors Service covering Hilton (and who was paid $10,000) and an unnamed employee at Market Street Partners, an investor relations firm working for Google.

Mr. Rajaratnam, a native of Sri Lanka, is listed as No. 551 on Forbes’s 2009 list of the world’s richest people, with an estimated net worth of $1.3 billion.

Law-enforcement officials on Friday said that Mr. Rajaratnam’s success appeared built not on “genius trading strategies,” but on his insider-trading connections.

“He is not a master of the universe,” said Robert Khuzami, the S.E.C.’s director of enforcement. “He is a master of the Rolodex.”

A spokesman for Galleon said in a statement: “Galleon was shocked to learn today that Raj Rajaratnam was arrested this morning at his apartment. We had no knowledge of the investigation before it was made public and we intend to cooperate fully with the relevant authorities. Galleon continues to operate and is highly liquid.”

A spokesman for Moody’s said in a statement: “Moody’s has strict policies against divulging confidential information, and the alleged wrongdoing by an individual at Moody’s would be an egregious violation of Moody’s policies and values. Moody’s fully supports the government’s prosecution of insider trading and will provide every assistance in its investigation of this matter.”

A spokesman for Intel said that Mr. Goel was placed on administrative leave Friday morning, and that the chipmaker had not been aware of the investigation until then. He added that Intel has not been contacted by authorities so far, but is ready to cooperate.

A spokeswoman for McKinsey said in a statement: “The firm was distressed to learn that Mr. Kumar was arrested and is looking into the matter urgently.” She declined to comment on Mr. Kumar’s job status, but a person briefed on the matter said that Mr. Kumar was placed on paid leave.

Representatives for I.B.M. and Market Street Partners declined to comment.

Representatives for Akamai and lawyers for the defendants were not immediately available for comment.

– Michael J. de la Merced. Steve Lohr contributed reporting.

Insider Trading Charges Against Galleon Group Founder

Sufficient regulation is required in order to assure that free markets deliver honestly their promised benefits.

ledefensetech profile image

ledefensetech 7 years ago from Cape Girardeau, MO

Only a sucker invests in hedge funds. Most people who know better were saying for years that hedge funds were a scam. Lo an behold, everyone else found out when the hedge funds failed. I don't feel sorry for those people. You do due diligence when you invest or you will lose your money. It only takes one or two instances of getting burned before you learn that high returns equal high risk. If you can't afford to lose your money, go with lower risk investments.

That has nothing to do with making it expensive to hire American workers. For a while we had it good. After World War II, we were pretty much the only industrial, somewhat capitalist nation left after the dust settled. That is why the 1950's were they heyday of union jobs in the US. After the Western European renaissance in the 1960's, things began to change, somewhat.

Because Europe also had socialistic tendencies, we still kept our lead until the 1970's and 1980's. By 1990 the rest of the world began to emerge from Communism and other sundry collectivist schemes and began to compete with American labor. Europe and the United States were there 200 years ago in those same conditions. Those kids worked so their kids would be free to go to school and their grandkids would be free to have childhoods. The same thing holds true for China and other emerging nations.

The really sad thing is that instead of wasting money on cash for clunkers that money would have been better spend trying to figure out how to sell cars to the Chinese. If domestic automakers could capture even 10% of that market, their troubles would be over. Americans are cutting back, we should look abroad for opportunities.

If sufficient regulation keeps things honest, how do you keep the regulators honest. How many oversight departments run by the government have become filled with people from the field in which they are supposed to be overseeing. The Fed and Treasury come to mind as well as the FDA. How can you keep those institutions honest when they're staffed with the very people they are tasked with overseeing?

Ralph Deeds profile image

Ralph Deeds 7 years ago Author

I should have said "reasonably" honest.

Paraphrasing Churchill, "Ours is the worst possible system, except for all the others."

ledefensetech profile image

ledefensetech 7 years ago from Cape Girardeau, MO

I don't like democracies. Republics are marginally better. Have you ever looked at the history of the Crown Colony of Hong Kong after World War II. Totally capitalist and they still are an economic forced to be reckoned with in China. Less so today with the reemergence of Shanghai as an industrial city, but they've been able to accomplish that on what amounts to a barren rock.

I still say private companies can do a better job than the federal government at keeping people honest. Look at Consumer Reports. Or Underwriter's Laboratories, they're a great example of how you can use competition to make products safer.

Ralph Deeds profile image

Ralph Deeds 7 years ago Author

Who will keep the Wall Street banksters honest? Who will keep the drug companies and the parasitic health care insurance companies honest. Who will keep the credit card companies from totally screwing their customers? You live in a different world from me, a dream world.

ledefensetech profile image

ledefensetech 7 years ago from Cape Girardeau, MO

What forces people to use a particular bank, insurance company, or drug company? Like it or not, it's the rules and regulations that the Federal government puts in place that both ensure these companies don't face competition, which would keep them honest, and keeps people ignorant of how these companies game the system for their own benefit.

I fail to see how you can consider the government a defender of the people after things like the auto bailout, Wall Street bailouts, ACORN scandal, unjust war in Iraq, etc. This sort of corruption crosses party lines and holds allegiance to no group or creed except that of greed.

Ralph Deeds profile image

Ralph Deeds 7 years ago Author

We live in an imperfect world, not a dream world. We have to work within the parameters of reality. I don't believe the answer to every problem is the government nor do I believe as you appear to that the cause of every problem is the government, either. It makes no sense to me to leave the hogs of Wall Street and barons private enterprise free to do whatever they want. Effective enforcement of reasonable laws and regulations are necessary to keep our system on track. The discussion we should be having is over how much regulation is needed and whether a particular regulation is effective, not whether any regulation is needed.

ledefensetech profile image

ledefensetech 7 years ago from Cape Girardeau, MO

What you don't consider is that it's the ability of government to force people to do things that the "hogs on Wall Street" to do what they do. Government in many ways is a double edged sword. Free enterprise would have allowed the auto industry and the banking industry to fail because they were engaged in practices that were not sustainable in the long run.

It's this power of government that our Founders rightly feared. Well most of them anyway, Hamilton and his ilk were as enamored of a monarchy coupled with mercantilism as any militant Tory.

The discussion should be about whether any regulation is needed. You never did answer the question of how do you keep the regulators honest. What makes you think that people will buy from a company that abuses its workers, pollutes the environment or engages in racist practices, to name a few? Do you not think that people who knew that organizations that were engaged in these things would purchase willingly from them?

The reason I don't believe in regulation is because any entity which can impose regulation, becomes susceptible to bribery and corruption by the very industry which it regulates. The FDA, SEC, Federal Reserve, even departments like Agriculture have all been infiltrated by members of the industries which they oversee. Where do you think their loyalty lies? With the goals of the organizations they work for, or their former employers?

As Underwriter's Laboratories and Consumer Reports demonstrate, the free market is more than capable of creating voluntary regulations that go far beyond what any governmental regulation will do. So much so that, using the example of Underwriter's Laboratories, many local building codes are copied from standards that UL has had in place since the San Francisco Earthquake of 1906.

Ralph Deeds profile image

Ralph Deeds 7 years ago Author

"What makes you think that people will buy from a company that abuses its workers, pollutes the environment or engages in racist practices, to name a few? Do you not think that people who knew that organizations that were engaged in these things would purchase willingly from them?"

Because I see them doing it every day. They are following your Ayn Randian, social Darwinist precepts--pursuing their own self interest without regard to the common interest. The parking lots are full these days at WalMarts, the king of "dead peasant" life insurance and cheap, shoddy imports from China. People are buying mutual funds from companies that have paid huge fines for serious conflicts of interest between them and investors in their funds. People bought GM cars for nearly a century despite its sorry record of discrimination against minorities and women. I could go on for a while longer, but you get my point.

I completely agree that regulation is far from perfect because the regulating agencies tend to become co-opted by the companies and industries they are supposed to regulate. This tendency is much more pronounced when Republicans are in the White House although it is a problem regardless of which party controls the executive branch. Too much money is sloshing around Washington. Campaign finance reform is badly needed--i.e., government financing of political campaigns.

ledefensetech profile image

ledefensetech 7 years ago from Cape Girardeau, MO

Ralph what we have is not a free market system. The system we have most closely approximates that found in countries that practiced National Socialism in the 1930's. Indeed many "democratic" leaders like Churchill and FDR praised Mussolini for "getting the trains running on time". The only economic system further from the free market is Communism.

I fail to see what "social Darwinism" has to do with anything. Every case you mentioned, well people bought their products because they were inexpensive and people liked them. Now I will agree that the type of consumerism that arose after WW II distorted the marketplace considerably, but what else can you expect from a central bank that constantly increases inflation.

As an aside, have you ever seen the BBC documentary "Century of the Self". I found it very interesting in their analysis of the 1920's. Some very interesting things were going on that the time which had a profound impact on the structure of societies that rebuilt themselves or evolved after World War II. I'd be curious as to your thoughts on the subject.

I fail to see how government financing of political campaigns is going to fix the problem. Won't that give the government de facto control over the political parties, like they now have de facto control over business through their regulatory agencies.

If we do go that route, then what is to keep political parties from corrupting the electoral regulatory agencies like businesses have done with agencies that regulate them? Also how can you expect current officeholders to voluntarily destroy the system which provides them with so much?

Ralph Deeds profile image

Ralph Deeds 7 years ago Author

Government financing of political campaigns would not give government de facto control. The regulations would provide for equal treatment of both or all parties. It would keep the corporate and labor union lobbyists from pulling the strings in the regulatory agencies as much as they do now.

No I didn't see 'Century of the Sell." I'll watch for it.

"What we have is not a free market system." Well, we have whatever we have, and we have to start from there and try to improve it. Starting with a utopian clean slate isn't an option. And we'll never go back to the idyllic conditions that Aya Katz so yearns for. You and she are sould mates.

ledefensetech profile image

ledefensetech 7 years ago from Cape Girardeau, MO

Sure, but regulation of business is supposed to level the playing field and keep abuses from happening in the marketplace. I think we're both in agreement that this is not the case. How and why would government financing be different. What is to keep government, for example, from limiting funds to "radical parties".

More likely I think you're talking about government providing some type of communications setup that doesn't involve the exchange of money. The only problem I see with that is that the government can then control the message, or perhaps I should say, in the past they could have controlled the message.

I'd say that because with the advent of the Internet, governments no longer have control over the message or the communications network:

I'm not so much starting with a utopian clean slate as I am with wondering why governments were not present in prehistorical times. Prehistoric man has left megasites all over the world and there seems to be an absence of centralized authority involved in the construction. Of course that could be because they left no records of what they did, but for certain there has been a thriving continental trade system since ancient times.

How is it that these trade routes, exchanges and markets were able to function without any sort of centralized oversight? Thomas Hobbes was said to believe that without government, men were reduced to beasts. If so, then how did prehistoric man ever survive to give birth to civilization? Why is it that societies which decentralize things tend to do so much better than highly centralized ones? Those are the sorts of questions I ask when analyzing our current problems. I find that contemporary political philosophers can't seem to answer such questions.

Ralph Deeds profile image

Ralph Deeds 7 years ago Author

Sure, but regulation of business is supposed to level the playing field and keep abuses from happening in the marketplace. I think we're both in agreement that this is not the case. How and why would government financing be different. What is to keep government, for example, from limiting funds to "radical parties".

I prefer to think in terms of "the extent" to which government regulation is successful, not WHETHER it is successful. We hear about the sensational failures, like the Madoff scheme, and less about the successes--namely the honest stock brokers who don't use insider information, and so forth.

You are much more alienated from government than I am. I give you credit for having given a lot of thought to the subject. I have libertarian tendencies as well.


Ralph Deeds profile image

Ralph Deeds 7 years ago Author

The banks are still in trouble

But it’s not a simple case of flourishing banks versus ailing workers: banks that are actually in the business of lending, as opposed to trading, are still in trouble. Most notably, Citigroup and Bank of America, which silenced talk of nationalization earlier this year by claiming that they had returned to profitability, are now — you guessed it — back to reporting losses.

Ask the people at Goldman, and they’ll tell you that it’s nobody’s business but their own how much they earn. But as one critic recently put it: “There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.” Indeed: Goldman has made a lot of money in its trading operations, but it was only able to stay in that game thanks to policies that put vast amounts of public money at risk, from the bailout of A.I.G. to the guarantees extended to many of Goldman’s bonds.

ledefensetech profile image

ledefensetech 7 years ago from Cape Girardeau, MO

The banks are about to go down. I have no solid proof of this, but consider the fact that banks "make their money" by originating loans. They're not originating loans, they're hoarding money. Why is that? Could it be that they're holding that money because they're about to write down billions more in bad loans? What do you think the chance is that taxpayers are gong to get their money back if it's lost during the write down period? It was a scam from the beginning perpetuated by both the Democrats and Republicans, Obama and Bush specifically.

Banks in this country get a sweet deal, especially with the Fed, since they can borrow money from the fed at below market rate and lend it to consumers at that market rate. Thus the banks make even more money than they would. You want to see an example of unfair practices and scams, look no further. Problem is banks are forbidden to operate under anything other than a fractional reserve basis which means that the Fed controls the monetary supply of all banks in the nation. Make no mistake, the government controls the Fed. Regan ordered Volcker to raise the interest rate to get rid of the excess liquidity in the economy in 1983 and it was done. Clinton ordered Greenspan to cut the interest rates which lead to the tech bubble. Bush ordered a drastic cut in the interest rates which led to the housing bubble. Obama has ordered Brenake to cut the interest rates to help the economy "recover". Banks in a free market would not be able to do what they do in a system not controlled by a central bank. For an alternative see the Free Lakota Bank, specifically the fact that they are a fully reserve bank, thus immune to bank runs:

You're 100% right about Goldman, but Goldman was only able to do what it did because the government intervened in the marketplace. The market passed it's judgment on the antics of the banks and found them wanting, that's why the banks were failing. They screwed around and made insane decisions. Look at the Tulip mania of 1637. The only difference between that and the housing bubble was the market affected. Specifically the Dutch parliament did this:

"On February 24, 1637, the self-regulating guild of Dutch florists, in a decision that was later ratified by the Dutch Parliament, announced that all futures contracts written after November 30, 1636 and before the re-opening of the cash market in the early Spring, were to be interpreted as option contracts. They did this by simply relieving the futures buyers of the obligation to buy the future tulips, forcing them merely to compensate the sellers with a small fixed percentage of the contract price."

By interfering in the marketplace, the Dutch government caused people to believe that the government would support the tulip market no matter how crazy things got. When that happens people lose their minds. They forget that the commodity they hold, be it tulip bulbs or houses, are only valuable to a certain extent. After that it's pure speculation and in the end someone will be holding the bag. Usually the ones left holding the bag are those who can least afford it.

Ralph Deeds profile image

Ralph Deeds 7 years ago Author

ledefensetech, You may be amused by the picture I added below.

ledefensetech profile image

ledefensetech 7 years ago from Cape Girardeau, MO

That sums up the situation perfectly. Corporate interests and government have pretty much locked things up between them. The only change I'd suggest is that the size of government and corporate business be the same size. After all no business, however powerful, can legally incarcerate you or take your life. Only government has that power.

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