The Libertarians Have It Backwards: Liquidity is Good but Speculation Is Bad

The Cause of Speculation

The cause of speculation is the futures markets in commodities being controlled by people who have no business in the particular commodity being speculated. It is one thing for farmers to hedge their production costs in the futures markets. It is quite another thing for an investment bank to circumvent the rules, and trade the contracts by bidding them up, so that by the time the farmer buys the commodity, the price is nothing more than a tax to the investment banks. Will Rogers knew exactly how this process worked, on the cusp of the Great Depression:

"We never will have any prosperity that is free from speculation till we pass a law that every time a broker or person sells something, he has got to have it sitting there in a bucket, or a bag, or a jug, or a cage, or a rat trap, or something, depending on what it is he is selling. We are continually buying something that we never get from a man that never had it." DT #1301, Sept. 24, 1930 (Willrogerstoday.com)

The speculation that resulted in the Great Depression is at work again. This time, there is only Dodd-Frank, which slows down real estate speculation, but there is no Glass-Steagall, which slowed all speculation and caused the expansion of the middle class and the stable 30 year fixed mortgages. Speculation threatens, as we have already seen, the middle class, the soundness of house prices and the tax you pay at the pump. You overpay, one trader estimated, at least a dollar fifty more than you would if the predatory investment banks were not involved in speculation.

We need more regulation, not less. We need the too big to fail banks to be taken down, and made smaller, but only one at a time. The financial system cannot survive, meaning our way of life could be in jeopardy, if the TBTF banks implode all at the same time.

Anyway, the libertarians believe that the invisible hand of self regulation will work against the speculators. I don't think so.


Speculation Is Killing the Average Joe Everywhere

Robin Hood Tax On Financial Trading

The Libertarians Have It Backwards!

The libertarians have it ass backwards. They want liquidity to dry up. They want very little lending and they want the demise of the 30 year mortgage. Before Fannie and Freddie, people got a mortgage and refinanced every 3 to 5 years. How would you all like that system?

And the libertarians want to let speculation go wild, without any regulation. Speculation works well in any kind of currency, so long as people who do not take delivery of the contracts are allowed to lever up futures purchasing. The investment banks are really good at that and can do that with any currency. We only have TULIPS in Europe as a great example.

So, to control speculation, we need regulation. Libertarians are against speculation and one wonders if they oppose the unlimited re-hypothecation and massive leverage that the UK financial district permits. Glass-Steagall was a brilliant result of Will Rogers' efforts to oppose speculation. But even Ron Paul, who voted against the repeal of the law in 1999 says he would not need this great law in his system. Of course, his system would not have insurance for your bank deposits. Banks could fold and take your money. The wild west of finance would be even more wooley and wild than what we have now!

We have the bankers who hate the fixed 30 year mortgage and we have the libertarians who hate the fixed 30 year mortgage. What is wrong with these people?

So What About Europe Going Forward?

Europe is a major trading partner with the US and China. If Europe implodes it will effect economies the world over. So, with the added liquidity coming from the combined efforts of the central banks of the world is the Eurozone fixed? Well, I don't believe so.

According to Mohamed El-Erian, PIMCO bond guru, the Eurozone is far from out of the woods and the crisis continues. Some have said the stock market rally based on the central bank liquidity bailout is nothing more than a sucker rally.

Anyway, El-Erian says that this effort to provide bank liquidity will fail the stated goal, to provide credit to individuals and businesses. Certainly Quantitative Easing in the United States has done nothing to help credit flow down to most citizens. There has been some thawing of credit to businesses here, but look how long it has taken.

One could think that Europe and the Euro could not wait for credit to filter down to citizens, as everyone is being squeezed, from homeowners in the PIIGS nations, to the governments of those nations. And as things get worse, the desire for credit wains. The central banks can't do a thing about that. So you have the Euro, which is not being backed by bonds or a single treasury, continually in need of help, and this does impact the wealth of the United States. It costs us to help and costs us not to help.

And El-Erian nails it when he says all this liquidity in the banks will do is to cause the banks to chase speculation, with no real help to the citizens. The synonym for speculation is risk on. Risk on is a term that puts people to sleep, as they don't know what it is. Risk on is speculation, pure and simple. It doesn't filter down to the average guy, and it will cause his cost of living to skyrocket. And this keeps Europe going while Americans suffer and will suffer more going forward.

Bottom line, liquidity bailouts for day to day bank operations are good for the survival of lending to businesses who deliver goods and services cheaply, but liquidity which leads to speculation and a commodity premium that average Joe has to pay is very bad. While the day to day operations lending will not ultimately determine the solvency of banks, it will allow banks and money market funds to continue functioning in the economy. But the additional liquidity to be used for speculation is most likely to keep the banks solvent without having to lend money to the real economy. That will ultimately kill the economy and work against prosperity and recovery.

We are in need of bailouts until we can regulate. The libertarians want no bailouts, but also don''t want regulation. The 30 year fixed loan, under attack by the bankers who want easy money and the libertarians who want tight money is important to the United States. Second, the Republicans with a few Dems like Larry Summers want more real estate bubbles. I write about this in my ebook, Dirty Dirty Republicans. Geithner as NY Fed president, and the NY Fed is the most powerful because of the banks there who own it, failed to regulate the CDO's that Paulson gave out that were falsely rated AAA. So the Dems are just as responsible for the housing bubble as the Republicans. Going forward that is not the case. Both parties allow massive speculation but the Dems want to slow it down especially in real estate. If you think the Republicans want to slow it down you are seriously mistaken.

So Libertarians Say Speculation Is Good

A comment by a libertarian posits that speculation is good and creates efficient markets. But I pointed out in the path of Will Rogers that this is not the case. Indeed, liquidity being used for lending to main street is good. Liquidity being used for speculation is very, very bad. As I posted to Business Insider:

The libertarians were all for derivatives, all for the free market, all for deregulation, all for speculation. Now they want everything to come crashing down when it didn't work like they thought it would work.

Indeed, I am for taking down the TBTF banks one at a time. I am not for implosion of the whole financial system, so that your department store, be it big or small, cannot get a business loan.


Here were my responses to the libertarian on this article:

I am talking about speculators who never take delivery, just like Rogers exposed in the Great Depression. The Mises argument that the invisible hand of self regulation will make the market efficient is very wrong. For example 147 dollar oil was pushed up by folks who never took delivery of the oil, who never STORED the oil.

Let them take the expense of storing the oil and you will have people less determined to take a contract. The investment banks never had the thing to sell, and then never intended to have it.

and:

One more point Evan, the housing bubble added 8 trillion of bogus value to the housing market before the inevitable crash. You could say that the people did the speculating, but really, the speculation was orchestrated by Wall Street and the cronies, NAR and the Builders, who said you had to get in before you would be locked out of the market forever. David Lereah said real estate rarely goes down. it was a Scam of speculation gone wild. The same could be said for TULIPS in centuries past. Don't tell me speculation is always efficient. It is mostly not efficient if the players who never take delivery have their way, and their profits off the rest of us are massive.

and:

You could say, Evan, that the speculators in housing, the investment banks, never took delivery of the notes. You see what fraud that was. They bundled those mortgages, without the notes, into bonds that became a source of speculation as well as they were mispriced on purpose by the investment banks. The CDO's that resulted were mispriced and the scam spread by Henry Paulson and others who sold billions of dollars of falsely priced CDO's all over the world.

and:

But because of speculation, and not taking delivery, which would slow down demand, demand is distorted and it no longer is a free market. Libertarians are for free markets right? Or are they just for screwing people by any legal means? Phony Libertarians!

Modest Inflation worked for years before speculation became easy with the repeal of Glass-Steagall in 1999. We had the best standard of living for our citizens in the world for decades.

For further study:

http://www.huffingtonpost.com/2011/09/14/how-banks-cause-world-hunger_n_960926.html

The Libertarians Were Fooled in the 1990's by Greenspan and by the City of London (the Square Mile)

People were warning in the 1990's that derivatives, and speculation and Alan Greenspan were dangerous to the economy. Well, we can now conclude that they were proven right. Speculation is not over, and reached the excess with $147 oil in 2008. Speculation in onions was forbidden after attempts to corner the market in 1955. In 1958, Eisenhower signed a law into force to ban the speculation on futures contracts for onions. When you go into a grocery store, you can see that this has helped consumers as onions are cheap. Speculation in other foodstuffs is hurting the US consumer and led to starvation in West Africa in 2007.

I ask you, which is the freer market, the onion market or the oil market?

Americans, we need to understand that speculation applies a premium, like a tax, on products. This hurts Americans in the pocketbook and the household budget suffers. The oil futures markets are thin markets, it has been said, and are easily manipulated for the profits of the big investment banks.

The libertarians wanted speculation, derivatives to be sold, and high frequency trading in the London Square Mile, the center of all this financial mayhem. They thought that was the free market. The stubborn ones think it still is the free market but it some libertarians want the whole thing to fail at once since it didn't work as they intended. But we now know It is a juiced market that exacts tribute from your household budget. It sounds like these derivatives and speculation are all free and noble. But we have seen from the housing bubble and subsequent crash in 2007 that these toxic instruments and toxic betting on futures are not free, nor are they noble.

And, of course, Wall Street and the CME wanted to emulate the big brothers, the biggest financial market in the world, London. And we see the damage that was caused.

The real libertarians who have power and influence, the ones in the UK, did very much want all that in 1996. I refer to the fellow that runs the Guido Fawkes blog, Paul Staines. Very influential insider. He marveled at the furious and liquid trading of public UK stocks and bonds as a means of disciplining UK companies. Some have said this short term profit requirement has hurt the long term goals of major corporations. This manual churning of stock was then replaced by the even faster churning by electronic trading. The seat of economic madness is in the Square Mile and the Libertarian Alliance has their intellectual backsides.Von Hayek, remember, was British as was one of the first libertarians, John Locke. Margaret Thatcher rekindled libertarianism in the UK.

Wikipedia also has an article on the Thatcher libertarians. And believe me, the square mile, the City of London, or the City, backed Thatcher and restored libertarian thought a a power in government. And the City of London is a power unto itself with it's own police and the British parliament has no power over this financial cabal!

This City has more power than Wall Street and remains the most powerful financial center in the world even though the British Empire no longer exists! The City of London answers to the Crown, not to Parliament!

The Square Mile is a vast, undemocratic tax haven that allows avoidance of tax. It is a nation unto itself, with no democratic control over it's speculation and betting. Even NYC does not have this power but certainly wants it. The City was the force behind financial deregulation in the Thatcher era, and has been heavily criticized for the destructive financial instruments and lending practices that led to the 2008 credit crisis.

I support the libertarian Nigel Farage in his attempt to keep the UK out of the Euro. But libertarianism as a whole has proven to be dreadful in dividing the UK and UK libertarian policy has caused one of the greatest wealth divides between rich and poor of any nation.

For further study, see how stupid this article from Paul Staines reads today:

http://www.libertarian.co.uk/lapubs/econn/econn069.pdf

http://en.wikipedia.org/wiki/Libertarianism_in_the_United_Kingdom

http://en.wikipedia.org/wiki/City_of_London

The City of London's Big Bang Was the Ultimate Source of the Credit Crisis!

It is clear that the Big Bang, which occurred in 1986 in the square mile, allowed for the deregulation of finance, which allowed US and European large investment banks to come in and operate with proprietary trading and high frequency trading and global hot money. This activity led to the repeal of Glass-Steagall, and huge flows of money into the US housing market, which resulted in the housing bubble and crash of the financial system.

The root cause, then, of the credit crisis was the Thatcher libertarian reform of the banking system. There was no Glass-Steagall in the UK. The banks took advantage and the momentum spread toxic loans throughout the world.

I am sure that this City of London cabal wants no focus upon it, through Occupy Wall Street type protests, since the Parliament has no power over the City, and it is a disreputable tax haven, a commodity exchange, a high frequency stock exchange, and everything financial rolled into one that answers only to the Queen of England.

For Further Study:

http://blogs.hbr.org/hbr/meyer-kirby/2011/08/idle-funds-are-the-devils-play.html



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Comments 22 comments

Evan G Rogers profile image

Evan G Rogers 5 years ago from Dublin, Ohio

I speculate every day of my life, countless times per day.

I didn't buy milk today because I'm hoping it will go on sale next week.

I bought food with a coupon.

I invested in the future by "speculating" that gold will go up in value.

Give it up: speculation is what drives an economy.


bgamall profile image

bgamall 5 years ago from Las Vegas, Nevada Author

No, speculation is what kills the middle class. You have seen it happen and yet you don't really see it Evan. Thanks for reading.


amillar profile image

amillar 5 years ago from Scotland, UK

Send them all to Las Vegas. As I understand it, the original intention for this sort of thing was to encourage farmers to go ahead and produce things for people to eat, without having to worry about crop failure ruining them. If people go hungry because they hike the prices, that’s man made famine - not for the first time.


bgamall profile image

bgamall 5 years ago from Las Vegas, Nevada Author

Oh yes, and there is proof that the investment banks bid up food so much in 2007 that people in West Africa literally starved to death.


Evan G Rogers profile image

Evan G Rogers 5 years ago from Dublin, Ohio

For anyone who wishes to learn how speculators not only save economies, help their fellow man, but also benefits the world, here's the link:

http://www.youtube.com/watch?v=Q3pM4DvzSik


bgamall profile image

bgamall 5 years ago from Las Vegas, Nevada Author

I am talking about speculators who never take delivery, just like Rogers exposed in the Great Depression. The Mises argument that the invisible hand of self regulation will make the market efficient is very wrong. For example 147 dollar oil was pushed up by folks who never took delivery of the oil, who never STORED the oil.

Let them take the expense of storing the oil and you will have people less determined to take a contract. The investment banks never had the thing to sell, and then never intended to have it.


bgamall profile image

bgamall 5 years ago from Las Vegas, Nevada Author

One more point Evan, the housing bubble added 8 trillion of bogus value to the housing market before the inevitable crash. You could say that the people did the speculating, but really, the speculation was orchestrated by Wall Street and the cronies, NAR and the Builders, who said you had to get in before you would be locked out of the market forever. David Lereah said real estate rarely goes down. it was a Scam of speculation gone wild. The same could be said for TULIPS in centuries past. Don't tell me speculation is always efficient. It is mostly not efficient if the players who never take delivery have their way, and their profits off the rest of us are massive.


bgamall profile image

bgamall 5 years ago from Las Vegas, Nevada Author

You could say, Evan, that the speculators in housing, the investment banks, never took delivery of the notes. You see what fraud that was. They bundled those mortgages, without the notes, into bonds that became a source of speculation as well as they were mispriced on purpose by the investment banks. The CDO's that resulted were mispriced and the scam spread by Henry Paulson and others who sold billions of dollars of falsely priced CDO's all over the world.


Evan G Rogers profile image

Evan G Rogers 5 years ago from Dublin, Ohio

Speculators who never take delivery? This sounds like a bogus argument that ignores half of the transaction.

If someone sells something, but then never gives it to them... who's fault is that? Surely not the person buying it.

$8 trillion of bogus value? Why... that sounds like just about as much money as the federal reserve printed out of thin air! Go figure!

Saying things like "real estate never goes down in value" is OBVIOUSLY false to anyone with a brain. Caveat emptor.

But the more important thing to notice is that real estate DIDN'T go down for almost an entire decade! How is this possible?! Your argument is that 'people were really good salesmen and convinced others that real estate was awesome" just can't be true.

The real issue with "the speculator" is this: what made it possible for millions of people to SEE that real estate didn't go down for almost an entire decade? That isn't the speculator's fault, it's the money-making-machine's fault. Blame the federal reserve.

Anyway, this endeavor is fruitless. To expect one of us to convince the other is hopeless. I merely hope to warn other possible readers of the flawed logic held within this article.


bgamall profile image

bgamall 5 years ago from Las Vegas, Nevada Author

This is the whole point Evan. The investment banks have contracts, corner contracts, but do not take delivery of the oil, or the food or whatever else they are speculating about. This article explains what Mises will never explain, either on purpose or out of sheer ignorance:

http://www.newint.org/features/2011/11/01/food-spe...

Here is another article about how the banks cause worldwide hunger: http://www.huffingtonpost.com/2011/09/14/how-banks...


Evan G Rogers profile image

Evan G Rogers 5 years ago from Dublin, Ohio

If people are buying things, but never taking the delivery of them, then that really doesn't change anything. You still are choosing when to sell it and when to buy it. If you don't take delivery of something it doesn't change the fact that you decide when someone is allowed to own it and do what they will.

Also, arguing that the banks of today are causing problems is nothing I can disagree with. I'm just shocked, however, that you don't place the blame on the CENTRAL bank that has bailed out these banks to the tune of $20 trillion in the last 3 years or so.


Hxprof 5 years ago from Clearwater, Florida

Bgamall, I agree with the premise that if speculators, that is those who purchase without ever taking 'possession' are causing us major problems. I was against repeal of the Glass-Steagall Act; I saw it then as an avenue for the exceptionally greedy-and that's how it turned out.

I disagree with the complete hands off policy of libertarians, though I'm entirely with them on this fact: That many of the laws/regulations and other government intervention in our society is indeed unconstitutional, and further, that if we choose NOT to abide by the constitution, which is the route America has taken for many years, then there is nothing left to guarantee our freedoms (those in the Bill of Rights) they can be stripped from us at will.

So I say that you are right, and so are the libertarians who in the name of constitutional law claim that the Federal Government has overreached. We are long overdue for a Constitutional Convention-something we'll never see.


claptona profile image

claptona 5 years ago from Earth

Hi Bg,

Show me a time in history where fiat inflation worked for any government?

Business people are in business to make money - investing in gold, silver, bonds or stocks - all are speculation on what is going to go on in the future.

Even Jobs was a speculator - he thought that his products would be worth something, that's why he built them.

To state one speculation is bad, and another is good - well, I am not God, so a shall not tell another what he/she must do.

I do know this - if sound money principles are in place - speculation goes down dramatically.

The speculation your are seeing is brought to you by the US and European Union. It's the only game left in town for financial firms.

Tell the governments to quit speculating that their moves will do anything about future prices and you will have less speculation in other areas.

Always goes back to governments trying to manipulate currencies.

Cheers


bgamall profile image

bgamall 5 years ago from Las Vegas, Nevada Author

Evan, you say:

"If people are buying things, but never taking the delivery of them, then that really doesn't change anything."

But because of speculation, and not taking delivery, which would slow down demand, demand is distorted and it no longer is a free market. Libertarians are for free markets right? Or are they just for screwing people by any legal means? Phony Libertarians!

Inflation worked for years before speculation became easy with the repeal of Glass-Steagall in 1999. We had the best standard of living for our citizens in the world for decades.


claptona profile image

claptona 5 years ago from Earth

BG,

The other problem with "Liquidity" is it is being done for just what you are against - to allow banks to have more money to speculate on things that you object to.

As seen over the last 4 years, liquidity has just fuelled speculation by the banks.

They don't loan the money out to home buyers and business people, there's no money in that.

Look at the $11 trillion used to prop up (Speculate that an action by the FED will cause housing prices to stop falling) banks - they took that money - bought more derivatives (Speculation there) and sold mortgages to the FED (speculation there) and the average citizen got nothing.

Liquidity, fiat currency is just a Ponzi scheme - thanks to your government and it's officials.

Don't have to be a rocket scientist - if you give money to thieves and liars (Government and banks) they are going to go where the best returns are.

Cheers


bgamall profile image

bgamall 5 years ago from Las Vegas, Nevada Author

You obviously didn't read the article. I specifically say that liquidity used for the wrong reasons, for speculation, rather than lending to main street, is bad.


Evan G Rogers profile image

Evan G Rogers 5 years ago from Dublin, Ohio

No, I did not read it wrong and neither did claptonia, but "speculating" isn't a wrong reason.

Every time you buy anything ever you are speculating.

This is the most simple and basic fact that you are repeatedly ignoring that I am trying to point out to you.

Once again, "changing ownership of a static object" does not in ANY way cause booms or busts. If someone pays me $500 for my computer, but leaves it in my house for a few weeks - or even months - then in no way has the economy become weaker. He simply thinks that this action is a good one.

If speculators are routinely wrong, then they lose money. If they are right, they make money.

"Distorting demand" -- whatever that is supposed to mean -- does not eradicate the free-market. Such a statement merely highlights ignorance.

Every time you buy anything, every time someone else buys anything, every time that you choose to NOT buy something, and every time you do anything at all, demand is distorted to some extent.

By your definition, having a baby would destroy the free-market. You clearly have no idea what you're talking about, and this is why you are led to false conclusions


bgamall profile image

bgamall 5 years ago from Las Vegas, Nevada Author

I am arguing about an economic reality, that massive speculation by electronic trading, taking no delivery, is artificial demand. The demand you are talking about is a free market. This is pre free market. This is before the item is delivered to the store, or the farmer, or the gas pump. This is unnecessary and unnatural speculation I am talking about. It is a tax by the speculators upon the product and therefore upon the consumer.


Evan G Rogers profile image

Evan G Rogers 5 years ago from Dublin, Ohio

It's not artificial demand : the person who buys the item in question STILL is allowed to sell when he finds appropriate.

Thus, it is not available for consumption until the owner - the speculator - says so.

It is not artificial. Artificial demand is a false term under voluntary situations.


bgamall profile image

bgamall 5 years ago from Las Vegas, Nevada Author

You can't grasp it, Evan. Artificial demand is the generation of demand by means that are not in the natural course of doing business. If there is too much easy money, and it causes house prices to go up because massive amounts of people can buy the house with no money down and interest only, it is not real demand. If the guy who speculates is never forced to take delivery, and enough people bid the price up, it is not real demand. Demand actually declined for oil in the past year while prices increased massively.

That is not a true free market, Evan. That is not the invisible hand of self regulation at work, but rather is the visible hand of theft at work.


Hxprof 5 years ago from Clearwater, Florida

@ Evan and Claptona: I'm not a great study on economics, but I can see clearly what BG is saying, and it makes sense.

Speculation on commodities, as BG here describes, is consistently carried out almost exclusively to manipulate the value of a commodity for profit. This kind of speculating brings little value to a nation's economy while enriching those who engage in it. It's clearly as artificial as BG claims it to be.

For many commodities it makes sense to require the 'buyer' to take possession of what he/she has purchased. It would, as BG suggests, slow down the inflating of the value of commodities because of the requirement that the 'buyer' (speculator) take possession.

In the case of the house you mention Evan, if I've purchased a house, then that IS taking possession - going forward I'm responsible for the upkeep of the property, property taxes and such. In the case of the commodity I've purchased but not taken possession, I've no corresponding reasponsibilies for what I've purchased; yes it's there, but I possess the commodity in name only. In the case of the house in Montana, I can drive to that location in Montana and see the house I've purchased; that's typically not so when it comes to commodities speculation.


bgamall profile image

bgamall 5 years ago from Las Vegas, Nevada Author

This is not a complex subject, but I appreciate your input Hxprof, so that these fanatic libertarians can learn something. They won't of course, but that is because Mises imprisons them.

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