How Brokers became Bookies

[onq]

I post a reference to an arcticle by a correspondent of mine Ellen Brown.

Ellen writes wspecifically about the American market, but the derivatives Market has global implications.

While defining it as gambling, and acknowledging it as requiring some sort of moderation and control, it is recognised as a source of wealth for some that should be taked for the greater good.

As a means of raising much needed government revenue for both the unemployed and the retired in a socialist democracy, I think a Tobin tax has much ot recommend it, as well as providing the necessary damper to the massive fluctuations distorting the market due to micro-trading.

FWIW

ONQ

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http://www.huffingtonpost.com/ellen-brown/how-brokers-became-bookie_b_643350.html

 

[demoivre]

Not everyone uses derivatives for speculative purposes. Hedging one's stock portfolio using derivatives, in anticipation of short term downward movements for example, is a perfectly valid, legitimate and cost effective way of protecting the value of one's shares.

 

[darag]

http://www.huffingtonpost.com/ellen-brown/how-brokers-became-bookie_b_643350.html

The article demonstrates almost complete ignorance of the workings of financial markets; the author could have tried reading some introductory wikipedia articles on the subject before peddling conspiratorial nonsense picked up from crackpot internet blogs. There are many reasonable arguments both for a Tobin tax and for stricter regulation of derivatives which don't require these sort of tin-foil hat theories.

 

[onq]

darag, apart from making an unprovoked attack on the writer of the article, perhaps you could point out where any of this is theoretical or conspiratorial?

In particular could you give evidence on - as opposed to allege - the "almost complete ignorance of the workings of financial markets" you referred to - the little checking I have done of the assertions Ms. Brown has made has borner out her comments.

There is no scintilla of doubt in my mind that our current situation arises from poor lending practices and lax regulation of the financial industry.

ONQ.

 

[onq]

Not everyone uses derivatives for speculative purposes. Hedging one's stock portfolio using derivatives, in anticipation of short term downward movements for example, is a perfectly valid, legitimate and cost effective way of protecting the value of one's shares.

demoivre,

All instruments used appropriately have their place.

Using a crafted instrument to disguise a loan as a sale of currency, as Goldman Sachs allegedly did for the Greek debt, is not in my opinion, appropriate use of an instrument.

I believe it is the unregulated use and lack of regulation or even vetting of such instruments that has us where we are today.

ONQ.

 

[darag]

Onq, could you explain what you mean by claiming my attack was unprovoked? It was provoked by reading the article.

You invited comment on an article and I provided one. This is a public forum, if you only want positive feedback, I suggest you've chosen the wrong medium.

I recall a previous posting by you containing wild sensationalist stuff about the Irish banks being exposed to 100s of billions of derivative loses and I pointed out the flaws in your reasoning and understanding.

Why should I provide evidence that her wild, illogical, sensationalist and ignorant claims are unfounded? It should be up to Ellen Brown to provide A SINGLE reference to any reputable (i.e. peer reviewed - evidence based) source which backs claims such as "high-speed program traders can actually manipulate the market so that the thing bet on is more likely to fail" or "by placing high-volume trades, the largest speculative traders can thus intentionally fix prices in any direction they want" instead of linking to other uninformed articles written by herself or web pages written by crack-pots.

Her claim that "the global market in derivative trades is now well over a quadrillion dollars" is nonsense and either completely misunderstands or misrepresents the valuation of derivatives. I explained this on that other thread you started.

The technology of flash trades (a regulatory requirement by the way to ensure that the customer gets the best price available when an instrument is traded on more than one market) has ABSOLUTELY NOTHING to do with front-running (a completely illegal activity) but yet she conflates the two. And front-running has ABSOLUTELY NOTHING to do with high-speed computer trading (and in fact was far more prevalent in the old days before the exchanges where computerized at all).

Derivative trading had ABSOLUTELY NOTHING to do with the economic implosion of Iceland or Ireland or the UK for example - both caused by old fashioned property/credit bubbles which was also the underlying cause of what happened in the US. The major Swiss banks on the other hand had huge derivative exposures and yet it's economy only experienced a blip. These derivative/trading conspiracy theories do nothing to explain the economic experiences of various countries around the world over the last few years.

You should ask yourself why one of the main responses from regulators and governments to the financial crisis has been a big push to force derivatives trading to be done on markets rather than OTC, if trading on financial markets is what caused the financial meltdown of the last few years.

What's most irritating about the article is that after conflating and confusing a whole series of unrelated topics and issues in finance, she then comes to "conclusions" (e.g. that governments should print money, etc.) that are completely unrelated to her outlandish theories about financial markets.

Like I said, I am prepared to listen to reasonable arguments for a Tobin tax but would consider myself not generally in favour and am actually in favour of increasing the regulation of derivatives. But I will certainly avoid the name "Ellen Brown" in future when reading about financial topics.

 

[onq]

darag

Attacks provoked by reading articles usually result in reasoned rebuttals, as opposed to scattershot ad hominems - well done for upping your game.

IIRC you said that a derivitatives portfolio, if balanced, should not give rise to claims on the bank in the region of hundreds of billions of Euros IIRC.

However that bank, Anglo, looks like becoming a bottomless pit for taxpayers money and the derivative book hasn't even been opened to scrutiny yet.

The only thing one has to ask about trading is that in well over a decade since Barings Bank, why haven't adequate controls and regulatory oversight been put in place?

I accpet your knowlegable comments about Ellen Brown because I am not in the position to rebut them [yet].

But your response seems far too defensive in relation to the kind of people we're talking about here to remain credible to the average reader.

Before the crash there was a joke doing the rounds in Wall St.

Q "Where are the client's yachts now".

A "The Brokers own them".

FWIW

ONQ.

 

[mercman]

ONQ this is the most ridiculous thread I have ever read on AAM. What has been posted is a ridiculous claim by a journalist, that nobody knows anything about her credibility.

You have made insinuations and false comment, something similar to the Irish media on a variety of issues, for which you know absolutely nothing about. In fact you have spouted off about Anglo's derivatives position without these made or brought into the Public Domain. If you have fact post them on -- Otherwise button it up.

And to top it all off you have started using these fancy enormous words to shout down other posters like derag and demoivre who appear to know a hell of a lot more than what you are dribbling about.

 

[Chris]

There is no scintilla of doubt in my mind that our current situation arises from poor lending practices and lax regulation of the financial industry.

There was never, and is no, lax regulation of the financial industry; it is the most regulated and government controlled industries in the world. Even excluding the fully controlled and manipulated money supply through central banks, the amount of financial regulation has been increasing in the past 20 years. So the age-old argument that deregulation was at the heart of the financial mess is nonsense.
It is the repeated government intervention to bail out creditors of banks and the stringent regulations that have caused this mess. Because of the all the regulations it is impossible for a small new bank to be founded, as the costs of regulatory compliance is in the millions. I have said this in many threads, but why do you not hear banks complaining about new regulations (except for salary caps)? Any additional regulations protects them from additional competition.
For an excellent and well researched article on why government behaviour is at the heart of this mess see Russ Roberts: http://mercatus.org/publication/gambling-other-peoples-money

I believe it is the unregulated use and lack of regulation or even vetting of such instruments that has us where we are today.

As already mentioned, derivatives had nothing to do with the financial crisis. The main cause of the financial crisis is lack of restraint on governments and their central banks. Yes, commercial banks lent out too much and too risky, but it was central banks that provided the ever increasing money supply and lowered interest rates; they are the ones to point blame at, and they are the ones, whose seemingly unlimeted power to intervene in economic matters, needs to be curtailed.

Onq, could you explain what you mean by claiming my attack was unprovoked? It was provoked by reading the article.

You invited comment on an article and I provided one. This is a public forum, if you only want positive feedback, I suggest you've chosen the wrong medium.

....

I couldn't agree more with darag, and your post made an excellent criticism of the article.
Apart from the total deficiancy of credible references, what annoyed me most is her utter lack of understanding of inflation; Ms Brown knows less about inflation than Bernanke! The idea that an extra $3.7tr, borrowed into existence out of thin air, would cause a benefit to the economy is Keynesian drivel at its worst. Especially considering, as she suggest, that this would have entered the market during the boom (2006). What does she think the property and equity bubble in the US was if not inflation?!?!?! Oh, but of course these are not measured in the CPI, so that means it doesn't count.

 

[Chris]

But I will certainly avoid the name "Ellen Brown" in future when reading about financial topics.

I just decided to not heed your advice, and looked up some of Ms. Brown's other "work". I came accross this truly terrible article:
http://www.webofdebt.com/articles/hyperinflation.php
But luckily Gary North has already taken it apart, saving me the anguish:
http://garynorth.com/public/4993.cfm

He sums it up nicely in just a few words: "To say that this is economically erroneous does not do justice to how wrong it is."

 

[Duke of Marmalade]

In particular could you give evidence on - as opposed to allege - the "almost complete ignorance of the workings of financial markets" you referred to -.

The following quote shows a complete ignorance of the national income stats.

Writing in Global Research in April 2007, he noted that the U.S. Gross Domestic Product in 2006 came to $12.98 trillion, while the total national income came to only $10.23 trillion; and at least 10 percent of that income was reinvested rather than spent on goods and services. Total available purchasing power was thus only about $9.21 trillion, or $3.77 trillion less than the collective price of goods and services sold. Where did consumers get the extra $3.77 trillion? They had to borrow it

The difference between GDP and National Income is an accounting adjustment for depreciation. It has nothing whatsoever to do with debt.

Anyway the main thrust of OP is that Derivatives are a Casino. Au contraire, the main rationale of derivatives is to reduce or spread the financial risks inherent in our economic life. One of the earliest derivatives was life assurance itself. Life assurance is a "swap" of premiums for a payment of a sum insured on death.

Yes, the brokers are bookies. Excellent analogy. Contrary to public perception bookies are not gamblers. By definition they seek to manage their "books" to be risk free.

The difference between a sports bookie and a derivatives broker is in the motivation of their customers. In the former case the punters want the thrill of a "bet"; by and large in the latter case the customers wish to neutralise a financial exposure.