28 April 2010

Life is a Cabaret

The senators, and the public from what one reads, are ticked off at Goldman Sachs and its brethren over the Great Recession. All of us are suspicious that Goldman had a more direct effect on the crash than just being a victim, as they claim.

The synthetic CDO named in the SEC action, and the subsequent revelation of the "shitty" Timberwolf CDO, led the senators to condemn Goldman as just gambling and running a casino. Well, that's all the stock market EVER is. Neither the senators nor most civilians get it. When you buy or sell a stock, if it isn't a Public Offering from the company, you're just gambling. You're gambling, if you bought, that the guy you bought the stock from was an idiot to part with the stock at such a low price. Conversely, if you sold the stock, you have a similar opinion of the buyer. You're gamblers.

If stocks were direct analogs to the companies named on the certificates, the Great Recession would never have happened. The housing market would still have imploded, but the rest of the world's companies would have been largely unaffected. They weren't housing market companies. The holders of the stock would "own" these companies, and would understand the responsibilities of ownership. And so forth.

But, of course, that's not true. Most buy stocks for the share price appreciation, not dividends paid from earnings, or even for the earnings alone. MicroSoft went decades without distributing earnings, and didn't do so until the IRS began to figure out that this was simple tax evasion; converting dividends (by not paying any) into capital gains through the appreciation of the share. Clearly, the share will appreciate if earnings increase (or costs decline, or revenues increase, or some other Good Thing Happens); however, the current holders of the shares have largely not contributed any cash to the company.

And that's the rub. What makes synthetic CDOs any more of a lottery ticket? Nothing at all. Credit default swaps, which were bundled into the "shitty" Timberwolf are another matter. CDSs are inherently evil, and should be banned. If a stock/bond purchase is too risky, then it won't be made, that's all and as the world should be.

Some have said that the problem was/is a global savings glut, and they're correct. The funds to fuel the housing bubble were not manufactured by the Fed. The Fed didn't print the money involved. The Right Wingnuts are conspicuously silent on this. The Hound of the Baskervilles: the dog that didn't bark in the night. The money largely came from Asia, where labour receives vastly less than what Adam Smith says it would earn; and this money piles up in the hands of capitalists, unused. Enter American mortgage companies, not banks. It was mortgage companies that created the sleazy mortgages, not banks. They provided a place to put all that cash "to work". And we know how well that worked out.

In sum: Goldman is far more evil than their stonewalling innocence. But stocks are all about gambling. What Goldman did was to rig the game by creating pigs ears and selling them as silk purses. They say that the law allows them to lie, in fact. They don't have to be honest about the nature of the item. The buyer is required to figure it out. Goldman is allowed to make figuring it out as difficult as possible, and they did. They were doing God's work; not the Christian God, of course.

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