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

With the bailout of the Eurozone by the central banks, Fed included, liquidity is supplied by the central banks to the big European banks. That is the good part, as long as the assets the Fed gets back, held to maturity, are paying a reasonable return.

The bad part is that this international banker cartel refuses to put a damper on speculation in commodities that will increase with this liquidity unchecked.

It is one thing to bail out the banks with the reserve currency, the dollar, for the purpose of getting banks to trust one another again, and make the money markets sound. It is quite another to allow rampant speculation in commodities that must be stopped if main street, especially in the United States, is to have a financial chance at recovery. With proper regulation of the big banks, bailouts would become more infrequent and much less necessary.

Already, before the November 30 Euro bailout, Thanksgiving dinner in 2011 was the most expensive in 20 years. And with the bailout of the Eurozone, oil is up 2 percent right out of the gate to over 100 dollars per barrel. Treating important commodities like oil and food as if they were toys in the hands of the investment banks is madness. This is what Will Rogers warned against. This is what will start another bubble in these essential substances that will just really hurt main street USA.

The housing market replacement costs will increase and this will continue to freeze the new house market. The folks that build houses should be advocating the restraint in commodity prices. You can't replace the cost of an existing house without cutting corners when the supplies to build the houses goes through the roof. This action to essentially skyrocket building supplies will have the effect of insuring housing bubbles in the future because no one will be able to afford the houses. The more they go down in value, the more that the replacement costs will increase.

Builders and the real estate people will no doubt call for easy money lending as the only fix, the only way to jumpstart the new house market. The scam of the business cycle will claim even more victims who think they "own" their houses with a dollar down. As of now little credit is available to main street. The bankers would prefer to speculate on commodities than lend you a dime. That is until they are able to get the government guarantees they are after, so they can forget about your creditworthiness like they did in the last bubble..

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.

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?

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.

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

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

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