Definition v. Regulation

I wish I had finished the "Rich Theory" project. One of the themes I wanted to develop in the project was the distinction between definition and regulation.

By "definition" I mean that the government works to make sure that the rules are well defined and understood by the players in the game. By "regulation" I refer to situations where the bureaucrats themselves become players in the game and actively play the role of deciding who can do what and when.

IMHO, the government needs to take an active role in defining the financial instruments that are on the market, but should avoid situations where politicians play the role of deciding who can do what and when. When bureaucrats actively play in the market, they often end up making decisions for political reasons.

There are many things in the current market that scream out for greater regulation. The prime examples are short selling and credit default swaps. The fact that these financial instruments are screaming out for regulation tells me that either they need better defintion, or they should be excluded altogether.

Credit default swaps are essentially a side bet placed on a loan. The justification for the financial instrument is that they help save banks the risk of loans. The actual results of the financial instrument is that they externalized and consequentially magnified risks.

Short selling was a creation of regulators. Short selling allows brokerages to artificially increase the float of a stock when there is insufficient stock on hand in the exchange to meet demand. Modern communication technology has pretty much eliminated all of the blocks that would have once stiffled the ability to trade shares on the market. Today short selling exists primarily as a tool for hedging risks or for taking wild speculative gambles.

The fact that short selling is screaming out for regulation tells me that perhaps we should be thinking of defining the process out of existance.

As traders are adamant that shorting be allowed to continue, an alternative approach to the market would be to create a real time exchange which accounted for every share on the market. In this exchange a person could trade stock for an IOU from a short seller. They would not be allowed to sell themselves until after the short seller replaced the stock.

Such as system would not require a regulation from a bureaucrat because the actual material regulates the actions of the short seller.

In other words, when ever we feel that there is a compelling need for regulators in the market, we probably could find a way to define the market in ways that is inherently self regulating.

NOTE, I joined a site called Fotolia which has a decent prices on stock images for use on blogs and web sites. This is my first shot at buying stock. The image below put me back $1.00.

Maple Leaves

I have a strange desire to run out tommorrow and take pictures of the Fall folliage. During my walk with Coco, I popped some maple leaves off several trees and shrubs, then took pictures backed by various backgrounds. The best is to the right.

Spreading the Wealth Around

Republicans are missing the boat on the Joe the Plumber conversation.

The problem isn't that Obama wishes to spread the wealth around. The problem is that centralization of the economy fails to do what its proponents claim. Yes, there is a brief spit of economic activity during the planned wealth redistribution. When the redistribution is over, the people on the outside of the new world order find themselves burdened by the yoke of an new power regime.

The best way to spread wealth around is the expansion of freedom and not the centralization of government.

What we have in the United States is a government that alternates between crony capitalism and socialism. With each tightening of the screw, the lot of the common man gets worse.

The equitable distribution of prospeerity will not come with the switching from one centralized party to the next. It can only come when the people realize that the answer does not lay with a central government or central market far removed from our primary concern, our local communities and families.

The Fake Economy

I agreed with John McCain earlier this year that the foundations of the real economy were fairly strong.

Pretty much all of our financial problems seem to originate with a bizarre fake economy created by banks, hedge funds and well intentioned but systemically unstable federal bureaucracies.

William Engdahl wrote on interesting article on one part of the fake economy called Credit Default Swaps. The CDS are relatively new creation which ballooned into a $62 Trillion dollar quaqmire in relatively no time. Apparently, the swaps are made secretly between banks and hedge funds.

Credit Default Swaps are a derivative designed with the intent of protecting the portfolios of super rich investors from risk. The mechanisms were designed to concentrate the benefit of financial stability on the super rich, while distributing the cost of financial risk on society at large. Sure enough, we are all being thrashed about by the externalized risk.

Warren Buffett once described derivatives bought speculatively as "financial weapons of mass destruction."

There isn't really much original thought centered around Credit Default Swaps. The credit default swaps involve the typical mix of derivatives and short selling of loans.

It is essentially the business model of Enron done on a global scale without consent of the billions affected.

Many reports attribute the creation of Credit Default Swaps to a Ms. Blythe Masters at JP Morgan Chase Bank. Ms. Masters graduated from Cambridge. Judging from her reported 2008 political contributions, Ms. Masters appears to be a left-leaning Democrat.

I contend that both the educational history and political leanings of Ms. Masters are relevant to understanding the current global economic crisis.

The market is a creation of our minds. What we are taught in school affects our minds and therefore affects the market.

If we were taught to value the building of equity, Americans would be spending their lives building equity, instead of this self destructive behavior where people take on onerous loans putting the vast majority of citizens in our nation in a form of debtors prison.

My experience is that left leaning professors are obsessed with abstract tools that can be used to concentrate benefits and distribute costs.

This has been true since Marx. If you ever bother reading Marx, you will find that he does not define communism. What he does is provide a perverted view of the free market (capitalism). A free market is simply a simply a system where people are free to engage in commerce as they please. Capitalism is a system where man is ruled by money.

The central feature of the left's view of capitalism are tools that concentrate benefit on political classes.

So, in my opinion, the way out of this mess is to create new financial tools designed to promote the building equity.

But such systems could not last long in a world where people are taught the negative way of thinking in the school system.

For example, I believe that a free society would have more than one type of financial exchange. The NYSE allows short selling. I think there should be exchanges for small equities that achieve market efficiency through exchanging the stock in real time, and that don't allow short selling.

The problem is that there will be libertarian wanks who will claim that the right to sell property you don't own is more fundamental than the right to actually own property, and the ability to have a vibrant market with different types of exchanges would be crushed under the weight of the ignorance imparted by our schools.

Free Speech for Teachers

Republicans are really doing themselves a disservice in trying to ban teachers from wearing political pens (Washington Post).

The rational for the ban is that people in public service should not be using publicly funded facilities for campaigns to determine their boss. This rationale applies to small local offices. I don't think it should apply to schools.

I think it would be good if teachers wore pins declaring their allegiance to The Party. If teachers wore political pins, students would notice that all of their teachers belong to the same party. Such information would help students come to grips with how wildly unbalance and partisan their education actually is.

Students might even start to realize that the source of the partisanship ripping our nation apart is our one-sided public school system.

The Wealth Envy Tax

Enough with the Joe the Plumber nonesense.

Would you like to see a list of the people targetted by the wealth envy tax:

Here it is:

The Inc. 5000.

You can browse the list by category, location and other cool features.

I read the list from top to bottom every year because it happens to list the companies I like the best ... small innovative firms that are doing well in their targetted market.

Obama notes that the vast majority of small businesses make under $250k a year. That is true because most small businesses are things like lawn mowing services, dog petting services and other side businesses.

Companies that provide higher paying jobs require a great deal of capital and require a revenue stream to cover materials, labor and high capital cost. It is possible for pure service jobs to have a low revenue per employee. The small tech and manufacturing firms that really drive the economy require substantial revenue per employee. You often find that a company would need $500,000 in revenue to pay the salary of a $75,000 a year engineer.

The people who create the innovations that spawn high paying jobs often go years in the red before they crest and have a brief revenue stream that triggers wealth envy at $250,000.

The debate about Joe the Plumber is silly. You can always pay plumbers under the table to avoid the high taxes. It is the Inc. 5000 that is the real target of the tax.

Infiltration and Capture

The media portrays Bill Ayers as a person who erred as a youth when he committed terrorist acts. The story goes that Ayers later vindicated himself with years of public service as a well paid muckety muck with the Annenberg Foundation.

Even worse, in the convoluted reasoning of the press, many have concluded that since Annenberg was a conservative, and he hired Ayers, then Ayers must now be a bipartisan.

I contend that the real story of Ayers is not his radical past, but the story of how all of our precious institutions are systemically being infiltrated and radicalized.

Anyway, I sat through the October 15th debate and found it depressing.

The part of the debate that turned my stomach most came when Obama said that he would require all students seeking scholarships to volunteer time with groups like Acorn or Ayers' project.

When I was a student I volunteered for such programs and came away deeply disappointed.

So many of these government sponsored organizations are driven by political agenda and are often more interested in indoctrinating students than in the community service that they wear on their sleeves. Students would do better dedicating themselves to their studies, or working a real job.

BTW, what I said is true of many of the religious groups on campus. As a non-Mormon in Utah, I see elements of indoctrination in the Missionary Training Center. This system has students in the impressionable years of 19-20 focused on expanding the political power of a central authority with which I disagree.

On the note of capture, the LDS Church was a commune and favored free love in the form of polygamy in its inception. The power base was captured by the right, making Utah the most Republican state. It is possible for the power base to be captured and transformed in other unexpected ways in the future.

The MTC, of course, is a private self funded effort. If this is how people chose to spend their time and money; then, so be it. A system where one throws the coercive power of government subsidized by taxpayers' dollars into an indoctrination effort, then the results are likely to be akin to the East German Stasi.

When people are inside organizations like the MTC or Acorn, they see it as something that is wonderful in every way. People on the inside of a powerbase tend to see it as righteous. People on the outside, however, see the efforts as something which is concentrating excessive power in a very small number of hands.

Anyway, Obama's plan to use scholarships to coerce students into volunteering for groups like Acorn does not suit my temperament.

Back to the debate ...

IMHO, the moderator spent too much time talking about issues where the president really should not be involved.

Remember, we are all supposed to be filled with hatred of the "Bush Imperial Presidency." The sins of the hated Bush all revolve around George Bush's usurping power that should not belong to the president.

However, the moderator kept asking questions that fall outside of the presidency.

For example, the moderator asked questions about how each candidate would balance the budget. The Constitution places the purse strings of the government in the hands of Congress.

IMHO, all of the questions about the economy, health care and education were also out of bounds. Our highly centralized government has the president doing too much.

The president is simply too far removed from these areas to be the decider on these issues. Doesn't anyone remember the ridicule Bush received when he said he was "The Decider?"

The president shouldn't be the person coming up with the plans. The president should be working to build consensus around the plans initiated by others.

In the limited form of government conceived by the founders, most of the decisions involving our personal lives (like health care and education) should be made locally, and not in Washington.

Oddly, McCain did okay with the few questions related to my view of what a president should be doing. He should have pointed out the questions in the debate were not relevant to the duties of the president.

I think too much of our minds are taken up with the big centralized machines of the big stock market, the big federal government, big education, and big medicine.

The great market collapse happened because big federal agencies (FannieMae and FreddieMac) centralized the mortgage industry. The mechanism was captured by groups seeking quick bucks on commissions for bad loans, and community organizers who pressured banks into making risky loans for political ends.

We will not find security in these big centralized systems because the rogues of the world are skilled at infilitrating and capturing the system.

This brings us back full circle to Bill Ayers. Billionaire Annenberg created a big fund to help improve public education. It was infiltrated and captured by people who seek to radicalize education.

Real security comes in the form of a limited government that focuses on doing what it is supposed to do well, and with smaller distributed organizations focusing on doing their jobs well.

The world falls apart when we depend on big markets, big government or big education.

Manipulators Vote Obama

8y million shares traded hands in the last minutes of 10/15/2008.

The great underlying problem with the market is that all of our securities have been so far removed from the equities and risks that they represent that the whole system is subject to epic manipulation.

The report that is supposed to have caused the sell off was a report that sales at stores had their sharpest decline in THREE years.

That is non-news if I had ever heard non news.

I repeat my belief that shorting, as it is practiced today, is very much a part of the problem. It increases volatility and makes the trading climate hopelessly removed from reality.

True to form, Obama joined the market manipulators and attacked the American economy during the debate. This process is so sickening.

Dogs and Bikes Don't Mix

I needed to shuffle some bikes around today. I also needed to take Coco on a walk.

The smart course of action would have been to place the bike atop a car and the dog in the back seat. Alas, I fear that most bikes in Utah travel more atop cars than on the road.

Rather than following the wise course of action, I did the foolish act of trying to take the dog for a bike ride.

I had a few hundred yards of bike riding with Coco trotting at my side. For most of the ride, however, Coco would try biting at the tires or jumping up on the seat. Realizing that spokes and tails are a bad mix, I ended up walking the bike for most of the trip.

Fortunately, most of the bike swapping involved just plain walking. Coco excels at just plain walking.

I am sad. I didn't ride my bike at all this summer. I did not even inflate the tires. My recreation time is spent walking a hyperactive dog.


BTW, people in Galveston suffered a hurricane of late. I realize they are less equal than the good folks of New Orleans, but Texans are in need. There is a bipartisan thing called the Bush Clinton Coastal Fund raising money to help with the relief. I am sure other organizations specializing in disaster relief are also engaged in helping with the recovery.

I wonder if the flooding of New Orleans would have had as deep an effect on our nation's psyche if it did not lend itself so well to partisan attack. A bipartisan effort for disaster relief receives a yawn.

People imagine that socialism will be a wonderful world where government helps all who are in need equally, while in actuality government aid is made in relation to expediency and not need.

Staggard Horizon

I consider the short ban on short selling a failure. The ban created an event horizon and that event horizon dominated trading for several days.

This post lists two elements needed to make a short ban work.

The biggest problem with the 2008 ban is that it created an event horizon. Everyone knew that the ban would end at a given time. This softened buying prior to the event horizon. It also created an opportunity for manipulators to hit the stock with twice the venom after the ban.

To stop the creation of an event horizon, the end of the ban must be staggard.

The reason for the ban is to prevent stock manipulation. Manipulation happens in the absence of real data about a company. Manipulation tends to happen in the ladder half of a quarter and tends to stop just prior to a company's quarter report. The 2008 ban ended a good two weeks before quarterly reporting started to hit the scene.

The second step to making a short ban work is to time the end of the ban with the quarterly report.

As quarterly reports tend to be staggard, you could pretty much stagger the end of the ban with the reporting cycle.