Summary of Reforms

Our financial institutions were designed to the desires of the central bankers--Not for the needs of the investing public.

Because of this our financial institutions artificially concentrate power in the hands of bankers while undermining the wealth creation process within the community.

The solution to this problem is to redesign financial products around the needs of the investing public.

We need actions. Not just complaints.

In this blog, I've made four very concrete proposals for financial reform. The common thread in these four reforms is that they replace financial tools geared to the needs of banks with tools geared toward the need of the investing public.

The reforms are:

• The Medical Savings and Loan: This reform replaces insurance with a system of structured savings and supplemental grants to secure medical coverage.
• Shared Equity Financing: This reform replaces mortgages with direct investment in housing.
• The Real Time Open Source Exchange is a product that replaces black box stock exchanges with an open source program that executes trades in real time. Executing the trades in real time eliminates naked short selling.
• The Object Oriented Tax. The object oriented tax is an interesting program that taxes an object between income and spending.

The first two proposals are concrete ideas that could be implemented by small companies.

The OSRTX is more theoretical. It could be implemented by a collection of companies or investors seeking to share ownership in equities. The primary goal of this project is to demonstrate the short selling is the creation of anti-market regulations.

The Object Oriented Tax is a political solution. This program taxes an object between income and consumption. It combines the best of a progressive income tax with a consumption tax. Essentially, everyone will have two accounts: An Investment and Spending Account. The system charges a progressive tax when people transfer money from the investment to the spending account.

With the OOT, people can make their investment decisions without having to calculate the effect of taxes. People would have to pay a progressive tax on what they spend. The system empowers individuals in saving and investing. The system eliminates the capital gains tax, but taxes capital gains spend on consumption at a progressive income tax rate.

Empowering the Investor

Each of these reforms arises from the same thought process which seeks ways to empower the individual in our economic system.

Even if I find no backers for thes programs, I believe a vigorous discussion of the reforms directly address the underlying problems with our current financial structure.

For example, the programs fit well in discussions about the difference between the free market and capitalism.

In the free market, the free mind of the individual is supreme. The theory of capitalism overemphasizes the role of paper money.

Implementing the Reforms

It would be easy for small organizations to implement the first two reforms. I designed the Medical Savings and Loan as a method for reverse engineering an insurance company. A company seeking to reduce the cost of health care benefits could implement the Medical Savings and Loan.

An investment firm could offer SEF-Liens as an alternative to mortgages. (A SEF-Lien is pegged to the local realty market. One would never see a house financially "underwater" because the lien would automatically drop in value if housing prices dropped.

Yes, it is true that businesses implementing either the Medical Savings and Loan or Share Equity Financing will make less profit per client than insurance or mortgages; however, people in need of financial services are likely to choose the products that offer best security.

I believe that, if the programs were implemented, they would be a hit in the market as they provide a better service to the public.

Conclusion

To restore the American experiment, tea party patriots simply must start engaging in a positive discussion of the ways that the free market and limited government can solve the problems created by our over centralized banks.

The structures discussed in this blog could be part of such an effort.

Tweet Button: Tweet

Shorting our Way Into Debt

We all know that America has a debt crisis. This crisis is not simply the result of borrowers. The debt crisis is the result of a financial system that floods capital markets with easy money.

Notably, the fractional reserve lending system of the Federal Reserve multiplies the amount of debt. Banks lend out multiple dollars for each dollar saved. The Fed works like a lens systematically magnifying debt.

Perhaps the most pernicious effect of short selling is that it contributes to this debt crisis.

A short sell is a similar source of easy money. Short selling is not an investment in production, but a financial tool derivative of other's productivity. It is a paradox-ridden kin to a margin play.

When a person shorts a stock, they borrow a stock then sell it at market prices. The person who lent the stock for the short sale no longer has an investment a company. The investor has a loan that tracks the price of the stock.

These loans often take place without the knowledge of the investor. So, you might think you have 100 shares of GM, when really you have a loan to a third party that tracks GM's price.

When a short seller sells a stock, the short seller gets money. This easy money floods into other investments. Short sellers often hold the money in tools like government bonds or mortgage backed securities ... creating an artificial demand for these financial products.

(Short selling feeds the beast that crashed our economy)

The amount of easy money created by short selling is phenomenal. It is second only to the amount of easy money created by the Fed.

Hedge Funds use a formula for shorting. For example, some hedge funds with have $30 in shorts for ever $70 in investments. The amount of money being shorted is massive.

Following the short interest on stocks, I find it common for the short interest to be 20%, 30% or even 40% of the float for long durations.

For a trillion dollars in investments, one might see short sellers generate $200 billion in easy money through shorting.

Free-marketeers should be irrate about short selling. This is not wealth created by the re-investment of surplus production (as was described by Adam Smith). It is vast quantities of easy money created by the financial regulations that allow short selling.

Short selling (selling stock that does not belong to you) is a direct violation of the principles of property rights. The system has numerous perverse effects that muck up the process of generating real wealth.

Tweet Button: Tweet

Short Selling and Liquidity

Proponents of short selling repeat the theme that short selling improves liquidity.

All of my experience shows that the exact opposite happens. Short selling decreases liquidity.

Wikipedia (drawn 11/20/2010) defines "Market Liquidity" as "an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value."

My experience is that when a short seller has a large block on the ask line, it is difficult to sell the stock without accepting a steep loss. I've often seen the case where a piece of bad news hits a stock. The short interest in the stock will explode and the price will tank. This reduces the ability of the common share owners to liquidate their stock.

I have noticed that short interest tends to jump just before planned sales of stocks. For example, when employee stock options vest, there is generally a jump in short interest prior to the vesting date dramatically dropping the price during the window when employees are allowed to exercise their options with planned sales.

Short interest increases whenever a company plans a secondary offering. The short sales are decreasing the liquidity of the stock.

Short sellers are like other investors. They want to sell high and buy low. As such short selling generally increase during market dips.

There was a massive increase in short selling during the liquity crisis of 2008. The prime time to short stock is when people are panicking or otherwise being forced to sell.

Yes, back in the 1800s when it took several days to execute a transaction, short selling helped improve the liquidity of stocks.

But when one has a system where transactions can take place in real time, there are few cases when short selling actually improves liquidity.

The most active short selling occurs when there is a distressed seller. In these cases short selling dramatically decreases the ability of the distressed seller from selling their stock.

Mortgage Backed Insecurity

Patrick Byrne of Deep Capture repeats an interesting rumor. The rumor is that a sizeable portion of the loans in the toxic mortgage-backed-securities bundles that crashed in 2008 were actually fraudulent loans. The "paperwork errors" holding up foreclosures are tiny things like houses that don't exist or mortgages that don't have liens on titles.

Possibly some of the bad loans aren't just loans made to people who can't repay, but were fraudulent loans from the start.

The convolutions of mortgage backed securities, CDOs and credit default swaps make my eyes curl up in their sockets.

However, this much I know.

These bizarre derivatives all came from the insurance industry.

The idea behind a mortgage backed security is that centralized banks can manage risk by bundling large number of mortgages into packages that are then traded on the market.

Freddie Mac and Fannie Mae are GSEs (Government Sponsored Enterprises) that bundled, insured and served as an exchange.

The exchanges created a convoluted complex of derivatives such as CDOs and credit default swaps to facilitate the trade of the securities and promised the ability manage risk.

The exchange system for mortgages failed miserably.

I repeat that. The exchange system for mortgages failed.

The exchange system for mortgages failed.

The exchange system for mortgages failed.

The exchange system for mortgages failed.

The heart of ObamaCare, and other current approaches to health care reform replicate the failed centralized exchange system of the mortgage industry.

The system where traders sit in towers and speculate on the risks of others will simply replicate the failed mortgage system. It will be rife with fraud while those needing care will be spun off onto the public coffers.

The better approach to health care reform is to march in the opposite direction. Rather than created convoluted group pools in which the elite control health care, we should develop a system where people self-funded their care (with supplemental grants and loans).

Hmmm, I wonder if anyone has come up with such a thing.

I've watched the news, read the papers, hit the tea party web sites.

I haven't found any.

Hmmm. If only some would work on such a system, it would be great.

TweetButton: Tweet

No One Can Listen

Harry Markopolis is an option trader who figured out that Bernie Madoff's hedge fund was a fraud decades before Madoff's ponzi scheme crashed in multibillion dollar financial scandal. This last year Markopolis penned a financial thriller titled: "No One Would Listen" (buy at Overstock.com) which details his frustrations as he tried to convey his discovery to the financial community.

He talks about how he brought his information to the SEC, the press and others, but no-one would listen.

I've had similar problems throughout my career where I have very clear ideas to communicate, and I am simply unable to communicate the idea.

I've come to the conclusion that it's not a simple case that no-one will listen, but that our leaders have dinked around with the language to such an extent that no-one can listen.

The modern era has been full of intellectuals who sought to manipulate discourse at a foundational level. For example, Hegel, Marx and modern progressives love the term "sublate." This is a process in which a term gets turned into its opposite.

The process is ever so clever; however, as progressives grub power through a systematic undermining of our language, we lose the ability to communicate with each other.

So, the power of the Aristotelian tradition was not so much that Aristotle created a superior method of reasoning, but that he created a relatively clean method for people to communicate their reasons.

Whenever there is a society where the Aristotelian method clicks, people are able to communicate with each other and accomplish great things. When intellectuals resort to manipulating the language to gain power, the ability to communicate dissipates and the society diminishes.

What is Capital?

This post is a reply to a tweet.

Before engaging in high level debates, it is useful to think about the terms used in the debate.

For example, we often use the term "capital." But what exactly does one mean by "capital"?

Wikipedia we find the term capital referring to different things. In classical economics it referred to a real physical thing ... a factor of production.

In Marxian economics capital refers to an abstract entity called "money."

It is possible to create or destroy money without actually producing any physical benefits. This is what the Federal Reserve does.

In common discourse, people tend to use a muddled definition where it refers to both the physical factor of production and the money used in investment, but in actually trying figure out how things work, one finds that different definitions of capital work differently.

Things become even more convoluted with the absurd convention of using the term "capitalism" to refer to the free market economic system favored in the United States.

Definition of Middle Class

I believe that the distribution of wealth is far more important than the distribution of income.

Income refers to the amount of money that a person receives in a year. Individual wealth refers to the resources that one owns over a life time.

In the scheme of things, one's income is derivative of ones wealth. Income is simply a slice of one's life long wealth.

I contend that if a society has a healthy distribution of wealth, it will naturally have a health distribution of income.

Conversely, a society with a healthy distribution of wealth might have an uneven distribution of income as people make different amount during different years of their life.

My last post spoke about the changing definition of the Middle Class.

The original definition of middle class was based on the distribution of wealth.

One could split the ancient regime into three primary classes. There was a small ruling class, a very large working class of peasants and workers and a middle class between the two.

The ruling class derived its wealth and power from the state. The working class sold its labor for subsistance.

The middle class learned to re-invest the proceeds of the labor to improve their productivity. This middle class of merchants and manufacturers re-invested the profit from their endeavors to build capital.

Note, both the ruling class and working class were largely dependent on the state. As the middle class built capital, it gained a certain amount of independence from the state.

Intellectuals despised this middle class with its independence.

Because this despised middle class was very good at creating wealth, it systematically pulled millions of people out of poverty and the ranks of the capital owning middle class swelled.

In this traditional paradigm, the term middle class (bourgeoisie) was based on the distribution of wealth. The distinguishing feature of the middle class was that it owned and controlled capital.

Progressives hate this property owning middle class with a deep abiding passion.

Progressives took a tool developed by Hegel and perfected by Marx called sublation. Sublate is a process which one can use to turn a term into its opposite.

The defining characteristic of the middle class was the ownership of capital (its wealth). Progressives simply made income, not wealth, the defining characteristic of wealth.

Income, like most statistical phenomena, falls into a simple bell curve. Progressives took to calling the middle section of the bell curve of income "The Middle Class."

For a variety of economic reasons, the reported incomes of the ruling class, middle class and upper segment of the working class will fall in the middle of the bell curve of income. The really successful business owners fall in the upper section of the bell curve, unsuccessful workers make up the bottom of the bell curve.

By changing the focus of the middle class from wealth to its derivative income, progressives successfully sublated the term "middle class."

Middle class no longer refers to the productive business owners who built up the wealth of the nation. It now includes the parasitic ruling class and some of the higher paid workers.

The term "middle class" now means its opposite. The group of capital owners who sat between the rulers and working class is now in a separate vilified class, while the proletariat is lionized as the middle class.

Of course the progressive definition of middle class is absurd. By simple economic laws, most people will fall in the middle of the distribution of income.

It is the distribution of capital that matters! With a centralized economy, control of the wealth of the nation falls into an increasingly small number of very corrupt hands.

While progressives pound the sublated definition of "middle class" the real middle class that gave us our prosperity is being systematically destroyed.

The Middle Class is the New Proletariat

Progressivism is a system of rule by manipulation. Long ago, the left learned that it can affect change subliminally by changing the language (aka sublation or the German aufheben).

One curious example of manipulating terms happens with the term: "Middle Class."

Traditionally the term "middle class" referred to the social class between the ruling class and the working class (The Third Estate). The ruling class referred to those who derived their income from ruling. This would be the kings, feudal lords and massive bureaucratic structure of the state.

The middle class referred to business owners who were making money independent of the state. A primary characteristic of this class was ownership of capital. The middle class would re-invest their capital and improve their lot. Note, the middle included trained professionals who invested as heavily in their careers as merchants and manufacturers invest in their businesses.

The working class and underclasses made up the vast bulk of the people.

Back in the days when Marx spewed his venom, he used the bizarre terms "bourgeoisie" and "proletariat." The French term "bourgeoisie" meant a person who [gasp] owned a business in town. [The Horror] [The Horror] The English translation of bourgeoisie is "The Middle Class." [The Horror] [The Horror]

During the Industrial Revolution, the Middle Class gained influence and the traditional ruling class waned.

The Middle Class was an open society. The markets created by the bourgeoisie pulled hundreds of millions of people out of poverty and into the maligned middle class.

Intellectuals loathed the people benefiting from the new found wealth with a deep passion.

So, an intellectual named Marx sought to unite the ruling class and working class (the proletariat) in a revolution against the horrible Middle Class (the bourgeoisie).

Marx succeeded in igniting a revolution and hundreds of millions of people died in agonizing ways.

History proved Marx a rogue. The bourgeoisie he loathed brought wealth to millions, while his revolution brought death and hardship.

If we were a people who learned from history, we would have rejected Marxism and adopted the ideals of the bourgeoisie.

Unfortunately, there is a group of low lives called progressives who continue to craved the totalitarian power promised by Marx.

Progressives seek the same goals as Marx. But they realized that, if they captured the university and media, they could accomplish the goal of a totalitarian state simply by manipulating the language. One can simply use the process of sublation to turn words into their opposite.

Transitioning the term "Middle Class" into its opposite was rather easy.

So, traditionally, the middle class referred to a relatively small class of business owners who sat on the social scale between the ruling class and the workers.

To change the definition, one simply de-emphasizes the source of the wealth and claim the distinguishing characteristic of the source of the middle class as income. The new definition of middle class labels all the people in the middle of the bell curve as "The Middle Class."

Since the bulk of the massive state bureaucracy (the new ruling class) have incomes that fall in the center of the bell curve, progressives have created a new paradigm where the ruling class is embedded in the definition of the middle class.

So, by clever manipulation of terms, we've arrived at a situation where the left is able to use the "Middle Class" in place of "proletariat."

This is problematic for our nation because it turns out that the source of the wealth does matter.

See, the source of the wealth of the traditional middle class was the re-investment of capital. This traditional middle class had the knack of creating new wealth and increasing the wealth of the nation.

The current middle class gains its wealth largely through redistribution. The modern American middle class consumes more than it produces and created a negative system in which our nation declines.

Since conservatives are too stupid to actually look at the roots of today's problems, I guess there is little to do but applaud progressives for their manipulative ways and lament the decline of our nation.

Tweet Button: Tweet

Utah's Immigration Law

Utah is considering an Arizona style immigration law.

Personally, I think this is silly as Utah is not a border state. I think it is wiser to wait a year or two to see how the Arizona law plays through before taking action.

I suspect that the 2012 election will produce a president who is eager to work with states on immigration, negating the need for the law. Passing a law with a 2 year horizon is foolish.

What is interesting about the Utah immigration debate is that the LDS Church is putting it's iron boot down on the throat of the subject.

Latin America is a growth area for the LDS Church, and this powerful entity wants to avoid any issue that might adversely affect that growth. It is in the interest of the LDS Church to stop the Utah immigration debate. Not surprisingly, the LDS Church issued a statement.

One particular section of the statement caught my attention: It reads: "Elected officials have the primary responsibility to find solutions in the best interests of all whose lives will be impacted by their actions."

This statement is counter to the ideals of a representative democracy.

The primary responsibility of a representative is the people being represented.

It is when government leaders start seeing themselves as the conduit of a higher good that tyranny sets in.

The world works best when different groups focus on different responsibilities. In this world we find one's family is the primary concern of most people. Businesses are concerned with the financial health of their property. Elected officials have a responsibility to the voters. Schools have a primary interest in educating their students. Churches and pundits might focus on higher concerns, etc.

When different groups focus on different aspects of our problems, we end up with better solutions.

Most problems are multi-dimensional and require multi-dimensional solutions.

The LDS Church is a powerful entity with an important and influential view in Utah. Because the group is so powerful, any statement will influence the views of the Utah electorate. Consequently, it will influence the decision of Utah Representatives.

Sadly, the Church chose to state its position in a way that was counter to the American tradition of representative democracy.

This saddens me.

Would they have made the same high sounding moral statement if it was not in their interest?

I agree with the desire to avert a local immigration debate, but disagree with the statement.

Anyway, some people have asked why I have no interest in starting a Medical Savings and Loan in Utah. This program is an alternative to insurance. It takes the bulk of the money from insurance and puts it back into the pockets of the people who earned the money.

The second actuaries run the numbers and see the amount of money that will flow from the ruling elite and back into the pockets of the people who earned the money, the institutions of the ruling elite will come back in full force against it.

The LDS Church has a substantial amount of money in insurance.

I would be messing with their money.

I have experienced the iron boot of the LDS Church in the past. I have no idea how to counter it. To make the system work, I need to find a different area.

As for immigration, I hope Utah State chooses to avoid the issue in this up coming legislative session. It is an issue best left for the 2012 election.

Tweet Button: Tweet

Federal Power and the Dream Act

The Dream Act is a tool that grants citizenship to families for joining the military or taking on other select government jobs.

The relative size of the Federal Government has been the most contentious issue of in the United States since its founding.

An act that grants citizenship for getting a government job weighs the body politics to those who want more power in the hands of the government. A government agency that wants expanding authority will hire new citizen/employees who will vote for expanded government power.

This fluffy sounding bill is one of the most manipulative bills ever put before Congress. In order to gain more power, the government simply grants a few million people who will support their power grab.

An act that allows the government to change the make up of the nation in favor of bigger government creates a dangerous feedback loop. This power grab is an attack at the very foundation of Democracy.

The founding principle of the Dream Act is "If you don't like the will of the people, change the people."

That said, I will now sit back and be labeled a racist by small minded progressives.

Tweet Button: Tweet