The Real Root of the Global Economic Problem

I’ve been thinking about this post all week; and have been pondering the possibility of it’s accuracy, but before I start, I need to get one thing very clear; this is speculation, based on hundreds of data points, articles, and a vast amount of research performed in my off-hours over the past few weeks. Meaning: I’m no financial expert, I’m a philosopher that thinks comprehensively with data either found or given – digests it – and builds points around it.

Overall, I’m going to try to be as comprehensive as possible, I’m going to try to explain it all as clearly as I can, but at the end of this post, you should see how Banks, all over the globe, drive the state of the working class down, perpetuate themselves, and are actually the cause of the global economic strife.

This goes beyond “the Government is bought by lobbyists”, “the Banks own everything”, “down with the large corporations”, or even “I’m the 99 percent”, this isn’t about that at all. This isn’t even about being a Democrat or a Republican. This isn’t about power-to-the-people, it’s about Algorithmic Trading.

Where it starts

Algorithmic trading is a faster-than-lightning trading approach, performed at every stock exchange, globally. It is the result of a series of computer systems placed inside the stock exchange that calculates fluctuations in the the stock market at thousandths of a second. These computer systems are owned by Investment Bank businesses.

Investment banks use these systems to drive their successes in trading. In fact they use these systems to inject their investments ahead of high volume trades, and thus generate advancement as a result of getting in ahead of a big bump in stock sectors.

Step 2

If you have a computer inside the stock exchange, you can basically change and drive the outcome of trading to be in your favor. Now, I’m not talking huge leaps and bounds, I’m talking about fractions of a penny, but done to the tune of trillions of dollars. So, if I’m working with $2,000,000,000 and move the needle on 1,000 trades per day at 1/32 of a cent, I can turn out $625,000,000 a day.

Of course, that’s just hypothetical, and probably at a volume a lot greater than what is allowed.

Allowed?

Let’s take an excerpt from http://www.reuters.com/article/2011/02/25/deutschebank-korea-idUSTOE71O02L20110225

25th February 2011 – Deutsche Bank’s South Korean brokerage unit was fined nearly $1 million by the country’s exchange operator, the largest it has ever imposed, for failing to notify it on time about big derivative trades. [...]

In 2009, Deutsche’s corporate and investment bank generated 2.67 billion euros in revenues from the Asia-Pacific region excluding Japan compared with the almost 28 billion the bank made globally.

From Wikipedia

A special class of algorithmic trading is “high-frequency trading” (HFT), in which computers make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe. This has resulted in a dramatic change of the market microstructure, particularly in the way liquidity is provided.

Where’s it go from there?

Let’s say you’re too big to fail, and you get some $2,000,000,000 (trillion) dollars from the US government after you generated billions of dollars of financial trouble, globally, for gaming a real-estate market, both commercial and residential. Let’s say that you also took it upon yourself to sell those reckless loans to countries like Norway (all of this actually happened, let’s not forget).

What would you do with $2,000,000,000 if you could perform HFT trades in global markets? Help the public? Are you kidding? No, you’d use it to do the following:

Lobby, you need power. Power is in deregulation, deregulation comes from Governments, you need more wiggle in your business, to drive your own economy
Algorithmic trading, FTW!

How’s this effect the 99%?

Last I checked, none of us little people have the capital to even think about investing at the rate these Investment Banks are operating at. Not only that, even if you did, you don’t have the computers inside the stock exchanges. Even better, if you bank with these huge businesses, chances are they’re playing against their own customers’ money, well before they’re playing with anything else.

I mean, why would you want to raise any flags? If you invest against your own investments, in volume, you can make your company rich, and still give “some” results to your customers to keep them happy.

Tie it all together

The best way to make money in a world fueled by currency that isn’t based on anything tangible, but rather, perceived value, is to generate more value. The only way to do that is through stock prices. Therefore, quarterly earnings reports are gold. Thus, the highest priority for any company with a stock-ticker-symbol is the cherished opinion of their shareholders. It is within every large corporation’s best interest to appear valuable to Investment Banks, so they can become “more valuable”. In short, here’s the corporations priority list:

Investment Banks
Perceived-Value
Quarterly Earnings
Shareholders
Company Executives
Strategy around increasing share value
Cover up bad press (PR)
Building the appearance of “good business” (Marketing)
Sending the appearance to The People (Advertising)
Avoid lawsuits
Avoid regulation from Governments
Lower costs … highest cost for corporations is The People

Nowhere in that list will you find, “creating a great job market”. Creating a healthy job market doesn’t involve recursive, positive effects in any of the above points. Besides, humans are the liability in this machine. At the end of the day, money is the tune they want to play their music to, not humanity.

Humanity has nothing to do with stock prices, in fact, humans waste time, they waste money, they waste resources, and they are a cost that shareholders (read: Investment Banks) find to be a strain on their end-result — The Bottomline.

The Market is not Free

See, this is where the Right versus the Left battle comes into play. Do you regulate? Do you claim a need for socialist intervention on the money machine? How far do you take this type of action under Government control?

Well, the best part for Corporations about this is, We The People are ridiculously divided, because all we see are keywords like “joblessness”, “deregulation”, “socialism”, “Marxism”, “free markets” etc — but are never given the actual cause of the problem.

Since the people are too busy fighting over the cream at the top of the cappuccino, we’re failing to see the coffee table the mug is sitting on, and thus, too tied up in the surface, and “get the money out of politics” arguments.

We’re all being too shallow-minded with our “Left/Right wing media is biased!” and “Down with Corporate America/Socialist agenda” viewpoints. We would all be better off if we focused on the actual cause of the problems faced with, instead of the end results we’re fighting against like water over stone.

To put things into a perspective we can all roll our eyes at:

Michael Bay’s Armageddon movie has something we can all learn from, you can’t save the planet by chipping away at the surface, you have to drill down into the core of the problem, and destroy it from the inside out if you want to win.

Solution

Corporations aren’t bad. Their priorities are.
Their priorities are bad because too much Greed controls their priorities.
The reward for being greedy is very high, thanks to Investment Banks controlling the markets.
The Bottomline needs to be the wealth of a Nation, not whether or not a company looks appealing to Investors / Investment Banks.
Mix all this with politics, and you have yourself a nightmare.

The Free Market is about allowing non-Government entities to operate and generate capital within a country for the betterment of the country – as whole. This isn’t some communistic plea to “give people what you’ve got”; it’s a simple fact – I own a company, I’m not a government employee, simple.

The Free Market mixed with an automated Money Market, not actually based on anything tangible, but rather, things that can be driven by the very hand that benefits from it – is not free. It’s a prison, and will end up being the worst crime against humanity in history if a solution can’t be reached, together, as a People.

10.23.11 • posted in: Business • Information

http://nicerobot.org nicerobot

I agree with your conclusion about reaching a solution, “together, as a People” but you’re entirely wrong that corporate priorities are bad. They are exactly what they should be, entirely motivated by profit at any cost. They are and should be single-minded about this. And it’s why so many rightly want to “get the money out of politics”. Government has to be single-minded too, to do the people’s bidding. Some of those people can be greedy owners/investors of corporations but their power to influence government must not be any greater than any other voter, no matter the wealth involved.Remember, our government *allows* corporations to do business for the public good. That notion is very important. They are allowed! We, the people, decide their right to exist. If corporations themselves can manipulate that system, it’s effectively useless.
- http://nrek.co nrek
  
  Reading into that, we’re basically on the same page, save for the notion that I’m a rooted humanist and believe in the betterment of humanity as a priority. As a founder of a corporation, I believe there’s room for us “people first, profits result” thinkers.
  - http://nicerobot.org nicerobot
    
    I too consider myself a humanist and own my own corporation and have also worked for large and small, public and private corporations. And while i will always run my company “people first”, shareholders and boards of public corporations don’t often consider that, and shouldn’t be forced to.
    
    A corporations primary goal is profits but they are allowed to exist for the public good, meaning, “betterment of humanity”. It’s my belief that the most sustainable profits come from honoring employees, customer, and humanity in general and all that that entails. And believe that such an organization has a competitive advantage over companies that focus on other means of profiting. I just believe corporations should be free to pursue profits by almost any means but we must implement laws, oversight and regulations to ensure they respect human rights and don’t engage in anti-competitive behavior.
Too

It looks like you put a lot of thought into this. Nice job.

However, you are wrong.

What you describe is a symptom of our problems. This environment exists because our elected officials are bought and paid for.

Lobbyists and corporate “bribery” are the root problems. Change that, then we get elected officials who are more inclined to fix these issues.
- http://nrek.co nrek
  
  What do lobbyists lobby for? Bribes for what?
  The politicians are under the umbrella of the money, the money is the problem. I don’t disagree that lobbying and bribery are rampant problems, but it’s via money these things happen… the money is all being driven by the Investment Banks motives.
  - http://nicerobot.org nicerobot
    
    I disagree. The money that drives politicians is campaign funding. They mostly don’t care where it comes from. It happens that large amounts come from Wall St (Investment Banks) which is why both parties kowtow to Wall St. If, for example, you were to disallow campaign funding from Wall St, politicians would instantly change focus to the next largest campaign contributors and the same problems would persist, just in another industry. In fact, the same problems already exist, it’s just that they don’t crash the economy because they’re smaller industries than Wall St. Just look at energy and drug policies. They favor the industries instead of us, The People.
    
    Removing special interest from their control of our system is the solution to most of our governmental and economic problems. Politicians would be able to write policies that work for The People instead of allowing special interests to influence, even write, bills that benefit only a few, often very rich individuals and corporations.
    
    The only way i see to regain control of our system is for us, The People, to instigate a policy of not electing incumbents until they have provided us with legislation that protects the system from special interests, specifically, the money and influence they carry.
    
    The only way that will happen is for The People to wake up and see that they are losing everything that made this country so great. I think we’re starting to see The People wake up in the Tea Party and Occupy Wall Street. If those two movements could combine for this common goal, The People might be able to save this republic.
http://twitter.com/jgold85 Jason Goldman

This discussion of “symptoms” of “root problems” strikes me as kind of ridiculous, as if the relationships between these things are not bidirectional. e.g. there is both feedforward and feedback between things like “elected officials,” “lobbyists,” and “money.” The entire system is cyclical, it all feeds back in on itself.
- http://nicerobot.org nicerobot
  
  But we can only control one side of the equation. We elect our politicians. They are supposed to work for us, The People. We can’t and shouldn’t expect corporations to work in our best interests. They only need to consider their own. Same as you and me. Personally, i thin it’s in everyone’s best interest to consider others too, but i’m just saying, you don’t have to. And ultimately, you have to look out for yourself first.
  
  So, given that we can only effect the governmental side, that’s where we have to focus all our efforts. Removing the influence of special interests on our politicians is the only way they’ll consider policies that work for The People instead of for the special interests that fund their campaigns, give them jobs after politics and write the bills that are supposed to exist to protect and benefit The People.
Peter Adams

Namaste. Larry K Mason’s No Physical Object Money system claims solve all these problems & much more. Idealistic perhaps, but from what i’ve read so far (several pages of the website & 20 chapters of the novel which helps with understanding of the system), i love it!

Peace & Love
Pete
stresler

I don’t want to be rude, but this assessment, while not strictly speaking incorrect, is somewhat shallow in it’s analysis. You led with stating that it was speculation based on a few hundred datapoints collected in off hours over the past few weeks, which is admirable. The problem with that approach is it is sort of like trying to form the picture off of the shadows on the cave wall.

I’m by no means an expert, but I can correct a few things and point out a few more avenues that will hoepfully help clarify a keener image of what is ‘actually going on’. The following are several somewhat disassociated points, that I can hopefully tie up into a neat bundle at the end.

A) There is a lack of accountability in publicly traded companies that is not lacking in the private world.

A lot of people today (including some commenters here) seem to be using the terms ‘Corporation’ and ‘Company’ interchangeably. They are not the same thing. In the United States there are types of business entities, LLC, LLP, C-Corp, S-Corp. While all of these are ‘companies’ the only ones that are players on the field we are discussing are C class corporations that have had enough success or capitalization to introduce an Initial Public Offering, or IPO and thus land on the stock market. While all the other types may grow to be huge as businesses, or can even be C-class corporations, until and IPO is made they are not on the stock market. Up until an IPO, in general the owners are not separated by an anonymous barrier (the stock market) from the company. While this isn’t a universal truth, in general, up until IPO ownership equals responsibility. For example, I own 50% of my own LLC. If something egregious happens that my company is directly responsible, me, THE OWNER, takes responsibility for that. Limited Liability Protection helps some, but let’s be unequivocal here, if you buy 50% of a company on the open stock market, and it does something egregious, you, as THE OWNER, would not be held directly responsible by dint of owning that stock.

B) Value is not the same thing as leverage. Disguising value is not risk mitigation. And neither of those things has to do with currency value.

Currency not based on a tangible item, such as gold, isn’t tied to stock value at the risk tolerance level, rather at the national level, which affects all dollars not just stock dollars. That’s a complex sentence, but in short, yes, the dollar decreasing in value would affect the value of a stock, and of the apple in the grocery store – it’s irrelevant to the discussion at hand. However, your point of perceived value very much is relevant.

It’s generally considered sound business strategy to leverage your current assets to get capital to increase profit. You get a small business loan to pay for the new bulldozer to get bigger and better jobs to pay back the loan and have greater profit all around. Investors do this too, and *that* is generally where the value confusion comes up. If you have $2B to trade with and you can borrow another $1B against that $2B you have $3B to trade with and when you win you can pocket the $1B’s profit yourself and return the $2B’s profit to the investor. Standardly you hedge your trades so that you can always pay back the $1B, even if your $2B takes the hit anyway. There’s a reason that leverage is highly regulated. Leverage can make an investment firm appear much more stable and wealthy than they are, but if they don’t hedge for at least the value of the leverage they’re actually in the red, not valuable.

In order to gain leverage, said investment companies need to prove the stability of assets, and that is where the value of a stock comes in. We’ve all heard of the loan bundling that was going on creating an asset bubble of perceived value that didn’t exist. If a mortgage has a 10% failure rate and we bundle 100 together as a single asset, then any 10% of that asset can fail and it will still be an asset worth 90% of the original value, highly stable. A particularly gifted 7 year old could show you why this is faulty logic when all the assets underlying the repackaged assets are /of the same type/, and incentives are given to get more of those mortgages regardless of the mortgage rules.

However, the sad reality is that this last asset bubble in the housing market wasn’t a particularly new thing. Our current economic system is prone to bubbling, and, in my opinion, that is an inherent flaw in how we are regulating the valuation of assets and companies. More on this later.

C) How can too-big-too-fail technically exist?

The main stream media and the politicians have done a good job injecting this phrase into common usage, and making it so that most people don’t question what it means, or it’s implications.

If a company’s value is it’s assets minus it’s liabilities as per the standard accounting equation then any company should be able to be liquidated for that value upon failure, paying it’s debts on a priority scale dependent on the terms of the liquidation. So how can a company grow so big that liquidation isn’t a feasible thing?

When considering national economics it’s useful to not look at the amount of the transaction but the speed and leverage of it. Consider the run on banks that sparked the Great Depression. The problem wasn’t that everyone ran to the banks, the problem was two-fold that the banks were over-leveraged as discussed above, and everyone needed there money /at the same time/.

One could argue that the banks in that era were ‘too big to fail’. But to look at the most recent collapse, too big to fail was defined as “couldn’t be liquidated fast enough to prevent a cascade failure amongst the other entities with which they were interacting”.

The Federal Reserve System was designed to stop just this sort of cascade from happening, by stepping in and providing enough financial capital to support the failing structure long enough to pay it’s bills while it liquified it’s assets and then /let the company die/. Thus preventing a widespread collapse, but letting the failing entity collapse in a controlled manner.

And it did that, for some, and other’s with the right connections it propped up until they could get back on track and roll with a booming business, and that was what was so wrong about the bailout. They money was needed but should have been used to ease the dying of an unsustainable business model, instead it propped it up, and reinforced that the best way to make a ton of money in this economy is to get ‘too big to fail’ as fast as possible.

D) Capitalism is fine, but what’s your capital?

Capitalism can be defined as a positive feedback loop where an investment managed properly creates a return on investment of greater value than the initial investment. This can be simple, You make widgets that cost you $1 to make and my lack of widget is costing me $1.50. I buy your widget for $1.30, creating a positive return on investment for me, and you profit $0.30 creating a positive return on investment for you.

That’s great for monetary capital, but I question that in the humanitarian goals we’re discussing that money is the end game to a healthy, wealthy society. What about human capital? Should business not have an adequate return on social investment? If I create a dog walking company, doesn’t it profit me to send some workers to clean up the local dog run? What about environmental capital? If I make paper, doesn’t it make sense to plant trees too?

Our current model of capitalism is really /monetary capitalism/, when a good model of capitalism would be one that created positive feedback loops in the related categories important to us as a species.

Sorry about the novel, hope it helps refine the thinking and you don’t just think I’m a nut job.
- stresler
  
  I should clarify one thing there, allowing failing businesses to fail is not, in my opinion, the same thing as liquidationism, which if I understand correctly is allowing the market to ‘un-stick’ itself through liquidizing assets to create money flow, but rather allowing failed business models to fail. In most recessions/depressions government spending to create liquidity in the market is a good thing, generally due to some other failed economic policy, if that makes sense.