Chapter 1.7 WALL STREET & THE GREAT INVESTMENT MYTH

CHANGING AMERICA'S MIND Chapter 1 - Part 7

Games Boys Play continued

Note: If you are just arriving to this blog, please start with the Introduction.
The book is being published sequentially as it is written.

With adolescent boys’ games perhaps the worst damage can be cleaned up by a school janitor. Not so with the games of the Wall Street boys. This last report is about the damage they do – the destructive economic consequences I described earlier in this chapter, the corporate responses to Wall Street pressures that drain the vitality from our nation.

In a July 25, 2010 NYT article, “Industries Find Surging Profits in Deeper Cuts.” Nelson D. Schwartz reported the following: “Many companies are focusing on cost-cutting to keep profits growing, but the benefits are mostly going to shareholders instead of the broader economy, as management conserves cash rather than bolstering hiring and production.” “This seeming contradiction – falling sales and rising profits – is one reason the mood on Wall Street is so much more buoyant than in households, where pessimism runs deep and joblessness shows few signs of easing.”

I can only add that to please Wall Street, one of the ways that corporate management cuts costs is to move production offshore to low wage countries. Increasingly, since President George W Bush’s 2003 capital gains tax cuts, they have been using this mechanism to lower costs, lay off long-term employees, renege on pension plans, and drive down wages for remaining US workers. I will demonstrate in the next chapter how such tax cut stimulus strategies that benefit the wealthy tend to send the country into recession or depression.

I want to close this section on the games of the Wall Street boys, by commenting on a recent development in the futures markets. In the mid-summer of 2010, the price of wheat has risen rapidly in response to a drought in Russia. In a Los Angeles Times article August 6, 2010, P.J. Huffstutter and Sergei L. Lolko, report that, “The price of wheat surged to a two-year high when Russian Prime Minister Vladimir Putin announced the ban (on exports) Thursday.” They point out that this is in the face of a bumper crop in the US and that “stockpiles of wheat and other grains worldwide are greater now than they were three year ago,” … when, “grain shortages and rising food prices in 2007 and 2008 sparked riots worldwide …” They go on to quote Jay O’Neil, a senior agricultural economist with Kansas State University’s International Grains Program, “The world is awash in feed grains,” O’Neil said. “This is silly. These grain prices shouldn’t be this high.”

I would echo that and say, amen! One of the most adolescent and destructive games played on ‘Wall Street’ and in this case, the Chicago Board of Trade, “puerile-y” for making money, is gambling in the futures markets. As alluded to earlier in the chapter, bankers and financial funds managers with wads of ‘loose wealth’ looking to score, drove up food and gasoline prices in 2008 when they could no longer make a killing in the subprime mortgage derivatives market. Then, and now, it has nothing to do with real supply and demand – or shortages. It is caused by this speculation driving up the prices that the rest of us must pay for the necessities of life. In my view, this is not only destructive, but supremely immoral. And under the Bush tax cuts, they get to pocket most of it since they are only paying a 15% capital gains tax.

For the most part, I do not favor extensive regulations as a means of reigning in such games, but in this case, I believe that there needs to be a law! There are plenty of legitimate and useful purposes for the futures markets in which a buyer takes an option on a certain quantity of a commodity at a preset price. Farmers are able to protect themselves from bad years, bread companies are able to assure an affordable price for flour, for years, Southwest Airlines was able to hold down the price of tickets by locking in fuel prices on the futures market, to name just a few. But for speculators to be able to gamble on commodities pushing up prices for legitimate businesses and consumers with no intention of ever taking delivery, is obscene. And worse, they are allowed to do it often with only 5% down, and during the TARP bailout, with taxpayer money. And they only pay half the taxes on their winnings that you and I have to pay on the wages we earn!

I propose a law which limits trading on futures markets to legitimate businesses who have a real business use for and facilities to receive delivery of the commodities they option. I also believe the law should require that they actually buy, pay for, and take delivery of at least half of what they option. That would put a stop to much of this puerile game of destructive speculation.

Coming next -
Insatiable Demand that Became an Additiction

Larry
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