Economic correction: ABOLISH THE STOCK MARKET!

I don't understand why no one has cometh forth with the logical correction to the current world's economic catastrophe. Here we are suffering the complete collapse of the capital infrastructure and instead of considering the abolition of Wall Streets everywhere governments are opting to finance its subsistence until it is able to again carry its own weight in gold.

Why would we want to save something that is not working and has proven inherently unstable? Since the Stock Market crash of 1929 less than 80 years have passed; and in between we have had other severe crisises such as the famed internet bubble burst and the Savings and Loan debacle to name but the top rated of them. And so how can we stand here today and say that there isn't something inherently wrong with the financial system, there is, there is something wrong with the system, it is obviously not working.

First of all we can all claim that the stock market is a necessity however it isn't. There was a time when there wasn't a stock market and most of humanity at least till the seventeenth hundreds, has actually financed itself and operated successfully without a functioning stock market. Some might argue that before the stock market existed the same mechanisms were in place but had not been formalized and that is very much a proper case to make; and more accurately it points out that there is no need for the stock market. Which is why here we must say that the stock market is more dangerous than any value it accrues.

The reason why the stock market is less beneficial than the value it accrues it's because the value that it accrues is not genuine value, sure at first that may have been the case, the initial stock market somewhere in Amsterdam probably dealt with genuine value, meaning that the investors had more or less a clear understanding of the possible accruals that would befall their investment. This is not because there was something inherently more honest in the character of the participants, those floating stocks and those investing in them, no they were probably suffering no greater virtue than their equivalent in the modern day. However the stock market was young, it was naive as youth is always naive and so discouragingly honest about its ways; and for that matter so were the investors, they were on a new venture together and this meant that the market had not yet created false expectations as it would later grandly do.

However the general propensity of any stock market is to bet on itself, a stock market is nothing more than a formalized gabling casino for companies and investors to bet on each others savvy. Anyone under the conception that the stock market is not a gambling institution would be wise to look at the market now. You can accumulate huge profits and huge losses but it is all based on calculated risk and you are betting that you can beat the house, or more accurately the house and you are both betting that you are going to win against the incalculable number of odds that besiege companies and investors. This is why investors constantly walk away with millions of dollars in loses and don't bother to expect someone to make it right, they know that it was a risk without a safety margin, they are aware that it was a risk they were willing to take.

National and international economic entities are willing to allow stock markets to exist because they realize that this is the only way to finance risky investment propositions that would otherwise not find capital to survive. The Internet was financed by lots of private capital that was lost when the Internet bubble collapsed but the Internet itself did not collapse; in fact the Internet has always been growing even after the Internet bubble went bust the Internet was growing and making millionaires everywhere, however many original investors lost grandly. The same took place with the Telecoms investments of the eighties, many of the original investors lost their shirts but overall the infrastructure that was built up is in used today much to the benefit of all.

On second thought when you think about the collapse of the mortgage industry it makes more sense to have a stock market, and in retrospect the Internet and the Telecoms investments were largely successful over generations of investors that is; so that the overall investment was sound though it took say three or four generations of investors for the profit capitalization to take effect. The same was true with the railroads, most of the investors that financed the tracks had to sell out before they made a profit. Stock markets start to make more sense if you don't look at them in terms of one time investors and start to measure the results over a few generations of investors. What that means is that an investment is not inherently of a nature to necessarily benefit the first generation of investors but rather best looked at as a more glacial investment that accrues its greatest benefits and value to intricate infrastructure projects or large scale enterprises. The stock markets makes sense over time and each generation of investors is sort of the guardian angel, of the moment, on watch till the day arrives when the investment matures to accrue a genuine success and profit.

This is why when you look at the stock market over time it has always performed well, it has always grown, yes it has had its abysmal performances but over time it has grown and blossomed riches from it. That brings us to the great mortgage investment crisis of today. Looked at it from a perspective of the immediacy of the moment it looks like a perfect description of a disaster. Over the last couple of decades the barriers to home ownership have been lowered because the risk associated with mortgages had been logistically diminished by the ability to pawn off the risk on someone else. If you owned a billion dollars in mortgages you could creatively repackage it into a mortgage baked security investment that someone else could purchase from you. The ability for financial entities to offload their mortgage liabilities gave them an incentive to continue adding new mortgages to their books; this created a downward market treasure that logically increased the potential number of mortgage loans. It thus became easier to buy a house because a greater number of, unusual, third party investors were helping the cash flow of first rate lenders to remain buoyant. In a sense what we were seeing was a mortgage investment binge, where foreign governments and local and foreign investors were willing to buy Susie's and Bill's mortgage in Kansas City and counted it as a futuristic asset.

As so many times happens the future failed to materialize the past's version of the future. we only need to go back to the eighties and nineties when homes were being built with all the networking wiring integrated into the walls so they would be ready as the networking home of the future. When wireless networking became the norm by the year 2001 all that walled in network cabling became a future wrongly fore casted. We now know that what they thought in the 1940s and 1950s about the year 2001 would mostly never materialize, their futuristic cars and houses could not have calculated what new materials and different life styles would conjure. In the same way in modern times it seemed right to invest in mortgages, generally not an unsafe investment, what no one could imagine is that the ability to sell mortgages to third party investors would create a huge pool of available loans so that new home owners with riskier credit habits would become eligible to own a house; and as a result it soon came to be that anyone could buy a house and make a good investment a bad investment.

The lure of home ownership is grandiose because it also offers the opportunity to get more credit, once you own a home the ability to get credit cards, second mortgages and instant cash is there for the taking, and people do just that. They get gobbled up by the ability to get instant credit cards and instant cash and of course no house is really a home till you add a second floor, tear out the backyard and remake it in your own image, or make a game room in the basement. As that happens the ability to pay the mortgage becomes strained, aside from the fact that you might have never been able to buy the home in the first place because you didn't rally merit it financially. The catastrophe grows from there.

But there again is another way to look at it, and it makes more sense if you look at it in longer term glacial cycles. Not many of those people would have owned a new home had the regulations not been eased so that mortgage liabilities could be repackaged and transfered to third parties, and in turn allow for the creative idea of sub prime mortgages which basically allowed anyone ignorant enough to take the risk to become a home owner while mildly unaware that their interest rates could double and triple depending on the economy. Moreover many investors that would have usually not invested in mortgage backed securities found themselves amiable to the idea thinking that they were buying safety margins by investing in assets that could be repossessed thus limiting their liabilities; a concept that as a whole was sound for it was based on the assumption that foreclosures would not become the norm; and when they did they turned mortgage holders into property owners of houses that they did not want with assets that could not be sold even at depreciated values.

We are witnessing something rather exquisite in these our times, the free market being unable to self correct proved that it could be bullish against reason and further proving that it does not have a cautious hand at the wheel or any self regulatory interests. Left to its own devices the free hand will always work to churn out the maximum potential of any investment market without much ado about the consequences to any and all.

Of course the very idea of a self regulating market is preposterous but at the same time that does not mean that the results are as bad as some would make them out to be. We have witnessed now first hand, in a clear and concise manner, in the span of no more than two decades what can happen when the freehand is left to its own devices. Now consider the results. First there are the investors that originally thought the whole idea of buying mortgage backed securities a good idea. They have all taken huge losses. These were investment houses, private and some public, the Chinese government may have up to 100 billion of its money in such investments, little towns in Iceland have put part of their portfolios on it, and an infinite set of investors that again may have never invested on the concept of a mortgage rather invested on the concept of mortgaged backed securities and all did lose their money as foreclosures exceeded expectations. What is interesting here is that these are a group of investors that actually entered a whole new creative investment infrastructure and so moved their capital to a new frontier and of course lost. Whereas normally these investors might have put the same money into General Electric or US Savings Bonds they turned to an investment that more directly affected the lives of everyday Americans. Thus the capital was redirected towards a riskier, less traditional client and therefore a more unpredictable market as a result we may have the largest redistribution of wealth ever in the history of The United States, and the world for this was a global investment tree.

At the other end of the spectrum is the consumer, all those persons that bought houses and had dreams of owning a home or of being more accepted as true middle class citizens. Many that could not afford it bought homes and for the first time got an inkling of the responsibilities, duties and economic dynamics that revolve around the concept of owning property. Some of those, a great number perhaps will keep their houses, either helped by relatives, the mortgage company, the local bank or some form of government assistance. As such those that never had a home have gotten an expensive education and those that managed to keep their home, whereas otherwise they might never have owned one, are now up one rung on the ladder to a stable middle class caricature.

In a sense what we have just witnessed was rather beneficial to the global economy because the capital wealth violated all of the possible processes for normal capital transference between individuals and entities and between government and individuals; a general bypass has been instituted where now the capital is going to get to where it needs to go fast and pronto. However that also implies that the capital itself has breached the wall of standard operating procedures within Wall Street and that means that the usual parties have not immediately benefited or received payment in kind for their investments.

Now aside from the obvious redistribution of wealth which will make a great academic study in a decade or two, we also have the other calamity, governments everywhere have had to redirect taxpayers money to guarantee the life of their banks and financial institutions as well as the stock markets of the world. England for instance, has had to guarantee the moneys of its compatriots in Iceland, that is an amazing accomplishment, to get a self centered England to accept external liabilities and to insure them for the sake of stabilizing its economy in relationship to Iceland of all places. And of course they have had to Nationalize their two most important banks so that kind of writes an epitaph for the glorious accomplishments of Margaret Thacher and Tony Blair. As Lady Thacher thought to create a freer market by moving more to the right than was right; and Tony Blair sort of gets banged all over the place as his centrist policies have now been turned entirely to the Left, left obliged. You see now the Government of England is more like the rest of Europe, or as the French might put it now, “Today England is more like the rest of us. And finally none of us can grasp the immensity and drastic change of the last few weeks as evidenced by the fact of a joint international action by major central banks to join in an unprecedented synchronized lowering of interest rates. Toto we are not in Kansas anymore.

In America the problem is more fascinating still, the home of capitalism has had to financed itself by selling securities to the communist Chinese and now it has to spend a trillion dollars of tax payers money shoring up the crisis while Russians can happily bargain shop the world with their 500 billion dollar surplus. And all this happened under a Republican administration; and to add to the irony it was the Democrats that fought hard to pass the bailout bill as proposed by a lame duck president and yet the bill lost on the first called vote thanks to the elephants in the house. Regardless, by default, the American government now owns Wall Street. There is no other way to look at it, the trillion dollars is only part of the investment, there is probably another half a trillion that will be invested via back end alleys to maintain confidence in the economy such as the 25 billion that has already been promised to the national car industry. So the entire system of capitalism has shown that it is unsound and that it needs constant government assistance in order to correct its calumnious vices.

Further how much capitalism can there be left if the government becomes the number one employer and consumer in the nation as is already the case?

But take that another way and this is the good side. We could save capitalism by simply eliminating the stock markets. Stock markets have one interesting value, they create an environment where capitalists can meet with entrepreneurs, they are a central plaza for investors, you want to invest you go into the stock market, instantly you will have access to a long list of companies that are searching for investment. The Stock Market most importantly creates liquidity in the investment process and reduces the investment cycle and by doing so also reduces risk. Money in any guise hates to stay still, the fact that one investor can sell his shares to another investor via a centralized depository is of great value. This allows for savvy investors to quickly best determine where there money is better spent, and it allows for a more evident value recognition based on demand. The assumption is that the hoards cannot be wrong, if everyone is investing in say, Google, they must be right. Still the point is that for the managing of investment capital, ease of capital flow, through a complex tier of investment layers, is essential and that is the genuine reason why stock markets exists and why they make sense.

However that very fluidity of investment also becomes the greatest risk opportunity within the constrains of the market. If investors can change their mind about a stock and sell it at will within a moments notice, instead of creating a more mature and sound market that creates a more volatile market because the short term investor is not interested in long term outcomes; and so what the ease of interchange does is create a rather whimsical market that is steered by the short term investor. The difference between a long term investor and a short term investor is that one is interested in the maturing process that companies go through to accrue the greatest value without having to transfer the initial investment to other investment ventures. The short term investor is only interested in accruing an immediate value by capitalizing on the fluctuations of the market however minute they may be. Thus they profit from instability by a process of increasing gain by selling and buying as if they were walking through the water by hoping rocks, sometimes doubling backwards to go maintain a forward perspective. This invariably, in the large scaling of the process, will destabilize the markets, however its effects are greatly shored up by the steady might of long term investors.

If we abolish the stock market the corrective is instant, without a stock market short term investment becomes an impossibility because without a central process for exchange capital flows will decrease liquidity.

What this means is that no investor would be allowed to go through a third party so as to invest their capital. All investors will have to go directly to the company or entrepreneur that they want to invest in and they will have to then decide if they want to invest based on the particular company strategy. This will mean that they are least likely to be short term investors, this is because they have to manually workout the value of the company, they have to negotiate the terms of the investment with that company, and even if these values are standardized they will still require more time than me going online right now and purchasing ten thousand shares of Google stock. My transaction is complex but not that difficult to execute, and frankly I don't know what Google's real strategy is other than the gathering of the worlds information, but the stock market allows me to invest without my being aware of the intricacies of the stock, whereas if I had to go directly to Google and convince them to take my money, which is pretty much as it sits right now, then it would make a greater degree of procedural detail that would make it both more participatory and also more difficult to get out of the investment; as you would have to negotiate your own terms for the purchase and sale of your investment.

Google is a perfect example of a company that is currently overvalued by any measure of the imagination. I am by the way a fan of the Google Brotherhood but the problem is that their value is pure speculation, if you look at Google today, after the free markets have just collapsed, you can no longer say that just because it looks good and it feels good it is a good investment. In the case of Google imagine that they now have so many investors believing their game plan that they have to execute but for all intends and purposes Capitalism may have ended as an economic engine when the US senate voted to pass the 700 billion dollar bailout package and it is under that guise that Google has to be judged. It's difficult to see how Capitalism could survive such massive amounts of government investment and sustain a fighting chance as a free and unadulterated market glad-handler. You have to consider the implications, if the consumer is not the principal means by which companies employ themselves in their particular business but rather do so through government bail outs of their obviously unsustainable business models, then it stands to reason that showing people the right place to shop via Google search, with uncanny accuracy, will still not yield any serious Google dollars returns to their respective clients. Now you might say but Google is still a sound investment. And I would retort that if investors, financiers and bankers are only in business because they have been bailed out by the government then it stands to reason that your job and my job are also being secured by the government, making any assumption of a free economy ludicrous and thus making Google stock highly suspect.

Thus what this means is that Google being a good investment has been swindle by false speculation about its natural capacity to deliver a return on investment; the natural capacity is just not there, it is only there as speculation which is what drives the price of Google stock. As such it has to at some point collapse, basically around the time that investors realize that Google has mastered search engines but little else. When you think of Google you think of a search engine, what else can Google do for you? It does not produce any information of significant value, it does own a liability in huge data centers that could at any time become useless warehouses of redundant data, as none of the data that Google snakes out of the Internet is Google property, the data is in the cloud at large and it is equally replicated for search criteria by the likes of Yahoo, Amazon and Microsoft to name but a few.

The problem is not however with Google, the problem is with the stock market that allows for such kind of speculation, so take the stock market out of it which in all truth is merely an arbitrage engine that adds very little value to the transactions it generates for the transactions are all speculative, they may never accrue any genuine value, or as happens it most cases, they may generate values that are bought and sold and profited from without the genuine product or value ever being produced. The stock market fundamentally allows for hypothetical values to be traded, that is the core of its business process, to permit entities to exchange equity on perceived values under the assumption that eventually those values are hammered out by a genuine, real world, business transaction. It is in this way that companies can have three, four, seven, one hundred or hundreds of thousand of times their real market value in stocks.

This would not be a problem if the speculating didn't become exponential without a cap. If there were a regulation that said that a company's stock market value could not exceed three times its gross earnings, or three times its capitalized assets, or three times its profits, then you would have a more real market valuation and a more clear headed investment process. But then who are we to say what a company is worth, if a company like Google can convince investors that it is worth hundreds of times its gross asset value. Who are we to say that that value is not real, specially so if Google continues to grow value in both the perceived and the real world scenarios?

Well the answer to that is simple, markets are not rational creatures they are irrational creatures, and are therefore more subject to err than to be right. The time is then ripe to abolish the stock market and to replace it with something more mundane, raw company stock. Each company has the ability to say what it is worth, something that can easily be determined not by potential sales, not by perceived value but by real asset and sales figures, what do you have on hand, and how much of it can you sell this year. It is that simple, based on that formula, you would still have a stock market type environment but without a stock market each investor would have to go directly to each company and bargain the purchase of the stock with them directly and regardless of potential whimsical fortune all market based capitalizations would be based on a maximum of three times asset and sales, assets and profit figures. Now if you think that is tightening the potential value of companies ask yourself how many companies are capable of growing 300 percent? Most companies are only capable of growing 300 percent their first year of business, which is not saying much, after that most companies never manage more than a meager stock market average of 15% growth. That's the reality.

That aside the most relevant change here is that there would be no speculative market, companies would not be able to capitalize via a third party entity so all of their transactions will be managed internally and as a result, will have very little speculative value; this is because it is much harder for an individual entity to increase its own worth than it is for a series of third party financial institutions to create a greater perception of wealth accrual potential. This is particularly so because those that benefit from the actual transactions of share trading have no other means of value accrual than the very transaction. And there is the inherent problem in the stock market, it is the transactions that matter and not the companies, there is no loyalty to companies, products and customers, there is only a value based on the transactions exchanged, remunerated, sold and resold, it is the volume of the transactions which accrues value, not the actual business of business.

The loss of the stock market will cause the economy to lose many jobs and businesses that are based on the slightest of bubble value accruals, that is jobs that are not real regardless of how we look at them, jobs that mislead value instead of accrue it, and as a whole the market would grow at a much slower pace, and you would see companies potential stifled by lack of investments because the only way that they could grow value in their internal stock is to genuinely grow their business.

Of course any action calling for the end of stock markets might just as well be calling for the end of capitalism. A call that has probably already been dealt by the current internal destruction of capitalism by government interference, and more with the support of Wall Street capitalists begging for government handouts. In other words, capitalism's Berlin Wall has smashed Wall Street from within, it is no small amount of irony that the leader of the largest bailout in history, the secretary of the treasury is a wall street lifer from the King of investment banks Goldman Sachs.

The current bail out will probably reach two trillion by the time you add up all the international shoring up that is currently taking place throughout all the major economic zones. Further once you have such huge amounts of artificial investment into a false economic model there is no telling how much hemorrhaging there will yet be to do. After all we have lost the free hand of capitalism and we are now under the bureaucratic hand of government that has a proven anachronistic corrective.

I therefore take no credit for something that has already been done, the destruction of the free market by no lesser free marketer pamphleteer than the American government and all because it lost all faith in market forces, or more accurately because it was frightened into action by them.

Ricardo Correa