Just A Reminder: Short Term Losses Are Not Always Bad

Tyler Durden at Zero Hedge Writes an article pinning yesterday’s equity down turn on the case against Goldman Sachs and the upcoming financial reform. This is the money quote:

“Washington simply cannot understand why it can’t destroy speculation and leverage yet keep the equity market up, as it is the only economic driver in the US since easy credit is no longer available. Tough indeed: since nothing or close to nothing is manufactured in the US we need our upper class’s investments to skyrocket so it is inclined to spend thereby providing service jobs.”

Here is the problem with what Durden is saying. A financial sector that has profits that are completely out of whack with services they provide is what got us into this mess in the first place, not what is going to get us out of it.

He is arguing that the entire US economy is screwed because of the lack of easy credit (a topic for another article on another day) and that the only driver for the economy is speculation. Our only hope is to let rich people become even richer so that the rest of us can service the wealth they earn. And then he blames politicians for not wholeheartedly embracing the idea of putting the country’s economic well-being in the hands of the always wise financial sector. Remember how well that worked when the housing bubble burst? Yeah…it didn’t work so well.

What he is describing is a huge reason FOR financial reform, not an argument against it. If limiting speculation (and thus massive bubbles) stops banks from making extremely risky bets with other people’s money for only the bank’s gain causes the market to be depressed for a week, or even a month, or even slows financial profits permanently then who cares? It will cause the market to be more stable long term, although giving less incentive for short-term massive profits.

Wall Street has an interest in being allowed to make as much money as possible. Sure, individuals make a whole lot of money in a boom and bust cycle. This doesn’t mean that economy as a whole is wealthy or that the poor and middle class don’t suffer during the busts. You want a financial sector that provides services to others and is in charge of their on risk. Right now you have a financial sector that is servicing itself, speculating with other people’s money and then getting government bailouts. They’ve collectivized risk and individualized profit. So they lose, we all lose. But if they win, only they profit it from it.

As a society we don’t want this. We want the wealth they are currently investing in their own huge salaries to be invested in small and medium sized businesses, salaries for other employees throughout the country, plants to make tractors, etc.

Sure Goldman Sachs, the financial reform, and the turbulence in Europe are causing a correction from the extremely bullish market of the last year. That doesn’t mean that suing Goldman Sachs, passing financial reform, and reigning in Wall Street won’t beneficial to the country (and Wall Street) long term.

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Casey Stubbs is the founder of Winners Edge Trading, which is one of the most widely read forex sites on the web. Winners Edge Trading has trained thousands of people to trade the Forex markets.

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  • Holly

    Tim, Thanks for the great comment. Really, thoughtful. I agree that there can be no end to speculation and that there is no such thing as a completely fair market, but that doesn't mean that steps can't be taken to improve the fairness of the market and try to keep more wealth in the market.

  • timbarnby

    I agree with both you and Tyler Durden. The government would love to end speculation. There's no question. But they can't. Fair markets work. The problem is, as you have stated, when large banks, and ultra wealth use economic laws like the Nash Equalibrium to create bubbles. SInce they know where the top of hte bubble is (they're pushing it there” they know where to short, and when to short futures contracvts, and on what. They make money on the way up and on the way down. Nothing is created in a market. When an asset increases in value based on market drivers without matching fundamental drivers, someone is siphoning wealth from that market. The banks and individuals who created this problem need to be punished. But that wealth that was siphoned from the economy, the mopney that never existed, should not just be printed to restore balance!

    Thanks for the great article!

    Tim