Crime on Wall Street

Almost always it is possible to reduce an economic problem along with a solution down to one sentence. Most people sense that there are negative issues with Wall Street and the rest of the financial sector that are starting to emerge.
Is there anything wrong with the way things are done on Wall Street that might cause economic hardships to the rest of the country? The answer of course is a resounding yes.
In its current form, Wall Street has no utility to society. Derivatives trading produce negative externalities to society. How is that? Derivatives derive their value from the underlying security on which a derivative is based. The percentage change in the price of a derivative is always much greater than the percentage change in price the underlying security. Any problem here? As a matter of fact yes there is a huge problem but not one that is likely to be seen with a casual glance.
Derivatives trading creates an incentive to buy derivatives and then manipulate the price of the underlying security. Unless there is a counterforce to prevent it, people act on any incentive they have. Stop enforcing securities laws and all stock trading becomes focused on manipulating stock prices. This is the exact situation that exists on Wall Street today.
This activity actually is a huge problem for Main Street because it interferes with the necessary process of putting capital to its highest and best use. Any less than efficient allocation of resources over a long period of time will destroy an economy.
Lets define the problem in one sentence and then provide a one sentence solution .
Problem: Manipulating securities prices is causing an inefficient allocation of capital and is causing economic hardships. (Inefficient allocation of resources is actually a major cause of unemployment.)
Solution: Since the existence of derivatives creates an incentive to manipulate securities prices, ban derivatives trading.
Is that simple enough? No, even if banning derivatives is the only solution to saving the world, it won’t happen. The solution is not popular so it will get dismissed and called unrealistic or something.


(Visited 16 times, 1 visits today)

About Fantasy Free Economics

James Quillian independent scholar,free market economist,and teacher of natural law. Who is James Quillian? Certainly I am nobody special, Just a tireless academic and deep thinker. Besides that, I have broken the code with respect to economics and political science. Credentials? Nothing you would be impressed with. I am not a household name. It is hard to become famous writing that virtually no one in the country is genuinely not in touch with reality. But, if I did not do that, there would be no point in my broking the broken the code. If you read the blog, it is easy to see that there are just a few charts, no math and no quantitative analysis. That is not by accident. Given what I know, those items are completely useless. I do turn out to be highly adept at applying natural law. Natural law has predominance over any principles the social science comes up. By virtue of understanding natural law, I can debunk, in just a few sentences , any theory that calls for intervention by a government. My taking the time to understand the ins and outs of Keynes General Theory is about like expecting a chemistry student to completely grasp all that the alchemists of the middle ages thought they understood in efforts to turn base metals into goal. Keynesian theory clearly calls for complete objectivity. Government can only make political decisions. Keynesian techniques call for economic decisions. So, why go any further with that? Fantasy Free Economics is in a sense a lot like technical analysis. Technical analysis began with the premise that it was impossible to gain enough information studying fundamentals to gain a trading advantage. Study the behavior of investors instead. Unlike technical analysis, I don't use technical charts. What I understand are the incentives of different people and entities active in the economics arena. For example, there is no such thing as an incentive to serve with life in the aggregate. In the aggregate, only self interest applies. It is routinely assumed otherwise. That is highly unappealing. But, I am sorry. That is the way it is. I can accept that because I am genuinely in touch with reality. Step one in using Fantasy Free Economics is for me to understand just how little I really know. A highly credentialed economist may know 100 times what I do based on the standard dogma. Compare the knowledge each of us has compared to all there is to know and we both look like we know nothing at all. There is always more than we don't know than what we do know. I am humble enough to present myself on that basis. Why? That is the way it is. I am not bad at math. I have taught math. What I understand is when to use it and when to rely on something else. Math is useless in natural law so I don't use it. While others look at numbers, I am busy understanding the forces in nature that makes their numbers what they are. That gives me a clear advantage.
This entry was posted in Daily Comments. Bookmark the permalink.