Casino Banking

I have long argued that we need the financial service industry to act as just that - to serve the needs of the community in which they operate. This means that they should adequately fund the operations of the productive sector of the economy. However, the majority of their profits come from casino operations where customers deposits and savings primarily fund their gambling operations. This activity has the effect of hoarding funds, which Keynes decried as the main reason for the failure of Say's law. As you know (if you have read Sabotaging America) Say's Law states that supply always equals demand and recessions are self correcting.

The German ban on "naked short selling" is really a ban on a form of derivative trading. It involves a bet that a particular financial instrument (e.g. a stock) will decline in value without actually taking any financial position in that instrument. When such huge bets become known herd psychology ensures that the "Market" starts to sell the particular instrument and the bet becomes a self-fulfilling prophesy. Perhaps it would be too much to suggest that the betting bank might also persuade some of its own customers to sell the particular instrument and help matters along - the mechanisms of "trash and cash" have many variants.

I have proposed the totally separation of commercial banking from casino banks to reduce the funds available for destructive betting operations and the winding down, at no taxpayer expense, of the latter when they fail.

The Market

The myopic fixed attention on "the Market" in Western countries betrays the fundamental underlying falsehood with the current socio-economic model. The falsehood is that a given Market index is a true indicator of the state of a country's economy. It follows, therefore, that the market must be propped up to save the country. This is a case of the tail waging the dog.

There are several truths to be understood. The first is that there is no relationship between the health of the economy and the so called "Market". The first chapter of "Sabotaging America" shows how economic bubbles cause the "Market" to go ecstatic, while the real economy is being destroyed. Similarly, layoffs and outsourcing cause the "Market" to rise. The second truth is that the "Market" is constantly being manipulated by speculative activity. The lunacy of the "Market" was exposed when one lone trader managed, in under an hour on May 6, 2010, to wipe 10% off the value of America as indicated by the "Market". In such obvious market malfunctions, only those possessing an ideological, faith based perception of the "Market" could continue to believe in such a farrago.

My next blog will indicate what should be done about the monstrosity