chiro said:
You have hedging and then you have speculation. Proper hedging I agree can help economies, but the speculative BS that goes on that is not true "hedging" is not only un-necessary but detrimental.
The problem is that if someone hedges, then someone else has to speculate. It's a zero sum contract.
The idea of buying something at one price and selling at a slightly higher price is really a worrying thing to me, and this kind of mentality is causing a lot of problems.
You can avoid that by having government price controls. In fact, one of the reasons that finance was "easier" in the 1960's was that interest rates in most countries was government controlled. The trouble is that that world is gone. You could have the US government set interest rates in the US, but if England doesn't play along then people can just do the deal in London (which is what happened in the 1970's). You theoretically could get around that by making it illegal for people in the US to do deals in London, but if you making it impossible for people to move dollars in and out of the US without permission, then you are talking about changes that would probably make the world worse.
People may say "well hedge funds gamble with their own money, so they take the risk", but the truth is that it's not just people that are separated from commercial banking anymore that are doing this.
Ultimately the government takes the risk, which means that the government is *extremely* interested that the banks don't take stupid risks, which requires a ton of reports to the government about what banks actually are doing, which is where I come in.
The point of exchange mechanisms is to facilitate the actual exchange itself not to turn the whole thing into a roulette wheel and a craps table.
If you let people set prices, then very complicated things happen.
Insurance has its place, but gambling doesn't and although the two may appear to be "the same", they shouldn't be.
X wants to reduce risk. That risk has to go *SOMEWHERE*. You just can't have insurance without someone that is willing and able to absorb losses. If you just have "pure insurance" then you are in a dangerous situation, because that means that the risk is going somewhere, and you don't know where it is.
I am familiar with some of the basic issues regarding using simple PDE's for this kind of thing but again, this mentality of adding this extra incentive is what gets me.
Actually they are very complicated PDE's. Also, it's not "mentality" any more than apples falling have anything to do with mentality. Once you have liquid markets, this *will* happen.
Things are becoming way more complicated than they ought to be. The idea of buying a stock was simply to put up investment money because people thought that the corporation would make profits that would be shared in.
And that turns out to be extremely complex. Once you have an asset without a fixed price, then the math gets very, very messy. The trouble with "simple financial systems" is that they turn out to force a messy complex world to be simple, and that turns out to be usually a bad thing.
We have absolutely ridiculous liquidity now with computers especially when the computers make their own trades. For things like an instant buy/sell (wash trades) I would love to see any kind of sane justification for that.
Easy. People want to be able to go online at a moments notice and sell their stock and get cash. If you go to your online broker and sell stock *right now*, it is extremely unlikely that there will be someone at that exact millisecond that wants to buy the stock. So what you end up with are broker-dealers that are able (and sometimes legally required) to buy that stock, and hold it until someone that is interested in buying that stock comes around.
The value added with brokers is that you can sell your stock in a millisecond. This isn't true with your car or your house.
This idea of trying to "control risk" is absolutely ridiculous: again the whole point of finance and banking at its core was never to eliminate risk: The point was to come up with some basic principles of attempting to understand where the risks lie so that the decision reflected more of a "calculated risk" rather than an abolishment of risk.
Well. Duhhh... What has ended up to be true is that ultimately various major world governments end up holding the ultimate risk. If your checking account and life savings go poof, ultimately it will be the government left figuring out what to do. So in order to make sure that they don't get left holding the bag, governments are imposing pretty tight regulations on banks.
What I am observing is that people are introducing these instruments and collectively they are tearing things apart.
It's dead. No one is introducing new financial instruments. The things that people are working on are mostly risk management.
There is no solid reason why anyone should be interested in the elimination of risk or for the sole intent on profit and to gamble on anything from an interest rate move to a commodity price movement only to make a quick profit.
If you want to be able to sell commodities and interest rate products quickly, then there is. Also, broker dealers usually don't take directional bets. The buy something and then the sell it as quickly as they can. The amounts that they make are tiny. It's only because you are moving billions of dollars that people end up making millions.
Also the quicker the profit, the less the risk and the less the spread. The regulators like it when people buy something and then unwind the position immediately. If you buy 50 shares of stock at $50.00 and sell it five seconds later at $50.01, then you've immediately close the position and you are insensitive to further stock moves.
If people want to buy something, they should not have the liquidity relaxations that allow them to buy and sell at the absolutely ridiculous speeds they do with these computers. If you want to buy something with an option contract then buy it: don't buy it and sell it straight away.
So how to you propose to uninvent the internet?
Also, there are exchange rules that people have put into control the speed of things, so that they are happening in seconds rather than milliseconds.
Airlines that buy fuel for real hedging don't wait for the maturity of their contract and then turn around and sell it somewhere else for a quick buck: they buy it because it's core to their business of getting people around the world. They don't need some ridiculous liquidity on the asset to do what a lot of these financial hubs do.
Right but the person at the other end of the contract wants to be able to resell. Also the airline probably doesn't know how to buy the contract from. They need someone that knows people that are willing to sell. At which point you have banking.
If people want do real hedging then that's fine, but these ridiculous liquidity environments that exist for general transactions are more detrimental than ever.
This idea of having a "chain" in the lending process is ridiculous: if there are multiple links in the chain, then the person who is loaning at the end should have a direct contract with the person they are loaning from. If the chain is bigger then people should be forced to adopt the loan and terminate a contract with the other link in the chain.
Which means that you can't write a check. When you deposit money into your checking account, do you know (or care) who that money gets loaned to? When you swipe your credit card, do you know (or care) who that money comes from?
You could imagine a world in which everyone had direct contact with the people that they loaned money from. That work would be one without checks, mortgages, or even money in any sense that we know of.
And it wouldn't last very long. All you need is to have someone borrow money and relend it, and you have a bank.
This is just common sense: creating a situation like this is going to blow up when you have all these dependencies everywhere. Again the idea is to keep it simple.
You can't keep it simple.
Of course an infrastructure to do transactions when billions of them are going on all the time requires the appropriate computational, communications, and secure architecture to facilitate this.
But this is not the same as having some complicated numerical simulation or using algorithms to crawl the web or to use these things to execute trades so that a bit of volatility can be created.
Yes it is. When someone figures out your credit limit, what do you think happens?
I need to emphasize again that the main issue I have is not with the bread and butter stuff like loans: it's with speculation but not real hedging.
Rule one of physics (and finance) sometimes you can't have what you want. If you can propose a system in which you can have hedging without *someone* speculating, I'd be interested in hearing about it, but right now, it's like someone complaining about quantum mechanics or general relativity because it's just too complicated.
Once you allow people to do market transactions and once you have communication tools, then things *will* become complicated. Personally, I think it's better to just accept that and try to deal with the consequences rather than wishing things were different. At some point it's like wishing that perpetual motion machines existed.
My issue is not with the computational power alone per se: it's more to do with the idea of how risk is handled (but more importantly introduced) and what the incentives are with regard to how that ends up motivating business policies for certain financial institutions.
Sure. But what makes this problem complicated is that you want to avoid financial blowups, but at the same time you want to allow for market transactions, while dealing with the realities like the fact that the internet exists and we do not have a world government.
Finance has become a major part of an economy and that is ridiculous: again the point of finance was to facilitate the things that aided real economies: not to be a major part of an actual economy.
Finance is all about decision making. As the world gets more complex, then you need to spend more time making decisions.
It used to be that if people wanted to buy a banana from the fruit shop, they bought it to eat it. They didn't buy it so they could create a so called profit.
Ummm... What fruit shop?
This is what banks do: it serves absolutely no use socially. Most people that go to the supermarket to buy food buy it because they are buying the very thing they need. They aren't buying it so they can sell it somewhere else and make a few cents profit, but this is entirely what is happening today.
Ummm... What supermarket? Why does the supermarket go through the effort of getting you bananas? (just between you and me, I've heard rumors and fruit shops and supermarkets make some money each time you buy a banana from them.)
This is the thing that I find frustrating about these conversations. The reality is that the financial system works so *well* that most people don't think about it. People talk about money as if it magically appears in banks just as if bananas magically appear in supermarkets.
I want to get rid of risk. I need someone that is willing to assume that risk. You need a broker.
