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If not trial and error, evolution is nothing. Without evolution, we could not be here. So does that make the stock market a matter of trial and error? It follows. And as John Cassidy points out in the 4 Oct. 2009 New Yorker, what can be individually prudent can be collectively disastrous. How can anything be good for each you and me but bad for both of us? And if that is really so, why is it so? These are the psycho-sociological questions of the hour that we turn to here. But first a bit of background.

Money is good, right? Well, it is if we use it to improve the human condition. It is not so good if we use it to buy assault rifles and blast our neighbors away. It is good if we invest it in a new venture that creates capital. Not so good if our gambling addiction destroys our fortune. Which brings up Las Vegas. Vegas is nothing if not a lesson in economics, which is all about money. But what is money? Is it not the third form of capital, the exchange medium between the human and substantial forms of capital? Once upon a time, money was coinage, a substance. Its connection with human capital was clear, clean, and dear. Gold and silver were the standards for millennia. Until they became too short in supply to connect human labor effectively with the huge amounts of goods characteristic of recent times. Out of necessity, paper money came into being--a genuine third form of capital.

What a glorious event that was. We could now print our way out of poverty! Well not quite. The more we print, the less it is worth, unless the other two forms keep pace. It is the central job of the Central Bank to keep the money supply in balance.

On another scale, let's say you and I win big at the poker table. We took three other people to the cleaners. One of those who lost his shirt will now miss a mortgage payment. Another will be unable to afford the medical care his little daughter needs desperately. Yet another will have to abandon an invention she was pursuing.

Gamblers forever try to corral capital, not create it.
If the gambler is our governor, s/he fleeces every last one of us.

Imagine these events coalesce into a tidal wave. But how can that be? Won't things even out? There has been no real change in the total capital on earth. True enough. Except when the economy of a nation is determined by poker players "Too Big To Fail," what then? The recent Wall Street tsunami swept millions of little guys into bankruptcy along with a few big ones foolish enough not to have stashed their dough offshore. Actually the big guys escaped personal disaster but their institutions did not.

So what came to pass?

  • People out of work create no capital, they can only consume it.
  • Printing money saves the big guys who paid their dues at the political watering trough.
  • Printing money devalues more than the currency, it devalues the society printing it.
  • Printing money allows the vast poker game to go on--for a time--not forever.

What does that have to do with Las Vegas? Go see for yourself. Dollars by the billions flow weekly out of visitor's pockets into casino vaults. So some people get rich at the expense of others. No new capital has been created, just like the stock market.

Now for some nitty gritty. We have been bombarded with the term derivative, an arcane form of money familiar to those in the know but mysterious to the rest of us. What a derivative is is a secondhand piece of paper. A mortgage is a firsthand piece of paper. When your banker taking your mortgage sells it to a Wall Street bank such as Merrill Lynch, it becomes a derivative. Here is how it works. Say a lending bank offers me a mortgage on my dream house that seems too good to be true, given my lousy credit rating. After taking their fee, my lender sells this too-good-to-be-true mortgage to Goldman Sachs whose business it is to pool mortgages and use the monthly payments to issue mortgage bonds. When my employer falls on hard times, I lose my job and can no longer make my mortgage payments. My neighbors suffer in like manner and the next thing we know we are foreclosed. When credit dries up as well, our overpriced homes must be sold at a loss. I lose my home. My third-deep lender loses his equity and more if he is not liquid enough to pay up when the bonds he bought on margin are called. The crunch for you and me comes when the Central Bank prints money and lends it to the three-deep lenders that are too large to fail. The mortgage originator laughed all the way to the bank, as did the builder of my house.

Not all mortgage originators were so lucky. Several were so reckless that they too went under. To some that meant indictments for executives in charge.

Sub-prime mortgage holders are a bit like cracks in a dike. When one crashes, the leak widens and becomes a torrent of vast proportion; dikes fail like falling dominoes.

Goldman Sachs survived alive and well and is still playing the trading cards, corralling money by the billions, much of which goes into the managers' pockets. There is nothing of substance to show for it. National unemployment is still rising. Daily our nation falls ever more deeply in debt to the rest of the world, ironically and most of all to "socialist" China. We fight over health-care legislation that is a pittance by comparison to the banking crapshoots.

There is something about gambling that is deeply parasitic. It is in our genes, a product of evolution. Three of our inherited traits seem to combine: Aggression, hierarchy and conventionalism. I want to win. You want to win. We all want to win so we are driven to the gambling tables. It seems like a good idea for our neighbors do it, too; like a flock of sheep we follow. Others among us prefer to shoot dice on Wall Street. Unlike the casino owner, these guys are "too big to fail." That is their insurance policy. How that affects you and me is that we are the policy holders.

If you are ever tempted, remember the folks you hire to watch over your investments are taking their cuts. Like the casinos in Vegas (and sub-prime mortgage originators), a percentage of every pot goes to the house, or your broker.


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