[Vision2020] Hating on Ben Bernanke

[Kenneth Marcy]

On 9/17/2012 11:14 AM, Paul Rumelhart wrote:
> I had no idea that Ben Bernanke was single-handedly responsible for 
> the gains in the Stock Market.  You learn something new every day.

Federal Reserve chairmen have often been able to affect the stock 
market. However, the relatively golden post-World War II years, with 
William McChesney Martin as chairman, came to an end when the Fed had to 
respond to Lyndon Johnson's refusal to go along with tax increases to 
pay for the war in Vietnam. The few and limited tools of the Fed rely on 
governments to exercise their greater number of more powerful tools wisely.

> I still think buying risky securities from big banks with money that 
> didn't exist yesterday is a formula for failure, no matter the 
> short-term gain.

Financial institutions all around the world have been on this track for 
a very long time now, with the result that the notional value of various 
forms of debt, and other securities that are derivatives of underlying 
debts, is on the order of magnitude of one and a half quadrillion 
dollars. Notice that's quadrillion -- not thousands, not millions, not 
billions, not trillions -- quadrillions. A quadrillion is a one with 
fifteen zeros after it.

By way of comparison, the total market capitalization of all publicly 
traded companies in the world was US$51.2 trillion in January 
2007^<http://en.wikipedia.org/wiki/Market_capitalization#cite_note-0> 
and rose as high as US$57.5 trillion in May 
2008^<http://en.wikipedia.org/wiki/Market_capitalization#cite_note-world-exchanges.org-1> 
before dropping below US$50 trillion in August 2008 and slightly above 
US$40 trillion in September 2008.

The gross world product is the combined gross national product of all 
the countries in the world. In nominal terms, the total 2011 GWP was 
around US$70.16 trillion. Adjusted for purchasing power parity, GWP 
totaled about US$78.95 trillion for 2011.

The point of these last two items is to suggest that, in round terms, 
all of the world corporate stock adds up to about 40 trillion, and all 
of the world output adds up to about 80 trillion. Derivatives are 
financial instruments based on some other relationship rather than 
having a value inherent in themselves. 
^<http://en.wikipedia.org/wiki/Gross_world_product#cite_note-1> 
^<http://en.wikipedia.org/wiki/Gross_world_product#cite_note-2011CIA-2> 
^<http://en.wikipedia.org/wiki/Gross_world_product#cite_note-2011CIA-2> 
So, why is it that the total nominal value of all the derivatives is 
between eighteen and nineteen times the entire world's output of goods 
and services? And why is it that the total nominal value of all the 
derivatives is between thirty-seven and thirty-eight times the total 
valuation of all the stocks of all of the companies in the world?

The fact of the matter is that these private financial derivatives have 
been allowed to get beyond the practical regulatory control of the 
governments of the world. The peoples of the world need their 
governments to cooperate in a set of reasonable, rational, orderly plans 
to reduce the unacceptably large numbers and nominal valuations of 
financial derivatives before they act within financial markets in 
unreasonable, irrational, and disorderly ways which have the effect of 
crashing and destroying the world financial order on which everyone depends.

Even if as individuals we don't deal in trillions and quadrillions, we 
depend on the financial system to keep its operations stable and smooth. 
Unfortunately, at the moment, conditions are ripe for instability, and 
those conditions need to be corrected to prevent unwanted, and 
unnecessary, disruptions. The problem is that a small number of really 
large organizations around the world are making a lot of money via the 
status quo, regardless of the increasing dangers inherent in the 
financial house of cards. Somehow we collectively have to find ways to 
convince financiers to be satisfied with less in exchange for a lesser 
degree of financial risk, and we have to do this without bringing on 
their emotional, psychological, reactions in the form of 
market-destructive activities.

This is not an easy challenge, but it is a necessary one. We are 
over-extended in the derivatives markets, and we need to come back in 
from the ledge outside the finance tower's upper-story windows. There is 
no need to jump to destruction, but there is a need to crawl back 
inside, and attend to the realities of business.


Ken

-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://mailman.fsr.com/pipermail/vision2020/attachments/20120917/076c3605/attachment.html>