Legalized gambling

Nope, I’m not talking about Las Vegas or an Indian reservation casino, but most of what takes place on Wall Street nowadays.  Of course, one could argue that a typical stock purchase is a form of gamble, in which you take a risk that the stock will go down in hopes for a payoff when it goes up.  True, but we can also think of this as pro-social gambling as it is a central and important elements in a successful modern economy.  Businesses need investors and buying stock in them allows for investment, economic growth, and all that good stuff.  Imagine instead, that without investing in Ford at all, you could simply gamble as to whether their profit would be above or below 3% next quarter.  How is that any different than gambling on whether the New England Patriots will cover the spread?  Short answer: it’s not.  Yet, somehow this first version is portrayed as an important Wall Street activity and the latter is illegal in most circumstances and certainly not seen as a productive part of the economy.  Basically, much of what drives Wall Street these days is little better than gambling on football games.  Stephen Pearlstein ran it down in yesterday’s Post:

Silly you.

You actually thought companies existed to make products and profits.

ou thought houses were meant to provide a place for people to live and office buildings a place for people to work.

You thought food was meant to be eaten, oil and gas to be turned into energy, and metals to be turned into cars, bridges and downspouts.

You weren’t sophisticated enough to realize that these really are just different “asset classes” meant to give investors around the world something to speculate in and to diversify their portfolios.

Even worse, you actually believed all that stuff about prices being set based on market fundamentals…

These markets have long since outgrown their original function of providing producers and consumers of these commodities with a way to hedge their risks by guaranteeing supply and locking in prices. All futures markets require a certain number of “speculators” to take the other side of the contracts from commercial users and producers. Typically, these speculators would represent 30 percent of the participants in a healthy futures market.

But today, because of a sudden desire to earn higher returns and diversify investment portfolios, there are more people wanting to invest in corn and copper and oil than there is corn and copper and natural gas produced and consumed. But no problem. The financial wizards on Wall Street have magically conjured up synthetic corn and copper and West Texas oil so that speculators can provide hedging opportunities for other speculators. Instead of 30 percent of the market, these “passive investors” typically account for 70 percent or more…

What’s clear from this tale is how little the financial services industry has really changed since the crisis of 2008. The financialization of the economy continues undeterred, creating a bubble in commodities just as it did with houses and office buildings. The industry is still engaged in clever games to circumvent regulation, increase risk and find the cracks between one regulatory agency and another. And when regulators step in to try to restore some sanity to the markets, they inevitably run into a political buzz saw created by the industry and its Republican allies.

The whole thing is just a giant joke (and Democrats definitely deserve a share of the blame as well).  Sadly, the joke is on most of us ordinary Americans.

About Steve Greene
Professor of Political Science at NC State

One Response to Legalized gambling

  1. Brian says:

    The Thumper mentality frightens me. I don’t care if it’s a Bible you thump, a Koran, or some morality of your own making. The problem with Thumpers is that they mistake their fervor for universality. Then anyone who transgresses that morality is, within that moral system, evil, and must be dealt with. In dealing with evil there can be no sufferance, no sanction, and no restraint.

    A moral code may teach tolerance or forgiveness for those who operate within that code who cause slight. But evil is the existential nullification of that code. It is its annihilation, its negation. So there can be no tolerance whatsoever. Those who represent evil must be totally destroyed. Stoned to death. Burned. Left to be eaten by vultures. Such annihilation is found in many religions. Even the Romans practiced it with crucifixion for those who transgressed the religion of State and Caesar.

    The evolutionary roots of this impulse are probably very similar to those of nationalism, racism, and xenophobia.

    So yes, Thumperism frightens me.

    That’s what I see here. Who cares if people want to gamble on sports? Who cares if they want to gamble on the price of wheat? A gamble cannot ultimately affect the outcome of the game. Nor can a proliferation of wheat futures contracts change the ultimate balance of supply and demand.

    I read the guy’s article. When I got to the part on the second page where he said that more people are taking long positions, betting the price would go up, I had to stop. The guy is a charlatan, some priest peddling some snake-oil morality. It doesn’t matter how many people are betting. It’s how many contracts there are. For every single contract that bets an upward movement, there is one that bets a downward movement. Yin and yang.

    I have traded commodities. I have never seen any price movement that was not justified by underlying conditions. Wheat prices are rising because the world grain reserves, measured in days of consumption, has been dropping. It was over 100 in the mid 80s. Now, it is hovering around 50 days or so.

    It is really discouraging to read things like this. It tells me that people would rather be led by some artificial morality rather than the facts of reality.

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