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World Financial Markets Seek a State of Equilibrium as the Values of Assets Seek to Reach Realistic Levels

By Andis Kaulins

All things in the universe seek a state of equilibrium, and this applies equally to the world financial markets.

At the National Post, Terence Corcoran has written an article that Financial markets go up and down as they should. As a result, the proposed financial bailout (A US "Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets"), as rejected by US Congress in the person of the U.S. House of Representatives, would not have staved off the ultimate financial future.

That future portends that "the market is going to continue marking stock prices and other assets down until values reach realistic levels." This is the essence of market capitalism.
See the CNN article, Markets mayhem after U.S. bailout failure.

The trouble with that approach, as written by Ben Stein at the New York Times, is that In Financial Food Chains, Little Guys Can't Win, causing Stein to wonder:

"Maybe the bailout should not be of the banks at all, but of homeowners themselves. Maybe if we make the government the buyer of last resort of homes, we will stabilize the markets, stabilize the debt associated with the markets and take the gain out of the credit-default swaps for the speculators. Yes, price would be a huge issue, but so it is for Mr. Paulson?s plan for buying debt from banks."

In either case, however, someone would be obtaining a windfall gain, paid for by somebody else.

In the case of a bank bailout, we would be punishing the victims, who, by their taxes, would be bailing out the perpetrators, i.e. the banks. In the case of a homebuyer bailout, we would be bailing out those who chose to buy homes beyond their means, or were even speculating with real estate to make windfall profits, paid for by those who are living within their means.

In Europe, the entire money, banking and financial crisis has led French President Nicolas Sarkozy, a master of the exploitation of the political scene to his benefit, to proclaim:

"The idea of the all-powerful market that must not be constrained by any rules, by any political intervention, was mad. The idea that markets were always right was mad....

The present crisis must incite us to refound capitalism on the basis of ethics and work ? Self-regulation as a way of solving all problems is finished. Laissez-faire is finished. The all-powerful market that always knows best is finished...." [emphasis added by LawPundit]

But, of course, Mr. Sarkozy, as an experienced politician, must know that when money is concerned in the real world, ethics and work have little to do with anything.

On average, in a world governed by inheritance, 100% of the world's assets change hands every generation, neither on the basis of ethics nor on the basis of work performed, but rather simply on the non-economic basis of selfish family relationships, bearing no relation to ethics or work performance whatsoever.

Similarly, countries whose territory sits on vast quantities of natural resources, such as oil and gas, exploit those resources selfishly for their own benefit, often hiring citizens from less favorably endowed countries to do the work. There is no correlation here between wealth and work or ethics at all. Quite the contrary, it has made many wealthy who do no socially beneficial work of any kind. If you want to see an UNETHICAL world, look to the financial world.

The state of the world economy has little to do with ethics, and if work is an issue, it is usually the work of the other guy, not the work of the person or institution that is accumulating wealth.

Why then, as Sarkozy suggests, should an unrealistic standard suddenly arise for financial markets, where greed and avarice are rampant, and have always existed? It is a world devoid of good or evil, ruled only by the ethic of money. Either you have it, or have it not. Being a good guy is irrelevant. Indeed, the real world indicates, au contraire to Monsieur Sarkozy, that it can be equally profitable to invest in God OR Satan.

Very few persons will disagree that new corrective legislation will be required to deal with inappropriate financial instruments, such as derivatives, which Warren Buffet has called "financial instruments of mass destruction", as the BBC writes, "financial instruments that allow investors to speculate on the future price of, for example, commodities or shares - without buying the underlying investment."

That is simply a type of Las Vegas gambling on a global financial scale that has to be stopped. Similarly, subprime mortgage markets will have to be much more strictly regulated in the future to keep home-buying on a prudent and payable scale.

None of this means that market capitalism has failed. Market capitalism does not guarantee smooth sailing, but that is a different matter. If the already existing regulators - who Sarkozy champions - had done their jobs diligently all of these past years, there would be no financial crisis. Everyone involved in these matters has failed, and now the price has to be paid.

And, not to forget. There WILL be winners. And some of them may not be the good guys.

Full post as published by LawPundit on September 30, 2008 (boomark / email).