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Saturday, August 13, 2011

There HAS To Be A Better Way

It is pretty unusual for a truly wealthy person to say something more than a carefully sanitized press release. Warren Buffet has talked about the economy in a straight forward way, and given valuable advice, which unfortunately, the majority party in the House, chose to ignore.

Now Mark Cuban's comments about the stock market have been published, and they are straight talk.  Mr Cuban is the owner of the "Dallas Mavericks" NBA franchise.  According to the New York Post, "He sold his Internet start-up in 1999 for $5.9 billion in Yahoo! stock -- and he says he's been involved in the stock market for the better part of a decade." His stock market activities were not for entertainment, but to increase his already considerable wealth.  Mr. Cuban is considered a successful businessman, and his ability to finance an NBA team and support the payroll necessary to take the team to a championship should validate those credentials. That means Mr. Cuban knows how to profit from investing in the stock market.

Now the market today does not function the way it was originally intended to.  The market was designed as a way for corporations to raise capital without borrowing from banks.  Rather than borrow from a bank, the corporation issues stock certificates and in effect is borrowing from the stockholders who buy the certificates.  In the beginning, people bought stock in companies they believed were financially strong, and would be profitable.  They held the stock for long periods of time, and received dividends from the company when it was profitable.  This is a little more risky than putting money in a savings account and getting a fixed interest rate, but a well run company will often provide a higher rate of return than a savings account, so it was a good investment choice when the economy was stable or growing.  People built wealth slowly by collecting and reinvesting dividends.  At some point, speculation came into the market, and I believe most of our historical economic ills can be tied in one way or another to this form of unrestrained greed.

Here is what Mr. Cuban has to say about the cause of the current economic mess, as reported in The New York Post, via Yahoo:
"The only people who know what business Wall Street is in are the traders," Cuban wrote on May 9, 2010. "They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It's a platform to be exploited by every technological and intellectual means possible."

Cuban went on to make another point, about how entire nations are now bought and sold within seconds and even nanoseconds:
"It’s hard to believe," he wrote, "but evaluating countries as an investment is now easier than evaluating companies."
Lo and behold, the current malaise on Wall Street is tied not to the earnings of public companies -- which are largely strong -- but to the debt load of national economies.
But Cuban came back again to the traders, whom he called "hackers" because, he said, they look for weaknesses in the system to exploit for short-term gain.
"The Government needs to create incentives for this business," he wrote, "and extract compensation from the traders/hackers for the systemic failure level of risk they introduce."
He concluded again in bold text with a scary forecast that, although not completely unique to him, now looks more and more accurate:
"There will be another crash, because there are too many players looking for the trillion dollar score."
The market is not operating as it was designed, and speculation is driving, what will surely become wider and wilder swings.  This is bad for business, and it is especially bad for the American people.  We have many other markets operating that are also a cause of economic problems.  Commodities markets were designed as a way to ensure the supply chain would deliver agricultural products reliably and steadily, rather than all in one huge wave at harvest time.  Industrial food processing is more profitable when there is a steady stream of food to be processed, rather than one huge flood each year.  However, speculation has caused instability and unnecessary inflation in food, oil, and other raw material prices.

There has to be a better way. We need to be able to get food and raw materials to market in a steady, predictable stream for efficiency, which SHOULD translate to lower prices; BUT, we need to eliminate speculation, which isn't good for anyone except the greedy speculator. We also need an efficient way for businesses to have access to capital needed to finance expansion, volume purchases, or replacing old equipment; BUT, we need to make sure our financial markets are not vulnerable to the speculator.

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