OT: The Price of Plutocracy

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The initial margin limit is 50%. The maintenance margin is 25% per the Fed's Regulation T. If the value of the stock falls below 25% of the account value. it will trigger a margin call where you need to put up more money or the brokerage will kindly sell enough of your stock to get back to 25%.
Many (most?) brokers will have higher limits like 30% to 40%.
-- Doug
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wrote:

Notice my conditional: "if it were prudent." Also my precise subject: bankers, not brokers. Investment brokers like Lehman could just disappear overnight because they weren't prudent. Over-leveraging caused the great Depression of 1929 and it helped caused this recent unpleasantness. It allows people to gamble with money they don't really have and may never have if the market turns sour enough, fast enough.
Much of modern finance is seriously (and perhaps overly) interlocked. That's become painfully apparent with Italy and Greece threatening the stability of the European Union and perhaps even the world economy. Margin buying, while great from a broker/banker's point of view (more commissions and fees) holds substantial risk for both the borrower and the economy at large. How long will it take our economy to de-leverage and recover from all the chain reaction events that occurred starting Sept 2008? Besides, unlike holding the deed to a house, where their might be more land than house value present, there's a potential for the collateral to become worthless. Holding Enron stock as collateral, as I am sure many banks did, turned out to be the same as holding no collateral at all.
I suppose I should have written "governments should make sure that FDIC banks don't lend more than 20% of the value of a stock offered as collateral for a loan to buy more stock." It's become clear that when banks and other lenders are willing to give away money to hoards of people who were sub-prime and unlikely to repay the loan, they create a risk for the economy at large. It's also clear that if they're willing to take give you one dollar for every two of stocks you own, they aren't so good at imagining bear markets that persist. And persist.
Now that it's clear that enough bad loans to enough dumb people for whatever the reasons ruins it for *everyone* then one of the obvious fixes is far better control of money lending with more government oversight. As you recall, there used to be usury laws which the banks mostly neatly disposed of through federal regulations concering credit cards. There can and should be a return to usury laws and other consumer protection regulations that can help prevent economic disasters.
The taxpayers have been asked to "carry" the bankers too many times to a) believe they are prudent in any sense of the word and b) that the bankers can ever regulate themselves. They are, however, too critical to the national interest to let go with a "don't crash the economy AGAIN kiddies" kiss on the head.
By coming to us for money, we've earned the right to have a say in just how risky their investments can become. You should hear the banks scream about being forced to carry even a fractional amount of cash on hand to cover their depositor's accounts.
http://www.thefiscaltimes.com/Columns/2011/06/24/Big-Banks-Balk-at-Higher-Capital-Standards.aspx
<<Barry L. Zubrow, chief risk officer at JP Morgan Chase, argued at a recent congressional hearing that federal regulators have done such a bang up job of oversight since the 2008-09 financial crisis that nothing more needs to be done. Putting a capital surcharge on so-called systemically important financial institutions, or SIFIs, "risks doing more harm than good, and putting U.S. firms at a distinct and unnecessary competitive disadvantage globally," Zubrow said.>>
This is the same puke we were exposed to BEFORE the crash. "Wah, we're already regulated enough, Wah, we won't be competitive with rest of the world." To that I say: "When you don't have disastrous crashes 10 years in a row we'll consider less regulation." As for as "won't be competitive" I say "but we'll still be the best, and people pay more for the best - not for some also-ran."
I, for one, am happy we're not imploding quite like the EU. Yet. The US's reputation as the financial rock of the capitalist world is being marred by the Madoff/Enron/Worldcomm scandals and the Sept 2008 rescues and failures. We've already gotten ourselves downgraded from AAA status because of the deficit panic and political theater. Changes need to be made and the people in place are never going to make those changes from within. Taxpayers need to demand that banks that benefit from FDIC insurance have to play by FDIC rules. They need to be re-regulated to insure greater limits the taxpayer's exposure to bankers betting on exotic derivatives they don't even understand.
Why shouldn't Big Banking balk when they *know* they'll always get a government bailout?
So yes, if bankers were prudent, you'd not be able to borrow very much money using stock as collateral. But we're talking about two somewhat different things as being interchangeable. I'll have to ask my banker what they would lend my on my portfolio. I'm betting it's less than a broker but I've never been in a position of having to borrow against stocks, so I'm admittedly not up on the rates. I do know Ameritrade and Etrade are so desperate they both have $1000 sign up offers in effect (for big accounts). Brokers aren't covered by the FDIC, though. And that's where the rub always has been.
With the FDIC and the taxpayers footing the risk, why shouldn't they lend out as much as they can? That's the smart business decision. It's up to the Feds to make it an unsmart one and return to the protections in place before bank lobbyists got them gutted so they could gamble big-time with OPM. Banks weren't happy being just mega-banks, they wanted a taste of brokerage money - while passing the risk on to the taxpayers. Sweet deal for them, for a while. Not so good for US citizens.
<<Fed Gov. Daniel K. Tarullo, the central bank's expert on financial regulation, who will also be in Basle this weekend, said the surcharge is both necessary and justified. "In a period of financial stress," Tarullo said in a recent speech, "the disorderly failure of one or more SIFIs carries the potential for a devastating impact on the financial system." That prospect led the Bush Administration to propose the Troubled Asset Relief Program and a reluctant Congress approved it, which was evidence for the proposition that, no matter what their general economic policy principles, government officials faced with a cascading financial crisis that threatens to bring down the national economy will usually support measures to rescue large banks.">>
If you're "too big to fail" you should get two choices: a) chop yourself up - or b) we'll do it for you.
-- Bobby G.
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It amazes me how someone who obviously isn't involved or knowledgable about the stock market professes to have all the easy answers. But that's how it is with libs, isn't it? Just one more law, one more restriction on us all, which they just KNOW is the answer and everything will be OK.
Just for the record, margin in the stock market has been at 50% for most of our lifetimes. It had nothing to do with the sub-prime real estate debacle. Yet, here we go again, with you fixing what ain't broken.
 >How long will it take our economy to de-leverage and recover from

No, it most certainly did not equate to holding no collateral at all. And once again, your ignorance is evident. Stocks virtually never go to zero overnight. In your example, Enron, the stock took a long road down on it's way to zero. And along the way, when the customer's equity reached 25%, it's a FED requirement that the customer either put up more money or liquidate part or all of the position. If the customer doesn't do so, the broker will. And brokers typically have more stringent requirements than the FED minimums. They will typically require the customer to maintain 30 to 40% equity. And in the case of a volatile stock like Enron most would require at least the 40%/.

Now you're gonna lecture us on bear markets? Show us a bear market since 1929, when there were no margin requirements, that resulted in brokers unable to cover margin loans.
If it ain't broke, why can't libs leave it alone?

More govt oversight? From the Congress with an approval of 9%? How many regulators and regulations do we already have? Did that prevent the subprime fiasco? In fact, govt ENCOURAGED and FORCED banks to make many of those subprime loans.
You're Monday morning quarterbacking again. Had the housing market not declined, but instead continued to go up, you'd be here bitching about how those greedy lenders did not make enough subprime loans. Why they'd be racists for denying the shot at the American dream to all those minorities. Yet, when they do what the govt requires of them and then the market turns against the buyer, why here you are bitching away.
 As you

Here's a novel idea. If you don't like the rate on that credit card, don't take it out.

The banks have paid back all the TARP money with 10% interest. Who's gonna pay back the Obama stimulus of $800bil? The taxpayers. Who would pay back the new stimulus he's seeking of $500bil because the last one didn't work?
You should hear the banks scream about

All I hear is you screaming here every day about one thing after another.

You just don't get it. The banks are already heavily regulated. We've had cycles where the banks got in trouble with or without regulation. Why is it that you always look to the private sector? What about the govt and govt regulators that were forcing banks to make subprime loans? What about guys like Barney Frank, with oversight responsibility, that proclaimed Freddie and Fannie to be basicly OK weeks before they collapsed?

How about I come into your life and tell you what to do, how much you can borrow, what you can or can't pay for a house, etc? If you were here right now, you'd be telling me how much salt I can have on my dinner, because that needs to be controlled too.
 But we're talking about two somewhat different

Then why don't you just shut up?
 I do know Ameritrade and Etrade are so desperate they both

The FDIC is NOT footing the risk on any significant amount of margin loans. The vast majority of all margin lending is done through brokerage accounts. Nor have margin loans been a problem since 1929. Your capacity to want to regulate, change, and control what you don't understand has no bounds, does it? It would be like me bitching about the rules for sumo wrestling and pontificating on all the new rules to add.

It's quite evident that you know less than zilch about business.
.
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wrote:

Please explain something to me. Financial analysts, stockbrockers, blah woof, studies have shown they're all essentially flipping a coin. So how is it that I've yet to see you agree with a single point that Robert G. has made? Not a one. The odds against him being 'wrong' on every single point are astronomically small. It appears - from the cheap seats - that you're channeling Groucho Marx.

http://www.youtube.com/watch?v=4v3etuIw-aM

Just saying.
R
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I do believe that's the first time I've seen someone use argumentum dilettante used seriously, in a while.

...nothing that makes sense.
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RicodJour wrote:

It's quite easy to be wrong on every single policy when that policy is determined by what feels good rather than hard facts.
For example, liberals asked themselves "What defines 'middle class'?" The answer highest on the list was home ownership. That was an easy fix: let's make sure everyone owns a home, and, presto, we elevate the lower class into the middle class.
Hence the Community Reinvestment Act of 1977 (under Carter). But that didn't work, or at least didn't work fast enough. So lending standards were reduced even more. True, the CRA wasn't the sole cause of the housing collapse, but without the CRA there would have been no problem. The CRA was necessary for the collapse, but it alone was not sufficient. (It took interest rates to go to near zero by the Fed as an additional requirement.)
No, an objective look at society tells us that virtually every single major problem we have can be traced to a liberal's "solution" to an up-stream, smaller problem. By this, I mean: education, homelessness, poverty, and most of the rest.
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The difference is that what you are referring to above is stock picking. Stocks move in both directions. Some do better than others. So, a person picking stocks statistically has a probability of picking at least one that will go the right way. The studies you are referring to have compared stock selecting to throwing darts and just picking stocks randomly. So, in the whole universe of stocks, sure there is a statistical distribution of winners and losers.
On the other hand, Robert's beliefs are founded in one general idea, call it extreme socialism or communism, from which spring all manner of faulty ideas. It's also quite apparent that he doesn't have any grounding in economics. So, quite naturally, virtually everything he spews forth is erroneous.
Now, let's make the right stock market analogy, OK? That would be a guy who believes only one specific kooky sector is where the opportunity is and he puts all his eggs in that one basket. For an example of where that gets you, look at John Corzine. He put MF heavily into european soverign debt in countries that were going under. Result? They ALL came up losers and the company is bankrupt.
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To split a hair, the margin requirement in 1929 was 10%. Way too small, but not nothing. -- Doug
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So you are saying Lehman went down because of margin lending? Or are you just using a specific instance of imprudence to try to prove a general point? Have any brokers gone down because of margin lending?
As to your precise subject, most (all?) brokers are banks these days. They converted in 2008 to get FDIC guarantees. http://dealbook.nytimes.com/2008/09/21/goldman-morgan-to-become-bank-holding-companies /
Yes, over-leveraging caused both the Great Depression and the Great Recession. Read "This Time is Different" by Reinhardt and Rogoff. http://online.wsj.com/article/SB10001424052748703298004574459001609215112.html
It is a depressing read, especially for anyone that thinks we are going to have a quick recovery or that there is any government miracle that can dig us out.
-- Doug
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wrote:

That is pretty much the case. You're conflating book value with market value with what someone would actually pay for the thing.
If Bill Gates sees that he's worth $50 billion or whatever, and decides to cash out and tries to dump all of his MS stock, MS stock would plummet. He wouldn't be worth his book value of $50 billion
If someone sees that a particular toy was valued at $X on the Antiques Roadshow, it doesn't mean that they'll get that much when they try to sell it. A dealer would pay half or less, and maybe a private individual who wanted it right _now_ would pay more. So which one of those is the 'real' value?
The cash you have in your pocket goes up and down in value every day, as does your house, your car (okay, that just goes down unless it's rare and in demand), gold, oil, food - everything goes up and down. So even if someone sold everything and took the cash, the resultant sum would only be their relative wealth on a particular day at a particular time and in a particular location.
Accounting is a means to standardize bookkeeping, and a means to keep track of the book value of wealth. It's still a book value. Arguing that the book value is the only real value is simplifying things to the point of error. That is what the banks did with CDOs. They tried to separate components of a number and sell those components individually to make more money - to create wealth. Unfortunately there were a lot of zeroes in those numbers and components.
R
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That's the pathological case. The everyday case is Joe Citizen owns 1000 shares of MSFT and it's trading at 25. It's clear that at that moment, it's contrinbution to his net worth is very close to $25,000 and there is no need to liquidate it to prove it.
It was the following exchange from the resident socialist who thinks he's competent to comment on economics that I was addressing:
" If I own $10,000 worth of stock in corporation "X" and corporation "X" announces a new product such that my stock is now worth $20,000, wealth has been created "
Robert: "Jeez. Where did you go to school? Your stock would be worth twice as much only if people sold their shares in other companies to buy shares in the new one. Wealth hasn't been created. It's just been transferred from one company to another. That's what OWS is all about. "
That's my vote for the stupidist post here in a long time. He's obviously just as ignorant about economics and the stock market as the hippie protesters. Yet he pontificates on how to fix the economy, wall street, God knows what.

Sure net worth goes up and down. And the value of certain unique assets like antiques can be hard to determine with certainty. But that doesn't mean that in most cases net worth can't be easily calculated to some reasonable degree of accuracy.

Book value and market value are two different things. Market value is what counts for net worth. The price of the gold, stock etc today, not what was paid for it 5 years ago.
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wrote:

Again, that's a theoretical valuation, and, yes, it is pretty much standardized in accounting. But there's a big but in there. People do have a tendency to exaggerate, Trump for one example, and it's also neglecting the liquidity factor. Limitations and gross markdowns due to an urgent need for cash flow can reduce anyone's net worth by a huge factor. Rich people and most businesses go bankrupt because of those limitations.
I'm not really arguing against you, I'm just saying that someone's 'net worth' is a standardized delusion, much like most of what happens in the stock market. A more realistic valuation would use a statistical model and would factor in liquidity and risk. As that's obviously too complicated for most purposes, people end up using a theoretical number at some fixed point in time, which allows us to go "oooh!" when we see the Forbe's 400 list.
R
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wrote:

Again, that's a theoretical valuation, and, yes, it is pretty much standardized in accounting. But there's a big but in there. People do have a tendency to exaggerate, Trump for one example, and it's also neglecting the liquidity factor. Limitations and gross markdowns due to an urgent need for cash flow can reduce anyone's net worth by a huge factor. Rich people and most businesses go bankrupt because of those limitations.
I'm not really arguing against you, I'm just saying that someone's 'net worth' is a standardized delusion, much like most of what happens in the stock market. A more realistic valuation would use a statistical model and would factor in liquidity and risk. As that's obviously too complicated for most purposes, people end up using a theoretical number at some fixed point in time, which allows us to go "oooh!" when we see the Forbe's 400 list.
------------------------------------------------------------------------ And then there are guys like Bernie Madoff who bring new meaning to the question:
"What's my investment worth?"
"Book value or real value?"
-- Bobby G.
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wrote:

That is pretty much the case. You're conflating book value with market value with what someone would actually pay for the thing.
If Bill Gates sees that he's worth $50 billion or whatever, and decides to cash out and tries to dump all of his MS stock, MS stock would plummet. He wouldn't be worth his book value of $50 billion
If someone sees that a particular toy was valued at $X on the Antiques Roadshow, it doesn't mean that they'll get that much when they try to sell it. A dealer would pay half or less, and maybe a private individual who wanted it right _now_ would pay more. So which one of those is the 'real' value?
The cash you have in your pocket goes up and down in value every day, as does your house, your car (okay, that just goes down unless it's rare and in demand), gold, oil, food - everything goes up and down. So even if someone sold everything and took the cash, the resultant sum would only be their relative wealth on a particular day at a particular time and in a particular location.
Accounting is a means to standardize bookkeeping, and a means to keep track of the book value of wealth. It's still a book value. Arguing that the book value is the only real value is simplifying things to the point of error. That is what the banks did with CDOs. They tried to separate components of a number and sell those components individually to make more money - to create wealth. Unfortunately there were a lot of zeroes in those numbers and components.
============================================= Thanks for explaining that a lot more patiently than I would have. There are so many ways to calculate value. In the case of something like a "toad" howitzer <g> there's an acquisition value (what did it cost us to buy it originally?) that's probably way different than its original projected value. There's the cost to replace it if the manufacturing line still exists. There are trade-in values, treaty values and foreign resale values. There's the cost to replace it if you have to rebuild or allocate production facilities. There's the value that it has compared to similar equipment that might be a substitute. There's scrap value and negative value, as in the cost to dismantle and disarm it so it doesn't fall into the hands of the HeyBub Revolutionary Guard.
Book value is, as you say, yet another value we can consider, but it's one that could change overnight and for a lot of people, it did. Or as that joke went about the guy buying up all that stock: "Sell it to whom?"
-- Bobby G.
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They did pretty well on Wall Street. Out of thin air.
HB
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harry wrote:

Whatever. They still created wealth without getting their hands dirty. This notion completely deflates your contention that wealth is created only by "(proper) work."
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gpsman wrote:

That calls for an empathetic governmental intervention.
The child should be removed and placed in an orphanage until a suitable adoption can be arranged.
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wrote:

More than arithmetically challenged, I fear, based on his understanding of the difference between creating wealth and transferring wealth.
-- Bobby G.
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Robert Green wrote:

Okay, I'll play. How do YOU think that wealth is created? Or is it your contention that the amount of wealth in society is relatively fixed but maldistributed?

I don't think they wanted to bring people down so much as they wanted a color TV.

Slight correction: The Iraqi war did not cost trillions; the latest number I've seen is in the neighborhood of $800 billion. In war costs.

That, and their parents had the foresight to set aside sufficient to provide the best for their children. Some parents, as you know, get a motorcycle and disappear.
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You must have thought I was kidding about the chicken and egg example, but THAT is an incredibly accurate model of the creation of wealth. In its most simple form, raw materials + work = wealth. Whether you are making eggs from corn feed, necklaces from stone beads, spearheads from flint or gasoline from crude oil you are taking a raw material and "adding value" to it. You might recognize that phrase from the Euro-tax called, appropriately, a VAT (value added tax). What they are trying to capture with the VAT is the "moment" when wealth is created.
I don't think that the current wealth distribution is fixed or is some zero-sum game. I just don't think it is headed in a good direction. It's not healthy for any country to get into a situation where money gravitates so much out of the hands of the consumers that propel the economy. Without a steady stream of consumers there's no growth. Growth is what makes the deficit go away. Growth makes tax cuts actually produce revenue rather than add to the deficit. Growth keeps investment strong and unemployment low. When money pools at the top, it's no longer in the hands of people who actually spend money, it's in the hands of people who collect it. The system stalls because it's geared to consumer spending.
Ironically, taking some of the huge upper end income and redistributing it to the poor via taxation would actually help the rich in the long run by re-starting the stalled economy. The rich can make enormous amounts of money in a good economy by lending it out. Now, no one's lending, no one's borrowing, no one's buying.
The rich can wait it out, the poor, not so much. That's why the much maligned Obama jobs bill would help get the economy moving forward. It would put money in the hands of consumers who would spend it, sending a signal to business that consumer spending and confidence levels were rising and they would begin to invest in expansion or new products. There isn't a Republican politician that doesn't know that, but they're pandering to the fear that somebody's going to get something for nothing
Looking at the Japanese experience, we know that these doldrums could last at least 10 years and perhaps more because of the general world malaise. Now I realize that there's moral hazard in giving money to the poor for doing nothing, which is why such redistribution and "pump priming" should be accomplished through a jobs or re-training program. If the Republicans do win in 2012, I suspect they will then do all the things they are preventing Obama from doing now.

In that case, they were bringing themselves up to the level of society they feel excluded from. (-: Looters (wealth redistributors) are a separate class from arsonists and hooligans (wealth destroyers). They're in the same mob, but their motivations are very different.

I've seen mostly other, much larger numbers. I trust my Federal Government to lie to me and conceal the true and enormous costs as it has been doing all along. Independent studies by a panel of experts comes up with far different figures than your citation - wait, you HAVE no citation. The CBO expects the health care costs alone for wounded vets to come close to a trillion so immediately your number is quite suspect.
http://www.google.com/search?q=true+cost+of+the+Iraq+war
pick any. Find a credible one at $800B
a.. Cost of war at least $3.7 trillion and counting | Reuters Jun 29, 2011 ... NEW YORK (Reuters) - When President Barack Obama cited cost as a ... Staggering as it is, that figure grossly underestimates the total cost of wars in Iraq, ... of accounting is common but too narrow to measure the real costs. ...
www.reuters.com/article/.../us-usa-war-idUSTRE75S25320110629 - Cached - Similar
I know you'd like to minimize the tab that a Republican President ran up. (What a surprise, son of rich parents spending other people's money like water. Who could have *ever* seen that coming?) But facts are once again getting in the way of your assertions. We spent ourselves deep into a financial hole by massive war spending. The people responsible are now pointing fingers at everyone they can to try to take the heat off of them. What a surprise!

Well, just remember when you claim America as a land of upward mobility that the stairway is getting steeper and narrower. The lower classes will have a tougher and tougher time competing against kids born with an elevator pass. When the Tea Party embraces the Founding Fathers, they should remember that the FF's wrote down a lot of very idealistic proclamations, like "all men are created equal" that don't correlate with our own experience of seeing a world with thalidomide babies, crack babies, FAS babies, etc.
-- Bobby G.
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