Forum Post: Pure Market Speculation is Anti-Capitalistic and Should be Highly Regulated

In pure capitalism, money is simply a symbol of service rendered. Some tangible good or service was provided by you as an individual in exchange for that symbol -be it gold or paper. As long as everyone accepts that symbol for the goods and services they provide, life is good.

Now go beyond individuals and imagine you lead a company manufacturing cotton cloth. You need a steady supply of cotton at a stable price through some period -let say a year in the future. To protect yourself from a price rise, you are willing to pay for an "option" to buy the cotton at the current market price a year from now.

Technically, the person selling you the option has enough cotton in a warehouse to sell to you at the option's "strike price" in a year. If the price stays the same or drops, you simply write off the premium you paid as a cost of doing business and buy the cotton at the current price. If the price rises, the person selling you the cotton loses only virtually -since presumably the strike price was a fair market price for cotton they already own, and they got a premium from you for the option in the first place. So life is good for both corporations and individuals.

Somewhere along the way, someone got the idea to use options as a means of pure market speculation -basically a form of gambling using the market price as the focal point.

I would call market speculation "anti-capitalistic" for two reasons: 1) there is no intention to produce new goods or render services with the commodity being sold at the market 2) at least one person in the exchange is hoping for a loss of value

In fact, when practicing the original form of "short selling" you need not ever have possession of the commodity for which you sell an option as long as the price stays below the strike price until the option expires"

After the market crash that led to the Great Depression, it became "illegal" to sell short without putting up enough money to buy the good or service at the strike price. However, this does not change the fact that selling what you don't have or buying what you don't need in hopes that the market price goes your way is nothing more than gambling.

A complicating factor is that the repeal of Glass-Stegal made it easier for banks to gamble with your savings and loans by removing the barriers between investment banking and commercial banks. To some extent, the commercial banks needed to do this to compete with other forms of investments, such as 401Ks -where we have been encouraged to put every spare nickel rather than into our neighborhood banks.

And the real estate bubble provided another speculative market -people were encouraged to buy houses they could not afford. They were told "they can always sell the house at a profit if things don't work out". Some were even told they could borrow the "equity" that was building up as the prices rose (not the equity they achieved by paying down the loan). Bundling these mortgages provided yet another market upon which both commercial and investment bankers could speculate.

With no real goods being produced or services being rendered, the bubble had to burst at some point (maybe a house of cards collapsing is a better analogy) . And unfortunately, we are right in the middle of it.

To sum up, Diogenes got it right when he said "the love of money [not money itself] is the root of evil" Pure market speculation is the love of money for money's sake since there is no service being rendered.

If I could make one "demand" it would be to regulate market speculation beyond its pure capitalistic purpose as insurance for those (often collectives) who own a surplus to provide insurance for those who need the commodity as part of their business. Net: you have to put the full amount of the option strike price in escrow until the expiration date; further, reinstate Glass-Stegal to again separate commercial banking from investment banking so that bankers cannot gamble with our savings.

Of course, this regulation will have its biggest impact on stock options since no one can argue that the stock (a symbol of equity in a company) is needed as part of manufacture or rendering the service of a company. Those 'selling short" would have to put the full amount in escrow.

It would have the side effect that most people buying stocks will do it because they believe in the goods and services being produced by the company -or that they really like the dividends provided from the profits. If the company grows and they sell it to take a profit from the growth, the problem is self limiting because they no longer own the stock.

Ok then...