IT WILL NOT HAPPEN TO ME! GUESS WHAT? IT WILL!!
FORWARD
I am Richard De Graff the second son of John Teller De Graff Sr. and Audrey Brown De Graff of Albany NY, USA. I have been a real stockbroker since 1960. I Completed the Graham and Dodd correspondence course from the New York Institute of Finance while serving in the United States Army for two years. Sept. 1957-Sept. 1959, it was known as the quiet period- no wars. I still remember my dog tag number-FR-12 538396. I am currently a member of the Congregational Church of Eastford Connecticut USA.
We, as residents of this planet earth, have progressed so far in the last 100 years that one can take all the progressions for 5,000 years and combine them into one small round ball and it won’t equal what man has done in the last 100 years. In sum, we have grown too fast and we don’t have new rules, or better yet, we have ignored the old ones that protected our individual freedoms.
I am writing this booklet because I believe the countries of this world believe the economy is rebounding. It is improving, but the market place is where the grasshoppers are playing to their greedy delight. Meanwhile the ants have hunkered down.
The near term solutions will hurt almost everyone for a very short time while we all readjust. Only a few will return to dust. This is Part One of this booklet.
Part Two has to deal with avoiding a total economic tsunami due to worldwide debt enthusiasm. We will have to learn to control our well-meaning intentions or face destruction of our freedoms.
Several of the Programs started when FDR was president worked very well, but the Congress failed to revisit these laws; they failed to correct or to improve these laws every 10 to 15 years. I am referring to the securities laws that were passed in the 1930’s and 1940-1941. In particular, the Investment Company Act of 1940. Protecting Mutual Funds should have been annulled when computers could price Mutual Funds’ holdings instantly. This failure has created a Goliath playing with a turbo-charged club in the securities industry. This is just one example where reform is needed.
FDR also instituted a socialist agenda where our central government welfare programs were aimed to kick-start the economy. Under the Keynesian theory we were supposed to pay down these debts over time when our economy was profitable. Sadly, we created more entitlement programs without saving for them. The rest of the world copied our programs and relied on bankers and the bond markets to finance their dreams.
Europe and the Middle Eastern countries are at the abyss now and that abyss is slowly coming to our shores. There are now giant hedge funds run by unscrupulous managers and they compete with central bankers in a game of self-destruction. The House of Representatives is supposed to have control of our monies.
Our market place is now a board game for the “privileged few” at the expense of entire populations.
We are now having two choices. The easier choice will devastate the sneaky, shady players in our market place over the short term. While we listen to our present leaders we will start falling into that sinkhole and we will all fail. The purpose of this book is for future reference for those non-believers while those who are prudent can take the necessary steps for survival.
The first part of this book is the easy part, but will take intestinal fortitude to implement, but these things must be done before we can re-regulate the entire finance industry.
The passages that I have written are from over 50 years on the battlefields of finance. In the Army they called it OJT- on the job training. It is now up to academics to prove or disprove my thoughts. Remember, Moses’ Ten Commandments were only 297 words and look at how much has been written about them!
We have crossed the raggedy bridge and it has collapsed. There is no way back. We must look forward.
Cheerio!!!!
Part One
THE PAST AND PRESENT
Chapter One Bring Back God!!!
Chapter Two LBJ
Chapter Three Bankers and Banks
Chapter Four Banking Reforms
Chapter Five Broken Bones
Chapter Six Up-tick Rule
Summary for Part One
Glossary
Chapter One
Bring Back God
“With confidence in our armed forces – with the un-bounding determination of our people – we will gain the inevitable triumph – so help us God.
I ask that the Congress declare that since the unprovoked and dastardly attack by Japan on Sunday, Dec. 7, a state of war has existed between the United States and the Japanese empire. “
The above is the last two paragraphs of President Roosevelt’s speech before the US Congress on December 8, 1941.
He is clearly asking God for HIS help. As a student of the Old and New Testament I can see the hand of God at work. The official naval archives listed it as “luck” in the Battle of Midway in May 6&7 1942.
Australians call The Battle of the Coral Sea the battle that saved Australia. The Japanese Naval forces were confidently heading for New Guiana to use a stepping off place to attack Australia and New Zealand.
They ran into an unexpected US Naval force with the USS Lexington aircraft carrier power base. In the ensuing battle the USS Lexington was sunk. What we did not know at that time was that the Japanese had lost about 60 airplanes. So their two aircraft carriers headed north to be re-supplied instead of rejoining the task force heading towards Midway Island.
So the Japanese had four aircraft carriers instead of six for that epic battle. The US had three, but only two were operating in battleship condition. Our backs were to the wall, but with American “can do” spirit we were able to Ambush the Japanese Navy.
Our scout planes found the naval task force and radioed back. While the Japanese planes were being rearmed with torpedoes our naval pilots stuck each time they shot down until the dive-bombers and torpedo planes showed up at the same time. The Japanese lost their four aircraft carriers and the naval ability plummeted.
The turning point in the battle was that two Japanese scout planes found our task force. When they went to radio back the news – their radios went dead. When they did report it was too late, but we did lose the Yorktown. The Naval report calls it “luck”; I say it was an act of God.
D-Day on the beaches of Normandy France was a slaughter until the defenders started running out of ammunition. At first the German High Command was afraid to wake up Hitler and then he would not release the Panzer tank division. I believe it was Déjà vu all over again from the Old Testament. (My complements to Yogi Berra for his honest, savory expressions.)
The United States has always allowed freedom of religion and God has blessed us until recently when we started breaking the Ten Commandments and taking God out of schools. The Lord Almighty has given us a warning shot across our bow with 9/11.
The biggest sacrilege though is leaving “so help us God” off FDR’s monument in Washington DC. We must restore his complete true speech.
Chapter Two
LBJ
The real culprit of today’s mess is Lyndon Baines Johnson, former president of the United States. A graduate of a third rate college, he wrecked our future economy with his “guns and butter” agenda that this country could not afford. The ultra-liberal wing took over the Democratic Party.
I believe LBJ is the “Ahab” of our country.
Robert Caro has been writing his fourth installment and it will be published in 2012. It should bring the house down.
LBJ’s programs forced Richard Nixon to get off the gold standard and this in turn opened the floodgates of Congress where ultimately 435 members control 300,000,000 people’s destinies.
So we went form a “pay as you go” society to one of borrowing from the future. The Social Security fund was already being raided under the guise of “smoke and mirrors”; forget about the interest being earned – it was the principal that was being used. That is the real Ponzi scam.
Chapter Three
“Woe to you, teachers of the law and Pharisees, you hypocrites! You clean the outside of the cup and dish, but inside they are full of greed and self-indulgence.
Matthew 23:24-26
Bankers and Banks
A healthy bank means a healthy community.
Today bankers are in control instead of serving the public. The House of Representatives has control of our purse strings, not the bankers. We should consider nationalizing our banks and buying the shares back at real book value. Their large bonuses should be given to depositors and shareholders. Steve Jobs quoted as the reason he was not taking a salary when returning to Apple Computer was, “ I already have billions of dollars – I don’t need more. I want to build Apple Computer into another Hewlett Packard.”
When one does well, one will earn honest money. We are becoming too greedy and bankers are living off our greed. Bankers used to be respected members of our community.
Today we are teetering on the brink of a worldwide collapse economically. The United States corrected this problem in the 1930’s. Most economic disasters happen because of easy credit and greed. This is a normal psychological cycle. It takes about three generations to happen.
The first generation learns from its mistakes. The second generation prospers because of the solid base built by the first. Then the third generation, which we can call “smarty pants” because they don’t believe it can happen again and they break all the rules put in place by the first.
The Congress of the 1930’s did a magnificent job protecting the investing public from the different kind of abuses that were prevalent back then and today.
When the economic collapse happened in 1973-1974 the Congress congratulated them selves on a job well done. Actually they should have revisited and amended many of the statues, for the seeds of 2000 fiascos were planted then by the survivors.
The formation of OPEC caught the world by surprise. A horrific adjustment would now take place. Many companies were unprepared and slowly sank into oblivion.
Wall Street got smacked. Big Time. 50% of the firms vanished. 50% of employees left for safer endeavors. Schumpeter’s Law of Creative Destruction was working to perfection. (The basic premise is that antiquated businesses are replaced by newer and growing businesses. A prime example is the buggy whip disappeared when the automobile was mass-produced.)
This is where the Congress failed. Instead of going back to Wall Street and seeing what laws need to be revised, or annulled, they went on their merry way, and let Wall Street feather their own nest.
Wall Street survivors vowed this would never happen again to them. The bankers, cozy in their fireside chairs, smugly smiled. They survived in pretty good shape.
Banking and Reforms
Most economic downturns are because of loose credit. Easy money leads to loose standards and eventually immoral behavior.
As I mentioned in the previous chapter, there are usually three stages to a recovery. The first stage everyone remembers the mistake made in the past cycle and are intent on not repeating these mistakes. This was the case in the 1930’s. The problem was that most congressmen that passed these laws retired knowing that they did a job well done. The next generation of Congresspersons believed that the problem had been corrected and never revisited the laws. Times change and conditions improve and standard of living improves with new invention. The computer is a prime example. In 1968 Wall Street embraced the computer as if it was a porn star. They never looked inside to see how it worked. They just pushed buttons and smiled at how easy it was.
The problem that developed was with the unsung heroes of the industry, the back office. They were understaffed and over worked. They had done so much business and a myriad of trades that no one could follow who owed whom. Firms were now rated by how many days they failed to deliver.
One bright young man had been going to night school to learn all about computer programming. He was with Smith Barney and was soon on control of the back office. They became so efficient that the rest of the street marveled at their accuracy. When they called another back office, the clerk hearing the name of Smith Barney would say, “How much do we owe you?”
Other firms would say when someone else called, “Let me check it and I will get back to you in a couple of days.”
Needless to say that young man became the next president of Smith Barney until the third generation took over the street.
My main point here is that when Wall Street had its own depression, this country survived in fine shape. All we had were mini recessions. Congress failed to revisit and improve and maybe justify their existence. The Investment Company Act of 1940 should have been radically changed to protect the customers instead of the mutual funds.
This was a monumental mistake. They failed to investigate what was happening to the street. They would have discovered that the Investment Company Act had created a monster in sheepskin.
The street had taken a 50% haircut all across the board. It was because of dumb foolishness by senior management looking to become the next financial wizard.
Instead of looking for values and the public wellbeing, they decided to feather their own nests with products that created excessive commissions. The first step was options. One out of ten trades is profitable the public, 9 out 10 to the firms. Wall Street has the ability to shoot itself in the foot too. By not supervising the trades and traders there was an explosion and several firms took the final dive.
Once the Street learned how to handle that crisis they went on to bigger and more profitable trading ideas. Program trading led to the Crash of ’87. It had created a perpetual motion machine once it had started and no one thought of pulling the plug on the computers. Computers need electricity to operate. Simple. It was not until the market closed that the firms involved had created lots of commissions, but lost principal. Luckily for the public, this program self-destructed.
My point is that at the end of every minor cycle there is a moment when we go back and correct or enter the second major cycle.
The first cycle is where one has pride in the job and themselves. They want to serve the community that they work in. The second stage can be called “Up your gross”. This has to do with the firm and making sure it is profitable. Team spirit. The firm can do well as a bond trader, or fine research, or stock market technicians. Usually there is one individual who is the firm’s star (GURU) that ends up calling the shots.
Our economy is changing from an inflation mode to a deflation mode. Individuals are now seeking quality and price in the market place. Socialist policies are the wrong fork in the road.
Chapter Four
Broken Bones Fixed
OK the doctor has been called in to fix our broken economy. The problem is that he is from the middle ages. For some the pain is going to be devastating. For many of these players (now called “BANKERS”) it could and should be fatal. Examples must be set for future generations.
The market place is corrupt and the private investor is being smothered. The Private Investor (PI) is the foundation of the economy and must be protected.
The first thing our medieval doctor (Let’s call him Merlin – for there is always hope) is going to raise margin rates. This will shell shock the market place and stocks will dive. Most Hedge funds will fall on their own weight because most are heavily margined with debt. If Merlin raises rates just 10% for stocks, then the new players will have to pay 60% of the price. The 50% players may stay at 50% and if they do same day trades will remain there, but if they fail to do this; then they are at the new rate.
Bond and commodity players will be cut to the quick. Bond traders are not supposed to be on Margin. Recently bonds have been used as a speculative vehicle to promote excessive fees for greedy bankers in convoluted trades that go by various names. The basic form is called a derivative. A derivative “derives” something from one place and gives it to another place; this usually means taking something good and combining it with something bad –so that the combined security looks better instead of junk. One can buy a prostitute a fancy dress, but she is still a prostitute.
Margin rates should be gradually increased so that all speculative fever is erased from the market place.
Most financial disasters have been built around too easy credit. In the 1929 crash, margin debt was 10%. At the end of November 2011 it ranges from 10% for certain commodities and bonds to 50 % for stocks.
If we are in the midst of a panic we should raise all margin debt to 100%. This will end speculation in a hurry. Schumpeter’s law of “creative destruction” should take over. It will be corporations who have been destroyed that will be replaced by ones that are newer and more creative. Big businesses hamper growth in most cases. They are laying-off and “fine tuning” their earnings while a young growing business is hiring and growing. 50% margin works like this. You buy a $10 stock for $5 and the bank, through a broker, lends you $5. Now if the stock goes to $15 and you sell, you would have made 100% once you pay back the $5.
Now if the stock goes to $5, you get a margin call and are sold out. Your loss is 100%. If you had paid cash you still have $5 investment.
Now commodities have enjoyed lower rates and the traders are making a bonanza. The easy credit has prospered many funds to dupe the unsuspecting. If they are so good why do they need your money?
The commodity market was formed for a noble cause. A corn farmer would work hard and then when his crop was harvested along with everyone else’s the monetary value was almost nothing. It is just like your neighbor offering you some tomatoes during the peak summer months. They have more tomatoes than they can eat.
Chapter 5
UP-TICK RULE
Joseph P Kennedy, the first SEC chairman, instituted the Up-tick Rule in shorting stocks as one of his first acts in 1938, which calmed the markets right down. Italy has just recently banned all short sales to stop a run on their markets.
The old rule, which was a good one, went like this: First the broker had to go to his or her back office and get permission to sell short. There had to be stock available for the short sale because it must be delivered to the investor who is buying your stock. Then the stock must have an up-tick in price. This stops raids on securities, or if the stock is in a free fall, the short seller fades into the woodwork. Now a large short position can be considered bullish because sometime in the future the seller must cover, or buy back, to record the profit. Then there is the possibility that the company is deep trouble. The other side of the coin is positive news like an extra dividend, which the short seller has to pay, or a merger, when the seller faces a huge loss. The rule is the downside is limited because it cannot go below zero, but the upside is or can be unlimited. So short sales can be a very risky investment under normal conditions.
Since they have rescinded the up-tick rule the volatility has increase to extremes never seen before. Computers are programmed to go wiz bang in a nanosecond or even faster. This will stop this and the flash crashes too. A flash crash is a computer driven sell program when all the buyers are absent or withdraw their bids. Luckily we have not had one around the close of the market place.
Chapter Six
USURY
Back in the 1970’s, when inflation was just beginning to rear its ugly head, disintermediation took place. This is how it worked. One could max out the credit card credit and legally the credit card companies could only charge 8%. Then the individual would be able to go and buy government agency short-term debt that was yielding 22%. That was a neat 14% return on one’s money. Sadly, individuals do not have lobbyists in Washington D.C. and the law was quietly changed to “protect?” the credit card companies. Most of our representatives in Congress are probably ignorant of the Rule of 72. Bankers love this rule. One takes 72 and divide by the interest rate you are paying. The result is how long it takes for that institution to double its return on your debt. If one has a 7% mortgage rate due in thirty years then every 10.29 years the bank will double its return. So over that 30-year period that bank will double its return 2.92 times. That is almost 3 times on your money over a 30-year period. That is a fair return because the bank has lent their depositor’s funds so you could buy your home. In return they receive interest on their funds and the banks can pay their employees fair wages. This is called velocity of money and how many times a dollar can be turned over. This is a healthy situation.
Now the credit card companies were able to go wild because their restraints were removed. Once a credit card holder failed to pay the entire monthly bill the interest charges kicked in. Just a little bit, but as the delay kicked in and the bill got bigger the rates went up. Your first month delay had now been over 6 months and while your charge on the latest month is probably minor, your late payments are now over 20% in most cases. We are now talking 3.6 years instead of 10.29 years. Once an outside shock awakens the populace they start de-leveraging, or paying down their debts. This is deflationary, because the funds are not buying products except for necessary products.
Now go big time. Governments and their entitlement programs are the same as individual credit cards but with more zeros. Our representatives do this because their perks are fantastic and start compounding the longer they remain in office. They know it is wrong, but who cares as long as they keep the ship floating with debt.
Once a sovereign debt percentage is more than their GDP, then future borrowings are just to pay interest on previous debt. Your ship is sinking. Sell assets at depressed prices? Cut entitlement programs?
Now you see the mess we are in. It starts by credit agencies lowering their credit ratings on debt. That means higher interest rates. Ugh!
SUMMARY OF PART ONE
If you grew as a child during WWII as I did from the ages of 6 to 10 it left a lasting impression. Sixty-six years later my mind still has the horrors of the aftermath of that noble combat.
We as a world now face a similar disaster. This time it is economic. We have greed and we are losing our morals and fairness to our fellow human being.
The solutions are not pleasant. The ones I have mentioned will have the effect of a bombed out European conflict. There were many casualties, but many more survivors in this conflict. Everyone is watching the economic recovery, which is really a house of cards. Its base is marked by greed and corruption of a few that will ultimately destroy the multitude.
The United States is the only country on this planet earth where multitudes would dream of living here. So we must set the standards for the rest of the world.
George Washington took the oath of office with his hand on a bible. We believe in a supreme being, and yet we as a nation espouse freedom of religion. WE as individuals have the choice to make. We as a nation chose separation of Church and state, just as Turkey did in the 20th century. We have both prospered. It is our basic freedom and no court should dictate to us or change our way because of hurting a minority. In a true democracy the minority is listened to but does not necessarily achieve its desire. We have freedom of religion. That is our God given right. Freedom does not mean censorship. Religion that uses violence to flourish is not the American way of life. (Jan 1, 2006 during communion, Jesus Christ spoke to me as I bit down on a piece of bread. HE said, “ You can pray to me too!”)
We must come up with a better way of choosing our national leaders. Graduation from a third rate collage and the ability to lie and pander are not valid credentials. Maybe there should be a bipartisan board to judge perspective candidates
Bankers are a special breed and should be the “watch dog” of the economic community- not a slithering python. Salaries should be based upon a criterion of performances within the bank itself. Bringing back the “Up-tick Rule“ restores a degree of safety to the market place and takes away one of the manipulative forces in the market place that hedge funds enjoy at the public’s expense.
There have been laws going way back in time. They can protect the average citizen from being duped.
All these measures are just a process of slowing event and hoary expectations down. These are hard choices for some and readjustments for many, but just over the short term.
Failure to enact and or reenact these reforms will beam us from a European conflict to a devastating wipe out like Hiroshima.
- Freedom of religion is based upon the old and new testament of the Bible. All the different sects are based upon love of our neighbors. As long as other religions have the same attitude they should be free to worship on our soil. We have a model of government based upon separation of Church and State.
- Reinstate the “Up-tick Rule” immediately.
- Raise interest rates that involve security transactions. No more “carry trades”. This will make derivative trades and high frequency trades obsolete.
- Reinstate the law.
- Establish a minimum standard to issuing credit cards.
- Separate banks and brokers.
These measures will cause havoc among certain groups that will scream bloody murder. The harder they scream will result in a safer place for the public.
We are now the only super power in the world. We have no agenda, no standards for the rest of the world to look up to or follow. Right now we are a rudderless ship of state floundering on the open seas. This in turn allows the world to be in chaos while the mighty rich plunder the defenseless populations at their free will.
Part Two is designed to create a new world order based upon our principals of individual freedoms and rights within the framework of benevolent governments. I call it our Future.
Glossary*
Derivative
derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties.[1][2]
Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form through which to extend credit.[3] However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks.[3] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy.[3][4]
Financial reforms within the US since the financial crisis have served only to reinforce special protections for derivatives, including greater access to government guarantees, while minimizing disclosure to broader financial markets.[5]
When the markets switched from the fractions system to decimals it negated the profit spread for market makers. Thus the street invented to new ways to remain profitable
Hedge Funds
| An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. |
Margin
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Short Sale
In finance, short selling (also known as shorting or going short) is the practice of selling assets that have not been purchased beforehand, but which the seller may have borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller. “Shorting” and “going short” also refer to entering into any derivative or other contract under which the investor similarly profits from a fall in the value of an asset. Mathematically, short selling is equivalent to buying a negative amount of the assets. Short selling is almost always conducted with assets traded in public securities, commodities or currency markets, as on such markets the amount being made or lost can be monitored in real time and it is generally possible to buy back the borrowed assets whenever required. Going short can be contrasted with the more conventional practice of “going long”, whereby an investor profits from any increase in the price of the asset.
A short sale one can make only the price the person sold short at and zero, but the loss is unlimited providing how high the security goes.A buying panic could wipe one’s assets out.
Uptick Rule
The rule went into The uptick rule refers to a trading restriction that disallowed short selling of securities except on an uptick. For the rule to be satisfied, the short must be either at a price above the last traded price of the security, or at the last traded price if that price was higher than the price in the previous trade. The U.S. Securities and Exchange Commission (SEC) defined the rule, and summarized it: “Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.”[1]
effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08.
Reinstating the uptick rule should curb most of the scurrilous practices.
Usury Laws
Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England
The Old Testament
From the King James Version
[Exodus 22:25] If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
[Leviticus 25:36] Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.
[Leviticus 25:37] Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.
[Deuteronomy 23:19] Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury:
[Deuteronomy 23:20] Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
[Ezekiel 18:17] He withholds his hand from sin and takes no usury or excessive interest.
[edit]Torah
Main article: Loans and interest in Judaism
The following quotations are from the Hebrew Bible, 1917 Jewish Publication Society translation:
If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.(Exodus, 22:25)[27]
And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase. (Leviticus, 25:35-37)
Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it. (Deuteronomy, 23:20-21)
[edit]New Testament
| This article may be confusing or unclear to readers. Please help clarify the article; suggestions may be found on the talk page. (March 2011) |
Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.[28]
The New Testament contains references to usury, notably in the Parable of the talents:
“Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”
—Matthew 25:27
“…Out of thine own mouth will I judge thee, thou wicked servant. Thou knewest that I was an austere man, taking up that I laid not down, and reaping that I did not sow. Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?”
—Luke 19:22-23
Finally the master said to him ‘Why then didn’t you put my money on deposit, so that when I came back, I could have collected it with interest?’
—Luke 19:23
[edit]Qur’an
Main articles: Riba and Islamic banking
The following quotations are English translations from the Qur’an:
Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)
God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! Those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)
O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-‘Imran 3:130)
And for practicing usury, which was forbidden, and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)
The usury that is practiced to increase some people’s wealth, does not gain anything at God. But if people give to charity, seeking God’s pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)
[edit]Scholastic theology
The first of the scholastics, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft. Previously usury had been seen as a lack of charity.
St. Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of interest is wrong because it amounts to “double charging”, charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is exchange-medium. It is used up when it is spent. To charge for the money and for its use (by spending) is to charge for the money twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity that anyone can sell. (For a detailed discussion of Aquinas and usury, go to Thought of Thomas Aquinas).
Labor is time, or if preferred, is measured by time. Workers are paid by the hour, by the day, by the week, by the month, rarely by the quarter or year. Labor is not effort, energy, expenditure of fuel (food). It is nothing but one’s time. As an example of labor without the expenditure of energy: A security guard whose job is just to be there. Perhaps nothing happens and he can read a book, assemble model trains, or even sleep, as long as he wakes up when the alarm rings. He has spent not one calorie of energy for the employer above what it takes just to live. Yet he is paid (compensated) for his time, for his labor. Even share-croppers and pieceworkers are compensated for the time they spent adding value to the raw materials. The sharecropper hands over the agreed portion of the increase (crop; harvest) to the owner of the land or the leaseholder in return for whatever the landlord provided: the land, perhaps the seed, farming tools, supplies, etc. The pieceworker is compensated for the labor, the time he spent, in adding value to the raw materials: the tools, the supplies, the workspace, light, heat, etc., according to the agreement made with the boss (client). If one labors for compensation, what he is compensated for is his time. As an even exchange of value, he has neither gained or lost anything. He has merely converted something he was going to lose anyway, time from his life, which, as we all know, is limited though we do not know in advance what the limit is, into something else that he wanted. Whether he is paid in goods, services or money is irrelevant. Money is but a medium of exchange that is much more efficient than straight barter. Only a miser wants money for itself, just to possess it. Normal people want money because it allows them to convert one thing that they are willing to sacrifice into something else that they actively want.
This did not, as some think, prevent investment. What it stipulated was that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all. This is usury. St Thomas quotes Aristotle as saying that “to live by usury is exceedingly unnatural”. Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) – an alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests. Judaism condemns usury towards Jews, but allows it towards non-Jews. St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as “montes pietatis”.[29]
In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral.[30] The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest “to compensate him for profit foregone in investing the money himself.” (Rothbard 1995, p. 46) This idea is very similar to Opportunity Cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena).
- All definitions have been gathered from Wikipedia.com or Investopedia.com by means of using google.com
*****
IT WILL NOT HAPPEN TO ME! GUESS WHAT? IT WILL!!
FORWARD
I am Richard De Graff the second son of John Teller De Graff Sr. and Audrey Brown De Graff of Albany NY, USA. I have been a real stockbroker since 1960. I Completed the Graham and Dodd correspondence course from the New York Institute of Finance while serving in the United States Army for two years. Sept. 1957-Sept. 1959, it was known as the quiet period- no wars. I still remember my dog tag number-FR-12 538396. I am currently a member of the Congregational Church of Eastford Connecticut USA.
We, as residents of this planet earth, have progressed so far in the last 100 years that one can take all the progressions for 5,000 years and combine them into one small round ball and it won’t equal what man has done in the last 100 years. In sum, we have grown too fast and we don’t have new rules, or better yet, we have ignored the old ones that protected our individual freedoms.
I am writing this booklet because I believe the countries of this world believe the economy is rebounding. It is improving, but the market place is where the grasshoppers are playing to their greedy delight. Meanwhile the ants have hunkered down.
The near term solutions will hurt almost everyone for a very short time while we all readjust. Only a few will return to dust. This is Part One of this booklet.
Part Two has to deal with avoiding a total economic tsunami due to worldwide debt enthusiasm. We will have to learn to control our well-meaning intentions or face destruction of our freedoms.
Several of the Programs started when FDR was president worked very well, but the Congress failed to revisit these laws; they failed to correct or to improve these laws every 10 to 15 years. I am referring to the securities laws that were passed in the 1930’s and 1940-1941. In particular, the Investment Company Act of 1940. Protecting Mutual Funds should have been annulled when computers could price Mutual Funds’ holdings instantly. This failure has created a Goliath playing with a turbo-charged club in the securities industry. This is just one example where reform is needed.
FDR also instituted a socialist agenda where our central government welfare programs were aimed to kick-start the economy. Under the Keynesian theory we were supposed to pay down these debts over time when our economy was profitable. Sadly, we created more entitlement programs without saving for them. The rest of the world copied our programs and relied on bankers and the bond markets to finance their dreams.
Europe and the Middle Eastern countries are at the abyss now and that abyss is slowly coming to our shores. There are now giant hedge funds run by unscrupulous managers and they compete with central bankers in a game of self-destruction. The House of Representatives is supposed to have control of our monies.
Our market place is now a board game for the “privileged few” at the expense of entire populations.
We are now having two choices. The easier choice will devastate the sneaky, shady players in our market place over the short term. While we listen to our present leaders we will start falling into that sinkhole and we will all fail. The purpose of this book is for future reference for those non-believers while those who are prudent can take the necessary steps for survival.
The first part of this book is the easy part, but will take intestinal fortitude to implement, but these things must be done before we can re-regulate the entire finance industry.
The passages that I have written are from over 50 years on the battlefields of finance. In the Army they called it OJT- on the job training. It is now up to academics to prove or disprove my thoughts. Remember, Moses’ Ten Commandments were only 297 words and look at how much has been written about them!
We have crossed the raggedy bridge and it has collapsed. There is no way back. We must look forward.
Cheerio!!!!
Part One
THE PAST AND PRESENT
Chapter One Bring Back God!!!
Chapter Two LBJ
Chapter Three Bankers and Banks
Chapter Four Banking Reforms
Chapter Five Broken Bones
Chapter Six Up-tick Rule
Summary for Part One
Glossary
Chapter One
Bring Back God
“With confidence in our armed forces – with the un-bounding determination of our people – we will gain the inevitable triumph – so help us God.
I ask that the Congress declare that since the unprovoked and dastardly attack by Japan on Sunday, Dec. 7, a state of war has existed between the United States and the Japanese empire. “
The above is the last two paragraphs of President Roosevelt’s speech before the US Congress on December 8, 1941.
He is clearly asking God for HIS help. As a student of the Old and New Testament I can see the hand of God at work. The official naval archives listed it as “luck” in the Battle of Midway in May 6&7 1942.
Australians call The Battle of the Coral Sea the battle that saved Australia. The Japanese Naval forces were confidently heading for New Guiana to use a stepping off place to attack Australia and New Zealand.
They ran into an unexpected US Naval force with the USS Lexington aircraft carrier power base. In the ensuing battle the USS Lexington was sunk. What we did not know at that time was that the Japanese had lost about 60 airplanes. So their two aircraft carriers headed north to be re-supplied instead of rejoining the task force heading towards Midway Island.
So the Japanese had four aircraft carriers instead of six for that epic battle. The US had three, but only two were operating in battleship condition. Our backs were to the wall, but with American “can do” spirit we were able to Ambush the Japanese Navy.
Our scout planes found the naval task force and radioed back. While the Japanese planes were being rearmed with torpedoes our naval pilots stuck each time they shot down until the dive-bombers and torpedo planes showed up at the same time. The Japanese lost their four aircraft carriers and the naval ability plummeted.
The turning point in the battle was that two Japanese scout planes found our task force. When they went to radio back the news – their radios went dead. When they did report it was too late, but we did lose the Yorktown. The Naval report calls it “luck”; I say it was an act of God.
D-Day on the beaches of Normandy France was a slaughter until the defenders started running out of ammunition. At first the German High Command was afraid to wake up Hitler and then he would not release the Panzer tank division. I believe it was Déjà vu all over again from the Old Testament. (My complements to Yogi Berra for his honest, savory expressions.)
The United States has always allowed freedom of religion and God has blessed us until recently when we started breaking the Ten Commandments and taking God out of schools. The Lord Almighty has given us a warning shot across our bow with 9/11.
The biggest sacrilege though is leaving “so help us God” off FDR’s monument in Washington DC. We must restore his complete true speech.
Chapter Two
LBJ
The real culprit of today’s mess is Lyndon Baines Johnson, former president of the United States. A graduate of a third rate college, he wrecked our future economy with his “guns and butter” agenda that this country could not afford. The ultra-liberal wing took over the Democratic Party.
I believe LBJ is the “Ahab” of our country.
Robert Caro has been writing his fourth installment and it will be published in 2012. It should bring the house down.
LBJ’s programs forced Richard Nixon to get off the gold standard and this in turn opened the floodgates of Congress where ultimately 435 members control 300,000,000 people’s destinies.
So we went form a “pay as you go” society to one of borrowing from the future. The Social Security fund was already being raided under the guise of “smoke and mirrors”; forget about the interest being earned – it was the principal that was being used. That is the real Ponzi scam.
Chapter Three
“Woe to you, teachers of the law and Pharisees, you hypocrites! You clean the outside of the cup and dish, but inside they are full of greed and self-indulgence.
Matthew 23:24-26
Bankers and Banks
A healthy bank means a healthy community.
Today bankers are in control instead of serving the public. The House of Representatives has control of our purse strings, not the bankers. We should consider nationalizing our banks and buying the shares back at real book value. Their large bonuses should be given to depositors and shareholders. Steve Jobs quoted as the reason he was not taking a salary when returning to Apple Computer was, “ I already have billions of dollars – I don’t need more. I want to build Apple Computer into another Hewlett Packard.”
When one does well, one will earn honest money. We are becoming too greedy and bankers are living off our greed. Bankers used to be respected members of our community.
Today we are teetering on the brink of a worldwide collapse economically. The United States corrected this problem in the 1930’s. Most economic disasters happen because of easy credit and greed. This is a normal psychological cycle. It takes about three generations to happen.
The first generation learns from its mistakes. The second generation prospers because of the solid base built by the first. Then the third generation, which we can call “smarty pants” because they don’t believe it can happen again and they break all the rules put in place by the first.
The Congress of the 1930’s did a magnificent job protecting the investing public from the different kind of abuses that were prevalent back then and today.
When the economic collapse happened in 1973-1974 the Congress congratulated them selves on a job well done. Actually they should have revisited and amended many of the statues, for the seeds of 2000 fiascos were planted then by the survivors.
The formation of OPEC caught the world by surprise. A horrific adjustment would now take place. Many companies were unprepared and slowly sank into oblivion.
Wall Street got smacked. Big Time. 50% of the firms vanished. 50% of employees left for safer endeavors. Schumpeter’s Law of Creative Destruction was working to perfection. (The basic premise is that antiquated businesses are replaced by newer and growing businesses. A prime example is the buggy whip disappeared when the automobile was mass-produced.)
This is where the Congress failed. Instead of going back to Wall Street and seeing what laws need to be revised, or annulled, they went on their merry way, and let Wall Street feather their own nest.
Wall Street survivors vowed this would never happen again to them. The bankers, cozy in their fireside chairs, smugly smiled. They survived in pretty good shape.
Banking and Reforms
Most economic downturns are because of loose credit. Easy money leads to loose standards and eventually immoral behavior.
As I mentioned in the previous chapter, there are usually three stages to a recovery. The first stage everyone remembers the mistake made in the past cycle and are intent on not repeating these mistakes. This was the case in the 1930’s. The problem was that most congressmen that passed these laws retired knowing that they did a job well done. The next generation of Congresspersons believed that the problem had been corrected and never revisited the laws. Times change and conditions improve and standard of living improves with new invention. The computer is a prime example. In 1968 Wall Street embraced the computer as if it was a porn star. They never looked inside to see how it worked. They just pushed buttons and smiled at how easy it was.
The problem that developed was with the unsung heroes of the industry, the back office. They were understaffed and over worked. They had done so much business and a myriad of trades that no one could follow who owed whom. Firms were now rated by how many days they failed to deliver.
One bright young man had been going to night school to learn all about computer programming. He was with Smith Barney and was soon on control of the back office. They became so efficient that the rest of the street marveled at their accuracy. When they called another back office, the clerk hearing the name of Smith Barney would say, “How much do we owe you?”
Other firms would say when someone else called, “Let me check it and I will get back to you in a couple of days.”
Needless to say that young man became the next president of Smith Barney until the third generation took over the street.
My main point here is that when Wall Street had its own depression, this country survived in fine shape. All we had were mini recessions. Congress failed to revisit and improve and maybe justify their existence. The Investment Company Act of 1940 should have been radically changed to protect the customers instead of the mutual funds.
This was a monumental mistake. They failed to investigate what was happening to the street. They would have discovered that the Investment Company Act had created a monster in sheepskin.
The street had taken a 50% haircut all across the board. It was because of dumb foolishness by senior management looking to become the next financial wizard.
Instead of looking for values and the public wellbeing, they decided to feather their own nests with products that created excessive commissions. The first step was options. One out of ten trades is profitable the public, 9 out 10 to the firms. Wall Street has the ability to shoot itself in the foot too. By not supervising the trades and traders there was an explosion and several firms took the final dive.
Once the Street learned how to handle that crisis they went on to bigger and more profitable trading ideas. Program trading led to the Crash of ’87. It had created a perpetual motion machine once it had started and no one thought of pulling the plug on the computers. Computers need electricity to operate. Simple. It was not until the market closed that the firms involved had created lots of commissions, but lost principal. Luckily for the public, this program self-destructed.
My point is that at the end of every minor cycle there is a moment when we go back and correct or enter the second major cycle.
The first cycle is where one has pride in the job and themselves. They want to serve the community that they work in. The second stage can be called “Up your gross”. This has to do with the firm and making sure it is profitable. Team spirit. The firm can do well as a bond trader, or fine research, or stock market technicians. Usually there is one individual who is the firm’s star (GURU) that ends up calling the shots.
Our economy is changing from an inflation mode to a deflation mode. Individuals are now seeking quality and price in the market place. Socialist policies are the wrong fork in the road.
Chapter Four
Broken Bones Fixed
OK the doctor has been called in to fix our broken economy. The problem is that he is from the middle ages. For some the pain is going to be devastating. For many of these players (now called “BANKERS”) it could and should be fatal. Examples must be set for future generations.
The market place is corrupt and the private investor is being smothered. The Private Investor (PI) is the foundation of the economy and must be protected.
The first thing our medieval doctor (Let’s call him Merlin – for there is always hope) is going to raise margin rates. This will shell shock the market place and stocks will dive. Most Hedge funds will fall on their own weight because most are heavily margined with debt. If Merlin raises rates just 10% for stocks, then the new players will have to pay 60% of the price. The 50% players may stay at 50% and if they do same day trades will remain there, but if they fail to do this; then they are at the new rate.
Bond and commodity players will be cut to the quick. Bond traders are not supposed to be on Margin. Recently bonds have been used as a speculative vehicle to promote excessive fees for greedy bankers in convoluted trades that go by various names. The basic form is called a derivative. A derivative “derives” something from one place and gives it to another place; this usually means taking something good and combining it with something bad –so that the combined security looks better instead of junk. One can buy a prostitute a fancy dress, but she is still a prostitute.
Margin rates should be gradually increased so that all speculative fever is erased from the market place.
Most financial disasters have been built around too easy credit. In the 1929 crash, margin debt was 10%. At the end of November 2011 it ranges from 10% for certain commodities and bonds to 50 % for stocks.
If we are in the midst of a panic we should raise all margin debt to 100%. This will end speculation in a hurry. Schumpeter’s law of “creative destruction” should take over. It will be corporations who have been destroyed that will be replaced by ones that are newer and more creative. Big businesses hamper growth in most cases. They are laying-off and “fine tuning” their earnings while a young growing business is hiring and growing. 50% margin works like this. You buy a $10 stock for $5 and the bank, through a broker, lends you $5. Now if the stock goes to $15 and you sell, you would have made 100% once you pay back the $5.
Now if the stock goes to $5, you get a margin call and are sold out. Your loss is 100%. If you had paid cash you still have $5 investment.
Now commodities have enjoyed lower rates and the traders are making a bonanza. The easy credit has prospered many funds to dupe the unsuspecting. If they are so good why do they need your money?
The commodity market was formed for a noble cause. A corn farmer would work hard and then when his crop was harvested along with everyone else’s the monetary value was almost nothing. It is just like your neighbor offering you some tomatoes during the peak summer months. They have more tomatoes than they can eat.
Chapter 5
UP-TICK RULE
Joseph P Kennedy, the first SEC chairman, instituted the Up-tick Rule in shorting stocks as one of his first acts in 1938, which calmed the markets right down. Italy has just recently banned all short sales to stop a run on their markets.
The old rule, which was a good one, went like this: First the broker had to go to his or her back office and get permission to sell short. There had to be stock available for the short sale because it must be delivered to the investor who is buying your stock. Then the stock must have an up-tick in price. This stops raids on securities, or if the stock is in a free fall, the short seller fades into the woodwork. Now a large short position can be considered bullish because sometime in the future the seller must cover, or buy back, to record the profit. Then there is the possibility that the company is deep trouble. The other side of the coin is positive news like an extra dividend, which the short seller has to pay, or a merger, when the seller faces a huge loss. The rule is the downside is limited because it cannot go below zero, but the upside is or can be unlimited. So short sales can be a very risky investment under normal conditions.
Since they have rescinded the up-tick rule the volatility has increase to extremes never seen before. Computers are programmed to go wiz bang in a nanosecond or even faster. This will stop this and the flash crashes too. A flash crash is a computer driven sell program when all the buyers are absent or withdraw their bids. Luckily we have not had one around the close of the market place.
Chapter Six
USURY
Back in the 1970’s, when inflation was just beginning to rear its ugly head, disintermediation took place. This is how it worked. One could max out the credit card credit and legally the credit card companies could only charge 8%. Then the individual would be able to go and buy government agency short-term debt that was yielding 22%. That was a neat 14% return on one’s money. Sadly, individuals do not have lobbyists in Washington D.C. and the law was quietly changed to “protect?” the credit card companies. Most of our representatives in Congress are probably ignorant of the Rule of 72. Bankers love this rule. One takes 72 and divide by the interest rate you are paying. The result is how long it takes for that institution to double its return on your debt. If one has a 7% mortgage rate due in thirty years then every 10.29 years the bank will double its return. So over that 30-year period that bank will double its return 2.92 times. That is almost 3 times on your money over a 30-year period. That is a fair return because the bank has lent their depositor’s funds so you could buy your home. In return they receive interest on their funds and the banks can pay their employees fair wages. This is called velocity of money and how many times a dollar can be turned over. This is a healthy situation.
Now the credit card companies were able to go wild because their restraints were removed. Once a credit card holder failed to pay the entire monthly bill the interest charges kicked in. Just a little bit, but as the delay kicked in and the bill got bigger the rates went up. Your first month delay had now been over 6 months and while your charge on the latest month is probably minor, your late payments are now over 20% in most cases. We are now talking 3.6 years instead of 10.29 years. Once an outside shock awakens the populace they start de-leveraging, or paying down their debts. This is deflationary, because the funds are not buying products except for necessary products.
Now go big time. Governments and their entitlement programs are the same as individual credit cards but with more zeros. Our representatives do this because their perks are fantastic and start compounding the longer they remain in office. They know it is wrong, but who cares as long as they keep the ship floating with debt.
Once a sovereign debt percentage is more than their GDP, then future borrowings are just to pay interest on previous debt. Your ship is sinking. Sell assets at depressed prices? Cut entitlement programs?
Now you see the mess we are in. It starts by credit agencies lowering their credit ratings on debt. That means higher interest rates. Ugh!
SUMMARY OF PART ONE
If you grew as a child during WWII as I did from the ages of 6 to 10 it left a lasting impression. Sixty-six years later my mind still has the horrors of the aftermath of that noble combat.
We as a world now face a similar disaster. This time it is economic. We have greed and we are losing our morals and fairness to our fellow human being.
The solutions are not pleasant. The ones I have mentioned will have the effect of a bombed out European conflict. There were many casualties, but many more survivors in this conflict. Everyone is watching the economic recovery, which is really a house of cards. Its base is marked by greed and corruption of a few that will ultimately destroy the multitude.
The United States is the only country on this planet earth where multitudes would dream of living here. So we must set the standards for the rest of the world.
George Washington took the oath of office with his hand on a bible. We believe in a supreme being, and yet we as a nation espouse freedom of religion. WE as individuals have the choice to make. We as a nation chose separation of Church and state, just as Turkey did in the 20th century. We have both prospered. It is our basic freedom and no court should dictate to us or change our way because of hurting a minority. In a true democracy the minority is listened to but does not necessarily achieve its desire. We have freedom of religion. That is our God given right. Freedom does not mean censorship. Religion that uses violence to flourish is not the American way of life. (Jan 1, 2006 during communion, Jesus Christ spoke to me as I bit down on a piece of bread. HE said, “ You can pray to me too!”)
We must come up with a better way of choosing our national leaders. Graduation from a third rate collage and the ability to lie and pander are not valid credentials. Maybe there should be a bipartisan board to judge perspective candidates
Bankers are a special breed and should be the “watch dog” of the economic community- not a slithering python. Salaries should be based upon a criterion of performances within the bank itself. Bringing back the “Up-tick Rule“ restores a degree of safety to the market place and takes away one of the manipulative forces in the market place that hedge funds enjoy at the public’s expense.
There have been laws going way back in time. They can protect the average citizen from being duped.
All these measures are just a process of slowing event and hoary expectations down. These are hard choices for some and readjustments for many, but just over the short term.
Failure to enact and or reenact these reforms will beam us from a European conflict to a devastating wipe out like Hiroshima.
- Freedom of religion is based upon the old and new testament of the Bible. All the different sects are based upon love of our neighbors. As long as other religions have the same attitude they should be free to worship on our soil. We have a model of government based upon separation of Church and State.
- Reinstate the “Up-tick Rule” immediately.
- Raise interest rates that involve security transactions. No more “carry trades”. This will make derivative trades and high frequency trades obsolete.
- Reinstate the law.
- Establish a minimum standard to issuing credit cards.
- Separate banks and brokers.
These measures will cause havoc among certain groups that will scream bloody murder. The harder they scream will result in a safer place for the public.
We are now the only super power in the world. We have no agenda, no standards for the rest of the world to look up to or follow. Right now we are a rudderless ship of state floundering on the open seas. This in turn allows the world to be in chaos while the mighty rich plunder the defenseless populations at their free will.
Part Two is designed to create a new world order based upon our principals of individual freedoms and rights within the framework of benevolent governments. I call it our Future.
Glossary*
Derivative
derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties.[1][2]
Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form through which to extend credit.[3] However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks.[3] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy.[3][4]
Financial reforms within the US since the financial crisis have served only to reinforce special protections for derivatives, including greater access to government guarantees, while minimizing disclosure to broader financial markets.[5]
When the markets switched from the fractions system to decimals it negated the profit spread for market makers. Thus the street invented to new ways to remain profitable
Hedge Funds
| An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. |
Margin
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Short Sale
In finance, short selling (also known as shorting or going short) is the practice of selling assets that have not been purchased beforehand, but which the seller may have borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller. “Shorting” and “going short” also refer to entering into any derivative or other contract under which the investor similarly profits from a fall in the value of an asset. Mathematically, short selling is equivalent to buying a negative amount of the assets. Short selling is almost always conducted with assets traded in public securities, commodities or currency markets, as on such markets the amount being made or lost can be monitored in real time and it is generally possible to buy back the borrowed assets whenever required. Going short can be contrasted with the more conventional practice of “going long”, whereby an investor profits from any increase in the price of the asset.
A short sale one can make only the price the person sold short at and zero, but the loss is unlimited providing how high the security goes.A buying panic could wipe one’s assets out.
Uptick Rule
The rule went into The uptick rule refers to a trading restriction that disallowed short selling of securities except on an uptick. For the rule to be satisfied, the short must be either at a price above the last traded price of the security, or at the last traded price if that price was higher than the price in the previous trade. The U.S. Securities and Exchange Commission (SEC) defined the rule, and summarized it: “Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.”[1]
effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08.
Reinstating the uptick rule should curb most of the scurrilous practices.
Usury Laws
Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England
The Old Testament
From the King James Version
[Exodus 22:25] If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
[Leviticus 25:36] Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.
[Leviticus 25:37] Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.
[Deuteronomy 23:19] Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury:
[Deuteronomy 23:20] Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
[Ezekiel 18:17] He withholds his hand from sin and takes no usury or excessive interest.
[edit]Torah
Main article: Loans and interest in Judaism
The following quotations are from the Hebrew Bible, 1917 Jewish Publication Society translation:
If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.(Exodus, 22:25)[27]
And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase. (Leviticus, 25:35-37)
Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it. (Deuteronomy, 23:20-21)
[edit]New Testament
| This article may be confusing or unclear to readers. Please help clarify the article; suggestions may be found on the talk page. (March 2011) |
Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.[28]
The New Testament contains references to usury, notably in the Parable of the talents:
“Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”
—Matthew 25:27
“…Out of thine own mouth will I judge thee, thou wicked servant. Thou knewest that I was an austere man, taking up that I laid not down, and reaping that I did not sow. Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?”
—Luke 19:22-23
Finally the master said to him ‘Why then didn’t you put my money on deposit, so that when I came back, I could have collected it with interest?’
—Luke 19:23
[edit]Qur’an
Main articles: Riba and Islamic banking
The following quotations are English translations from the Qur’an:
Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)
God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! Those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)
O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-‘Imran 3:130)
And for practicing usury, which was forbidden, and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)
The usury that is practiced to increase some people’s wealth, does not gain anything at God. But if people give to charity, seeking God’s pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)
[edit]Scholastic theology
The first of the scholastics, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft. Previously usury had been seen as a lack of charity.
St. Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of interest is wrong because it amounts to “double charging”, charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is exchange-medium. It is used up when it is spent. To charge for the money and for its use (by spending) is to charge for the money twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity that anyone can sell. (For a detailed discussion of Aquinas and usury, go to Thought of Thomas Aquinas).
Labor is time, or if preferred, is measured by time. Workers are paid by the hour, by the day, by the week, by the month, rarely by the quarter or year. Labor is not effort, energy, expenditure of fuel (food). It is nothing but one’s time. As an example of labor without the expenditure of energy: A security guard whose job is just to be there. Perhaps nothing happens and he can read a book, assemble model trains, or even sleep, as long as he wakes up when the alarm rings. He has spent not one calorie of energy for the employer above what it takes just to live. Yet he is paid (compensated) for his time, for his labor. Even share-croppers and pieceworkers are compensated for the time they spent adding value to the raw materials. The sharecropper hands over the agreed portion of the increase (crop; harvest) to the owner of the land or the leaseholder in return for whatever the landlord provided: the land, perhaps the seed, farming tools, supplies, etc. The pieceworker is compensated for the labor, the time he spent, in adding value to the raw materials: the tools, the supplies, the workspace, light, heat, etc., according to the agreement made with the boss (client). If one labors for compensation, what he is compensated for is his time. As an even exchange of value, he has neither gained or lost anything. He has merely converted something he was going to lose anyway, time from his life, which, as we all know, is limited though we do not know in advance what the limit is, into something else that he wanted. Whether he is paid in goods, services or money is irrelevant. Money is but a medium of exchange that is much more efficient than straight barter. Only a miser wants money for itself, just to possess it. Normal people want money because it allows them to convert one thing that they are willing to sacrifice into something else that they actively want.
This did not, as some think, prevent investment. What it stipulated was that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all. This is usury. St Thomas quotes Aristotle as saying that “to live by usury is exceedingly unnatural”. Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) – an alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests. Judaism condemns usury towards Jews, but allows it towards non-Jews. St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as “montes pietatis”.[29]
In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral.[30] The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest “to compensate him for profit foregone in investing the money himself.” (Rothbard 1995, p. 46) This idea is very similar to Opportunity Cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena).
- All definitions have been gathered from Wikipedia.com or Investopedia.com by means of using google.com
*****
IT WILL NOT HAPPEN TO ME! GUESS WHAT? IT WILL!!
FORWARD
I am Richard De Graff the second son of John Teller De Graff Sr. and Audrey Brown De Graff of Albany NY, USA. I have been a real stockbroker since 1960. I Completed the Graham and Dodd correspondence course from the New York Institute of Finance while serving in the United States Army for two years. Sept. 1957-Sept. 1959, it was known as the quiet period- no wars. I still remember my dog tag number-FR-12 538396. I am currently a member of the Congregational Church of Eastford Connecticut USA.
We, as residents of this planet earth, have progressed so far in the last 100 years that one can take all the progressions for 5,000 years and combine them into one small round ball and it won’t equal what man has done in the last 100 years. In sum, we have grown too fast and we don’t have new rules, or better yet, we have ignored the old ones that protected our individual freedoms.
I am writing this booklet because I believe the countries of this world believe the economy is rebounding. It is improving, but the market place is where the grasshoppers are playing to their greedy delight. Meanwhile the ants have hunkered down.
The near term solutions will hurt almost everyone for a very short time while we all readjust. Only a few will return to dust. This is Part One of this booklet.
Part Two has to deal with avoiding a total economic tsunami due to worldwide debt enthusiasm. We will have to learn to control our well-meaning intentions or face destruction of our freedoms.
Several of the Programs started when FDR was president worked very well, but the Congress failed to revisit these laws; they failed to correct or to improve these laws every 10 to 15 years. I am referring to the securities laws that were passed in the 1930’s and 1940-1941. In particular, the Investment Company Act of 1940. Protecting Mutual Funds should have been annulled when computers could price Mutual Funds’ holdings instantly. This failure has created a Goliath playing with a turbo-charged club in the securities industry. This is just one example where reform is needed.
FDR also instituted a socialist agenda where our central government welfare programs were aimed to kick-start the economy. Under the Keynesian theory we were supposed to pay down these debts over time when our economy was profitable. Sadly, we created more entitlement programs without saving for them. The rest of the world copied our programs and relied on bankers and the bond markets to finance their dreams.
Europe and the Middle Eastern countries are at the abyss now and that abyss is slowly coming to our shores. There are now giant hedge funds run by unscrupulous managers and they compete with central bankers in a game of self-destruction. The House of Representatives is supposed to have control of our monies.
Our market place is now a board game for the “privileged few” at the expense of entire populations.
We are now having two choices. The easier choice will devastate the sneaky, shady players in our market place over the short term. While we listen to our present leaders we will start falling into that sinkhole and we will all fail. The purpose of this book is for future reference for those non-believers while those who are prudent can take the necessary steps for survival.
The first part of this book is the easy part, but will take intestinal fortitude to implement, but these things must be done before we can re-regulate the entire finance industry.
The passages that I have written are from over 50 years on the battlefields of finance. In the Army they called it OJT- on the job training. It is now up to academics to prove or disprove my thoughts. Remember, Moses’ Ten Commandments were only 297 words and look at how much has been written about them!
We have crossed the raggedy bridge and it has collapsed. There is no way back. We must look forward.
Cheerio!!!!
Part One
THE PAST AND PRESENT
Chapter One Bring Back God!!!
Chapter Two LBJ
Chapter Three Bankers and Banks
Chapter Four Banking Reforms
Chapter Five Broken Bones
Chapter Six Up-tick Rule
Summary for Part One
Glossary
Chapter One
Bring Back God
“With confidence in our armed forces – with the un-bounding determination of our people – we will gain the inevitable triumph – so help us God.
I ask that the Congress declare that since the unprovoked and dastardly attack by Japan on Sunday, Dec. 7, a state of war has existed between the United States and the Japanese empire. “
The above is the last two paragraphs of President Roosevelt’s speech before the US Congress on December 8, 1941.
He is clearly asking God for HIS help. As a student of the Old and New Testament I can see the hand of God at work. The official naval archives listed it as “luck” in the Battle of Midway in May 6&7 1942.
Australians call The Battle of the Coral Sea the battle that saved Australia. The Japanese Naval forces were confidently heading for New Guiana to use a stepping off place to attack Australia and New Zealand.
They ran into an unexpected US Naval force with the USS Lexington aircraft carrier power base. In the ensuing battle the USS Lexington was sunk. What we did not know at that time was that the Japanese had lost about 60 airplanes. So their two aircraft carriers headed north to be re-supplied instead of rejoining the task force heading towards Midway Island.
So the Japanese had four aircraft carriers instead of six for that epic battle. The US had three, but only two were operating in battleship condition. Our backs were to the wall, but with American “can do” spirit we were able to Ambush the Japanese Navy.
Our scout planes found the naval task force and radioed back. While the Japanese planes were being rearmed with torpedoes our naval pilots stuck each time they shot down until the dive-bombers and torpedo planes showed up at the same time. The Japanese lost their four aircraft carriers and the naval ability plummeted.
The turning point in the battle was that two Japanese scout planes found our task force. When they went to radio back the news – their radios went dead. When they did report it was too late, but we did lose the Yorktown. The Naval report calls it “luck”; I say it was an act of God.
D-Day on the beaches of Normandy France was a slaughter until the defenders started running out of ammunition. At first the German High Command was afraid to wake up Hitler and then he would not release the Panzer tank division. I believe it was Déjà vu all over again from the Old Testament. (My complements to Yogi Berra for his honest, savory expressions.)
The United States has always allowed freedom of religion and God has blessed us until recently when we started breaking the Ten Commandments and taking God out of schools. The Lord Almighty has given us a warning shot across our bow with 9/11.
The biggest sacrilege though is leaving “so help us God” off FDR’s monument in Washington DC. We must restore his complete true speech.
Chapter Two
LBJ
The real culprit of today’s mess is Lyndon Baines Johnson, former president of the United States. A graduate of a third rate college, he wrecked our future economy with his “guns and butter” agenda that this country could not afford. The ultra-liberal wing took over the Democratic Party.
I believe LBJ is the “Ahab” of our country.
Robert Caro has been writing his fourth installment and it will be published in 2012. It should bring the house down.
LBJ’s programs forced Richard Nixon to get off the gold standard and this in turn opened the floodgates of Congress where ultimately 435 members control 300,000,000 people’s destinies.
So we went form a “pay as you go” society to one of borrowing from the future. The Social Security fund was already being raided under the guise of “smoke and mirrors”; forget about the interest being earned – it was the principal that was being used. That is the real Ponzi scam.
Chapter Three
“Woe to you, teachers of the law and Pharisees, you hypocrites! You clean the outside of the cup and dish, but inside they are full of greed and self-indulgence.
Matthew 23:24-26
Bankers and Banks
A healthy bank means a healthy community.
Today bankers are in control instead of serving the public. The House of Representatives has control of our purse strings, not the bankers. We should consider nationalizing our banks and buying the shares back at real book value. Their large bonuses should be given to depositors and shareholders. Steve Jobs quoted as the reason he was not taking a salary when returning to Apple Computer was, “ I already have billions of dollars – I don’t need more. I want to build Apple Computer into another Hewlett Packard.”
When one does well, one will earn honest money. We are becoming too greedy and bankers are living off our greed. Bankers used to be respected members of our community.
Today we are teetering on the brink of a worldwide collapse economically. The United States corrected this problem in the 1930’s. Most economic disasters happen because of easy credit and greed. This is a normal psychological cycle. It takes about three generations to happen.
The first generation learns from its mistakes. The second generation prospers because of the solid base built by the first. Then the third generation, which we can call “smarty pants” because they don’t believe it can happen again and they break all the rules put in place by the first.
The Congress of the 1930’s did a magnificent job protecting the investing public from the different kind of abuses that were prevalent back then and today.
When the economic collapse happened in 1973-1974 the Congress congratulated them selves on a job well done. Actually they should have revisited and amended many of the statues, for the seeds of 2000 fiascos were planted then by the survivors.
The formation of OPEC caught the world by surprise. A horrific adjustment would now take place. Many companies were unprepared and slowly sank into oblivion.
Wall Street got smacked. Big Time. 50% of the firms vanished. 50% of employees left for safer endeavors. Schumpeter’s Law of Creative Destruction was working to perfection. (The basic premise is that antiquated businesses are replaced by newer and growing businesses. A prime example is the buggy whip disappeared when the automobile was mass-produced.)
This is where the Congress failed. Instead of going back to Wall Street and seeing what laws need to be revised, or annulled, they went on their merry way, and let Wall Street feather their own nest.
Wall Street survivors vowed this would never happen again to them. The bankers, cozy in their fireside chairs, smugly smiled. They survived in pretty good shape.
Banking and Reforms
Most economic downturns are because of loose credit. Easy money leads to loose standards and eventually immoral behavior.
As I mentioned in the previous chapter, there are usually three stages to a recovery. The first stage everyone remembers the mistake made in the past cycle and are intent on not repeating these mistakes. This was the case in the 1930’s. The problem was that most congressmen that passed these laws retired knowing that they did a job well done. The next generation of Congresspersons believed that the problem had been corrected and never revisited the laws. Times change and conditions improve and standard of living improves with new invention. The computer is a prime example. In 1968 Wall Street embraced the computer as if it was a porn star. They never looked inside to see how it worked. They just pushed buttons and smiled at how easy it was.
The problem that developed was with the unsung heroes of the industry, the back office. They were understaffed and over worked. They had done so much business and a myriad of trades that no one could follow who owed whom. Firms were now rated by how many days they failed to deliver.
One bright young man had been going to night school to learn all about computer programming. He was with Smith Barney and was soon on control of the back office. They became so efficient that the rest of the street marveled at their accuracy. When they called another back office, the clerk hearing the name of Smith Barney would say, “How much do we owe you?”
Other firms would say when someone else called, “Let me check it and I will get back to you in a couple of days.”
Needless to say that young man became the next president of Smith Barney until the third generation took over the street.
My main point here is that when Wall Street had its own depression, this country survived in fine shape. All we had were mini recessions. Congress failed to revisit and improve and maybe justify their existence. The Investment Company Act of 1940 should have been radically changed to protect the customers instead of the mutual funds.
This was a monumental mistake. They failed to investigate what was happening to the street. They would have discovered that the Investment Company Act had created a monster in sheepskin.
The street had taken a 50% haircut all across the board. It was because of dumb foolishness by senior management looking to become the next financial wizard.
Instead of looking for values and the public wellbeing, they decided to feather their own nests with products that created excessive commissions. The first step was options. One out of ten trades is profitable the public, 9 out 10 to the firms. Wall Street has the ability to shoot itself in the foot too. By not supervising the trades and traders there was an explosion and several firms took the final dive.
Once the Street learned how to handle that crisis they went on to bigger and more profitable trading ideas. Program trading led to the Crash of ’87. It had created a perpetual motion machine once it had started and no one thought of pulling the plug on the computers. Computers need electricity to operate. Simple. It was not until the market closed that the firms involved had created lots of commissions, but lost principal. Luckily for the public, this program self-destructed.
My point is that at the end of every minor cycle there is a moment when we go back and correct or enter the second major cycle.
The first cycle is where one has pride in the job and themselves. They want to serve the community that they work in. The second stage can be called “Up your gross”. This has to do with the firm and making sure it is profitable. Team spirit. The firm can do well as a bond trader, or fine research, or stock market technicians. Usually there is one individual who is the firm’s star (GURU) that ends up calling the shots.
Our economy is changing from an inflation mode to a deflation mode. Individuals are now seeking quality and price in the market place. Socialist policies are the wrong fork in the road.
Chapter Four
Broken Bones Fixed
OK the doctor has been called in to fix our broken economy. The problem is that he is from the middle ages. For some the pain is going to be devastating. For many of these players (now called “BANKERS”) it could and should be fatal. Examples must be set for future generations.
The market place is corrupt and the private investor is being smothered. The Private Investor (PI) is the foundation of the economy and must be protected.
The first thing our medieval doctor (Let’s call him Merlin – for there is always hope) is going to raise margin rates. This will shell shock the market place and stocks will dive. Most Hedge funds will fall on their own weight because most are heavily margined with debt. If Merlin raises rates just 10% for stocks, then the new players will have to pay 60% of the price. The 50% players may stay at 50% and if they do same day trades will remain there, but if they fail to do this; then they are at the new rate.
Bond and commodity players will be cut to the quick. Bond traders are not supposed to be on Margin. Recently bonds have been used as a speculative vehicle to promote excessive fees for greedy bankers in convoluted trades that go by various names. The basic form is called a derivative. A derivative “derives” something from one place and gives it to another place; this usually means taking something good and combining it with something bad –so that the combined security looks better instead of junk. One can buy a prostitute a fancy dress, but she is still a prostitute.
Margin rates should be gradually increased so that all speculative fever is erased from the market place.
Most financial disasters have been built around too easy credit. In the 1929 crash, margin debt was 10%. At the end of November 2011 it ranges from 10% for certain commodities and bonds to 50 % for stocks.
If we are in the midst of a panic we should raise all margin debt to 100%. This will end speculation in a hurry. Schumpeter’s law of “creative destruction” should take over. It will be corporations who have been destroyed that will be replaced by ones that are newer and more creative. Big businesses hamper growth in most cases. They are laying-off and “fine tuning” their earnings while a young growing business is hiring and growing. 50% margin works like this. You buy a $10 stock for $5 and the bank, through a broker, lends you $5. Now if the stock goes to $15 and you sell, you would have made 100% once you pay back the $5.
Now if the stock goes to $5, you get a margin call and are sold out. Your loss is 100%. If you had paid cash you still have $5 investment.
Now commodities have enjoyed lower rates and the traders are making a bonanza. The easy credit has prospered many funds to dupe the unsuspecting. If they are so good why do they need your money?
The commodity market was formed for a noble cause. A corn farmer would work hard and then when his crop was harvested along with everyone else’s the monetary value was almost nothing. It is just like your neighbor offering you some tomatoes during the peak summer months. They have more tomatoes than they can eat.
Chapter 5
UP-TICK RULE
Joseph P Kennedy, the first SEC chairman, instituted the Up-tick Rule in shorting stocks as one of his first acts in 1938, which calmed the markets right down. Italy has just recently banned all short sales to stop a run on their markets.
The old rule, which was a good one, went like this: First the broker had to go to his or her back office and get permission to sell short. There had to be stock available for the short sale because it must be delivered to the investor who is buying your stock. Then the stock must have an up-tick in price. This stops raids on securities, or if the stock is in a free fall, the short seller fades into the woodwork. Now a large short position can be considered bullish because sometime in the future the seller must cover, or buy back, to record the profit. Then there is the possibility that the company is deep trouble. The other side of the coin is positive news like an extra dividend, which the short seller has to pay, or a merger, when the seller faces a huge loss. The rule is the downside is limited because it cannot go below zero, but the upside is or can be unlimited. So short sales can be a very risky investment under normal conditions.
Since they have rescinded the up-tick rule the volatility has increase to extremes never seen before. Computers are programmed to go wiz bang in a nanosecond or even faster. This will stop this and the flash crashes too. A flash crash is a computer driven sell program when all the buyers are absent or withdraw their bids. Luckily we have not had one around the close of the market place.
Chapter Six
USURY
Back in the 1970’s, when inflation was just beginning to rear its ugly head, disintermediation took place. This is how it worked. One could max out the credit card credit and legally the credit card companies could only charge 8%. Then the individual would be able to go and buy government agency short-term debt that was yielding 22%. That was a neat 14% return on one’s money. Sadly, individuals do not have lobbyists in Washington D.C. and the law was quietly changed to “protect?” the credit card companies. Most of our representatives in Congress are probably ignorant of the Rule of 72. Bankers love this rule. One takes 72 and divide by the interest rate you are paying. The result is how long it takes for that institution to double its return on your debt. If one has a 7% mortgage rate due in thirty years then every 10.29 years the bank will double its return. So over that 30-year period that bank will double its return 2.92 times. That is almost 3 times on your money over a 30-year period. That is a fair return because the bank has lent their depositor’s funds so you could buy your home. In return they receive interest on their funds and the banks can pay their employees fair wages. This is called velocity of money and how many times a dollar can be turned over. This is a healthy situation.
Now the credit card companies were able to go wild because their restraints were removed. Once a credit card holder failed to pay the entire monthly bill the interest charges kicked in. Just a little bit, but as the delay kicked in and the bill got bigger the rates went up. Your first month delay had now been over 6 months and while your charge on the latest month is probably minor, your late payments are now over 20% in most cases. We are now talking 3.6 years instead of 10.29 years. Once an outside shock awakens the populace they start de-leveraging, or paying down their debts. This is deflationary, because the funds are not buying products except for necessary products.
Now go big time. Governments and their entitlement programs are the same as individual credit cards but with more zeros. Our representatives do this because their perks are fantastic and start compounding the longer they remain in office. They know it is wrong, but who cares as long as they keep the ship floating with debt.
Once a sovereign debt percentage is more than their GDP, then future borrowings are just to pay interest on previous debt. Your ship is sinking. Sell assets at depressed prices? Cut entitlement programs?
Now you see the mess we are in. It starts by credit agencies lowering their credit ratings on debt. That means higher interest rates. Ugh!
SUMMARY OF PART ONE
If you grew as a child during WWII as I did from the ages of 6 to 10 it left a lasting impression. Sixty-six years later my mind still has the horrors of the aftermath of that noble combat.
We as a world now face a similar disaster. This time it is economic. We have greed and we are losing our morals and fairness to our fellow human being.
The solutions are not pleasant. The ones I have mentioned will have the effect of a bombed out European conflict. There were many casualties, but many more survivors in this conflict. Everyone is watching the economic recovery, which is really a house of cards. Its base is marked by greed and corruption of a few that will ultimately destroy the multitude.
The United States is the only country on this planet earth where multitudes would dream of living here. So we must set the standards for the rest of the world.
George Washington took the oath of office with his hand on a bible. We believe in a supreme being, and yet we as a nation espouse freedom of religion. WE as individuals have the choice to make. We as a nation chose separation of Church and state, just as Turkey did in the 20th century. We have both prospered. It is our basic freedom and no court should dictate to us or change our way because of hurting a minority. In a true democracy the minority is listened to but does not necessarily achieve its desire. We have freedom of religion. That is our God given right. Freedom does not mean censorship. Religion that uses violence to flourish is not the American way of life. (Jan 1, 2006 during communion, Jesus Christ spoke to me as I bit down on a piece of bread. HE said, “ You can pray to me too!”)
We must come up with a better way of choosing our national leaders. Graduation from a third rate collage and the ability to lie and pander are not valid credentials. Maybe there should be a bipartisan board to judge perspective candidates
Bankers are a special breed and should be the “watch dog” of the economic community- not a slithering python. Salaries should be based upon a criterion of performances within the bank itself. Bringing back the “Up-tick Rule“ restores a degree of safety to the market place and takes away one of the manipulative forces in the market place that hedge funds enjoy at the public’s expense.
There have been laws going way back in time. They can protect the average citizen from being duped.
All these measures are just a process of slowing event and hoary expectations down. These are hard choices for some and readjustments for many, but just over the short term.
Failure to enact and or reenact these reforms will beam us from a European conflict to a devastating wipe out like Hiroshima.
- Freedom of religion is based upon the old and new testament of the Bible. All the different sects are based upon love of our neighbors. As long as other religions have the same attitude they should be free to worship on our soil. We have a model of government based upon separation of Church and State.
- Reinstate the “Up-tick Rule” immediately.
- Raise interest rates that involve security transactions. No more “carry trades”. This will make derivative trades and high frequency trades obsolete.
- Reinstate the law.
- Establish a minimum standard to issuing credit cards.
- Separate banks and brokers.
These measures will cause havoc among certain groups that will scream bloody murder. The harder they scream will result in a safer place for the public.
We are now the only super power in the world. We have no agenda, no standards for the rest of the world to look up to or follow. Right now we are a rudderless ship of state floundering on the open seas. This in turn allows the world to be in chaos while the mighty rich plunder the defenseless populations at their free will.
Part Two is designed to create a new world order based upon our principals of individual freedoms and rights within the framework of benevolent governments. I call it our Future.
Glossary*
Derivative
derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties.[1][2]
Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form through which to extend credit.[3] However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks.[3] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy.[3][4]
Financial reforms within the US since the financial crisis have served only to reinforce special protections for derivatives, including greater access to government guarantees, while minimizing disclosure to broader financial markets.[5]
When the markets switched from the fractions system to decimals it negated the profit spread for market makers. Thus the street invented to new ways to remain profitable
Hedge Funds
| An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. |
Margin
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Short Sale
In finance, short selling (also known as shorting or going short) is the practice of selling assets that have not been purchased beforehand, but which the seller may have borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller. “Shorting” and “going short” also refer to entering into any derivative or other contract under which the investor similarly profits from a fall in the value of an asset. Mathematically, short selling is equivalent to buying a negative amount of the assets. Short selling is almost always conducted with assets traded in public securities, commodities or currency markets, as on such markets the amount being made or lost can be monitored in real time and it is generally possible to buy back the borrowed assets whenever required. Going short can be contrasted with the more conventional practice of “going long”, whereby an investor profits from any increase in the price of the asset.
A short sale one can make only the price the person sold short at and zero, but the loss is unlimited providing how high the security goes.A buying panic could wipe one’s assets out.
Uptick Rule
The rule went into The uptick rule refers to a trading restriction that disallowed short selling of securities except on an uptick. For the rule to be satisfied, the short must be either at a price above the last traded price of the security, or at the last traded price if that price was higher than the price in the previous trade. The U.S. Securities and Exchange Commission (SEC) defined the rule, and summarized it: “Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.”[1]
effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08.
Reinstating the uptick rule should curb most of the scurrilous practices.
Usury Laws
Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England
The Old Testament
From the King James Version
[Exodus 22:25] If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
[Leviticus 25:36] Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.
[Leviticus 25:37] Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.
[Deuteronomy 23:19] Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury:
[Deuteronomy 23:20] Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
[Ezekiel 18:17] He withholds his hand from sin and takes no usury or excessive interest.
[edit]Torah
Main article: Loans and interest in Judaism
The following quotations are from the Hebrew Bible, 1917 Jewish Publication Society translation:
If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.(Exodus, 22:25)[27]
And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase. (Leviticus, 25:35-37)
Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it. (Deuteronomy, 23:20-21)
[edit]New Testament
| This article may be confusing or unclear to readers. Please help clarify the article; suggestions may be found on the talk page. (March 2011) |
Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.[28]
The New Testament contains references to usury, notably in the Parable of the talents:
“Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”
—Matthew 25:27
“…Out of thine own mouth will I judge thee, thou wicked servant. Thou knewest that I was an austere man, taking up that I laid not down, and reaping that I did not sow. Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?”
—Luke 19:22-23
Finally the master said to him ‘Why then didn’t you put my money on deposit, so that when I came back, I could have collected it with interest?’
—Luke 19:23
[edit]Qur’an
Main articles: Riba and Islamic banking
The following quotations are English translations from the Qur’an:
Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)
God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! Those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)
O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-‘Imran 3:130)
And for practicing usury, which was forbidden, and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)
The usury that is practiced to increase some people’s wealth, does not gain anything at God. But if people give to charity, seeking God’s pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)
[edit]Scholastic theology
The first of the scholastics, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft. Previously usury had been seen as a lack of charity.
St. Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of interest is wrong because it amounts to “double charging”, charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is exchange-medium. It is used up when it is spent. To charge for the money and for its use (by spending) is to charge for the money twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity that anyone can sell. (For a detailed discussion of Aquinas and usury, go to Thought of Thomas Aquinas).
Labor is time, or if preferred, is measured by time. Workers are paid by the hour, by the day, by the week, by the month, rarely by the quarter or year. Labor is not effort, energy, expenditure of fuel (food). It is nothing but one’s time. As an example of labor without the expenditure of energy: A security guard whose job is just to be there. Perhaps nothing happens and he can read a book, assemble model trains, or even sleep, as long as he wakes up when the alarm rings. He has spent not one calorie of energy for the employer above what it takes just to live. Yet he is paid (compensated) for his time, for his labor. Even share-croppers and pieceworkers are compensated for the time they spent adding value to the raw materials. The sharecropper hands over the agreed portion of the increase (crop; harvest) to the owner of the land or the leaseholder in return for whatever the landlord provided: the land, perhaps the seed, farming tools, supplies, etc. The pieceworker is compensated for the labor, the time he spent, in adding value to the raw materials: the tools, the supplies, the workspace, light, heat, etc., according to the agreement made with the boss (client). If one labors for compensation, what he is compensated for is his time. As an even exchange of value, he has neither gained or lost anything. He has merely converted something he was going to lose anyway, time from his life, which, as we all know, is limited though we do not know in advance what the limit is, into something else that he wanted. Whether he is paid in goods, services or money is irrelevant. Money is but a medium of exchange that is much more efficient than straight barter. Only a miser wants money for itself, just to possess it. Normal people want money because it allows them to convert one thing that they are willing to sacrifice into something else that they actively want.
This did not, as some think, prevent investment. What it stipulated was that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all. This is usury. St Thomas quotes Aristotle as saying that “to live by usury is exceedingly unnatural”. Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) – an alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests. Judaism condemns usury towards Jews, but allows it towards non-Jews. St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as “montes pietatis”.[29]
In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral.[30] The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest “to compensate him for profit foregone in investing the money himself.” (Rothbard 1995, p. 46) This idea is very similar to Opportunity Cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena).
- All definitions have been gathered from Wikipedia.com or Investopedia.com by means of using google.com
*****
IT WILL NOT HAPPEN TO ME! GUESS WHAT? IT WILL!!
FORWARD
I am Richard De Graff the second son of John Teller De Graff Sr. and Audrey Brown De Graff of Albany NY, USA. I have been a real stockbroker since 1960. I Completed the Graham and Dodd correspondence course from the New York Institute of Finance while serving in the United States Army for two years. Sept. 1957-Sept. 1959, it was known as the quiet period- no wars. I still remember my dog tag number-FR-12 538396. I am currently a member of the Congregational Church of Eastford Connecticut USA.
We, as residents of this planet earth, have progressed so far in the last 100 years that one can take all the progressions for 5,000 years and combine them into one small round ball and it won’t equal what man has done in the last 100 years. In sum, we have grown too fast and we don’t have new rules, or better yet, we have ignored the old ones that protected our individual freedoms.
I am writing this booklet because I believe the countries of this world believe the economy is rebounding. It is improving, but the market place is where the grasshoppers are playing to their greedy delight. Meanwhile the ants have hunkered down.
The near term solutions will hurt almost everyone for a very short time while we all readjust. Only a few will return to dust. This is Part One of this booklet.
Part Two has to deal with avoiding a total economic tsunami due to worldwide debt enthusiasm. We will have to learn to control our well-meaning intentions or face destruction of our freedoms.
Several of the Programs started when FDR was president worked very well, but the Congress failed to revisit these laws; they failed to correct or to improve these laws every 10 to 15 years. I am referring to the securities laws that were passed in the 1930’s and 1940-1941. In particular, the Investment Company Act of 1940. Protecting Mutual Funds should have been annulled when computers could price Mutual Funds’ holdings instantly. This failure has created a Goliath playing with a turbo-charged club in the securities industry. This is just one example where reform is needed.
FDR also instituted a socialist agenda where our central government welfare programs were aimed to kick-start the economy. Under the Keynesian theory we were supposed to pay down these debts over time when our economy was profitable. Sadly, we created more entitlement programs without saving for them. The rest of the world copied our programs and relied on bankers and the bond markets to finance their dreams.
Europe and the Middle Eastern countries are at the abyss now and that abyss is slowly coming to our shores. There are now giant hedge funds run by unscrupulous managers and they compete with central bankers in a game of self-destruction. The House of Representatives is supposed to have control of our monies.
Our market place is now a board game for the “privileged few” at the expense of entire populations.
We are now having two choices. The easier choice will devastate the sneaky, shady players in our market place over the short term. While we listen to our present leaders we will start falling into that sinkhole and we will all fail. The purpose of this book is for future reference for those non-believers while those who are prudent can take the necessary steps for survival.
The first part of this book is the easy part, but will take intestinal fortitude to implement, but these things must be done before we can re-regulate the entire finance industry.
The passages that I have written are from over 50 years on the battlefields of finance. In the Army they called it OJT- on the job training. It is now up to academics to prove or disprove my thoughts. Remember, Moses’ Ten Commandments were only 297 words and look at how much has been written about them!
We have crossed the raggedy bridge and it has collapsed. There is no way back. We must look forward.
Cheerio!!!!
Part One
THE PAST AND PRESENT
Chapter One Bring Back God!!!
Chapter Two LBJ
Chapter Three Bankers and Banks
Chapter Four Banking Reforms
Chapter Five Broken Bones
Chapter Six Up-tick Rule
Summary for Part One
Glossary
Chapter One
Bring Back God
“With confidence in our armed forces – with the un-bounding determination of our people – we will gain the inevitable triumph – so help us God.
I ask that the Congress declare that since the unprovoked and dastardly attack by Japan on Sunday, Dec. 7, a state of war has existed between the United States and the Japanese empire. “
The above is the last two paragraphs of President Roosevelt’s speech before the US Congress on December 8, 1941.
He is clearly asking God for HIS help. As a student of the Old and New Testament I can see the hand of God at work. The official naval archives listed it as “luck” in the Battle of Midway in May 6&7 1942.
Australians call The Battle of the Coral Sea the battle that saved Australia. The Japanese Naval forces were confidently heading for New Guiana to use a stepping off place to attack Australia and New Zealand.
They ran into an unexpected US Naval force with the USS Lexington aircraft carrier power base. In the ensuing battle the USS Lexington was sunk. What we did not know at that time was that the Japanese had lost about 60 airplanes. So their two aircraft carriers headed north to be re-supplied instead of rejoining the task force heading towards Midway Island.
So the Japanese had four aircraft carriers instead of six for that epic battle. The US had three, but only two were operating in battleship condition. Our backs were to the wall, but with American “can do” spirit we were able to Ambush the Japanese Navy.
Our scout planes found the naval task force and radioed back. While the Japanese planes were being rearmed with torpedoes our naval pilots stuck each time they shot down until the dive-bombers and torpedo planes showed up at the same time. The Japanese lost their four aircraft carriers and the naval ability plummeted.
The turning point in the battle was that two Japanese scout planes found our task force. When they went to radio back the news – their radios went dead. When they did report it was too late, but we did lose the Yorktown. The Naval report calls it “luck”; I say it was an act of God.
D-Day on the beaches of Normandy France was a slaughter until the defenders started running out of ammunition. At first the German High Command was afraid to wake up Hitler and then he would not release the Panzer tank division. I believe it was Déjà vu all over again from the Old Testament. (My complements to Yogi Berra for his honest, savory expressions.)
The United States has always allowed freedom of religion and God has blessed us until recently when we started breaking the Ten Commandments and taking God out of schools. The Lord Almighty has given us a warning shot across our bow with 9/11.
The biggest sacrilege though is leaving “so help us God” off FDR’s monument in Washington DC. We must restore his complete true speech.
Chapter Two
LBJ
The real culprit of today’s mess is Lyndon Baines Johnson, former president of the United States. A graduate of a third rate college, he wrecked our future economy with his “guns and butter” agenda that this country could not afford. The ultra-liberal wing took over the Democratic Party.
I believe LBJ is the “Ahab” of our country.
Robert Caro has been writing his fourth installment and it will be published in 2012. It should bring the house down.
LBJ’s programs forced Richard Nixon to get off the gold standard and this in turn opened the floodgates of Congress where ultimately 435 members control 300,000,000 people’s destinies.
So we went form a “pay as you go” society to one of borrowing from the future. The Social Security fund was already being raided under the guise of “smoke and mirrors”; forget about the interest being earned – it was the principal that was being used. That is the real Ponzi scam.
Chapter Three
“Woe to you, teachers of the law and Pharisees, you hypocrites! You clean the outside of the cup and dish, but inside they are full of greed and self-indulgence.
Matthew 23:24-26
Bankers and Banks
A healthy bank means a healthy community.
Today bankers are in control instead of serving the public. The House of Representatives has control of our purse strings, not the bankers. We should consider nationalizing our banks and buying the shares back at real book value. Their large bonuses should be given to depositors and shareholders. Steve Jobs quoted as the reason he was not taking a salary when returning to Apple Computer was, “ I already have billions of dollars – I don’t need more. I want to build Apple Computer into another Hewlett Packard.”
When one does well, one will earn honest money. We are becoming too greedy and bankers are living off our greed. Bankers used to be respected members of our community.
Today we are teetering on the brink of a worldwide collapse economically. The United States corrected this problem in the 1930’s. Most economic disasters happen because of easy credit and greed. This is a normal psychological cycle. It takes about three generations to happen.
The first generation learns from its mistakes. The second generation prospers because of the solid base built by the first. Then the third generation, which we can call “smarty pants” because they don’t believe it can happen again and they break all the rules put in place by the first.
The Congress of the 1930’s did a magnificent job protecting the investing public from the different kind of abuses that were prevalent back then and today.
When the economic collapse happened in 1973-1974 the Congress congratulated them selves on a job well done. Actually they should have revisited and amended many of the statues, for the seeds of 2000 fiascos were planted then by the survivors.
The formation of OPEC caught the world by surprise. A horrific adjustment would now take place. Many companies were unprepared and slowly sank into oblivion.
Wall Street got smacked. Big Time. 50% of the firms vanished. 50% of employees left for safer endeavors. Schumpeter’s Law of Creative Destruction was working to perfection. (The basic premise is that antiquated businesses are replaced by newer and growing businesses. A prime example is the buggy whip disappeared when the automobile was mass-produced.)
This is where the Congress failed. Instead of going back to Wall Street and seeing what laws need to be revised, or annulled, they went on their merry way, and let Wall Street feather their own nest.
Wall Street survivors vowed this would never happen again to them. The bankers, cozy in their fireside chairs, smugly smiled. They survived in pretty good shape.
Banking and Reforms
Most economic downturns are because of loose credit. Easy money leads to loose standards and eventually immoral behavior.
As I mentioned in the previous chapter, there are usually three stages to a recovery. The first stage everyone remembers the mistake made in the past cycle and are intent on not repeating these mistakes. This was the case in the 1930’s. The problem was that most congressmen that passed these laws retired knowing that they did a job well done. The next generation of Congresspersons believed that the problem had been corrected and never revisited the laws. Times change and conditions improve and standard of living improves with new invention. The computer is a prime example. In 1968 Wall Street embraced the computer as if it was a porn star. They never looked inside to see how it worked. They just pushed buttons and smiled at how easy it was.
The problem that developed was with the unsung heroes of the industry, the back office. They were understaffed and over worked. They had done so much business and a myriad of trades that no one could follow who owed whom. Firms were now rated by how many days they failed to deliver.
One bright young man had been going to night school to learn all about computer programming. He was with Smith Barney and was soon on control of the back office. They became so efficient that the rest of the street marveled at their accuracy. When they called another back office, the clerk hearing the name of Smith Barney would say, “How much do we owe you?”
Other firms would say when someone else called, “Let me check it and I will get back to you in a couple of days.”
Needless to say that young man became the next president of Smith Barney until the third generation took over the street.
My main point here is that when Wall Street had its own depression, this country survived in fine shape. All we had were mini recessions. Congress failed to revisit and improve and maybe justify their existence. The Investment Company Act of 1940 should have been radically changed to protect the customers instead of the mutual funds.
This was a monumental mistake. They failed to investigate what was happening to the street. They would have discovered that the Investment Company Act had created a monster in sheepskin.
The street had taken a 50% haircut all across the board. It was because of dumb foolishness by senior management looking to become the next financial wizard.
Instead of looking for values and the public wellbeing, they decided to feather their own nests with products that created excessive commissions. The first step was options. One out of ten trades is profitable the public, 9 out 10 to the firms. Wall Street has the ability to shoot itself in the foot too. By not supervising the trades and traders there was an explosion and several firms took the final dive.
Once the Street learned how to handle that crisis they went on to bigger and more profitable trading ideas. Program trading led to the Crash of ’87. It had created a perpetual motion machine once it had started and no one thought of pulling the plug on the computers. Computers need electricity to operate. Simple. It was not until the market closed that the firms involved had created lots of commissions, but lost principal. Luckily for the public, this program self-destructed.
My point is that at the end of every minor cycle there is a moment when we go back and correct or enter the second major cycle.
The first cycle is where one has pride in the job and themselves. They want to serve the community that they work in. The second stage can be called “Up your gross”. This has to do with the firm and making sure it is profitable. Team spirit. The firm can do well as a bond trader, or fine research, or stock market technicians. Usually there is one individual who is the firm’s star (GURU) that ends up calling the shots.
Our economy is changing from an inflation mode to a deflation mode. Individuals are now seeking quality and price in the market place. Socialist policies are the wrong fork in the road.
Chapter Four
Broken Bones Fixed
OK the doctor has been called in to fix our broken economy. The problem is that he is from the middle ages. For some the pain is going to be devastating. For many of these players (now called “BANKERS”) it could and should be fatal. Examples must be set for future generations.
The market place is corrupt and the private investor is being smothered. The Private Investor (PI) is the foundation of the economy and must be protected.
The first thing our medieval doctor (Let’s call him Merlin – for there is always hope) is going to raise margin rates. This will shell shock the market place and stocks will dive. Most Hedge funds will fall on their own weight because most are heavily margined with debt. If Merlin raises rates just 10% for stocks, then the new players will have to pay 60% of the price. The 50% players may stay at 50% and if they do same day trades will remain there, but if they fail to do this; then they are at the new rate.
Bond and commodity players will be cut to the quick. Bond traders are not supposed to be on Margin. Recently bonds have been used as a speculative vehicle to promote excessive fees for greedy bankers in convoluted trades that go by various names. The basic form is called a derivative. A derivative “derives” something from one place and gives it to another place; this usually means taking something good and combining it with something bad –so that the combined security looks better instead of junk. One can buy a prostitute a fancy dress, but she is still a prostitute.
Margin rates should be gradually increased so that all speculative fever is erased from the market place.
Most financial disasters have been built around too easy credit. In the 1929 crash, margin debt was 10%. At the end of November 2011 it ranges from 10% for certain commodities and bonds to 50 % for stocks.
If we are in the midst of a panic we should raise all margin debt to 100%. This will end speculation in a hurry. Schumpeter’s law of “creative destruction” should take over. It will be corporations who have been destroyed that will be replaced by ones that are newer and more creative. Big businesses hamper growth in most cases. They are laying-off and “fine tuning” their earnings while a young growing business is hiring and growing. 50% margin works like this. You buy a $10 stock for $5 and the bank, through a broker, lends you $5. Now if the stock goes to $15 and you sell, you would have made 100% once you pay back the $5.
Now if the stock goes to $5, you get a margin call and are sold out. Your loss is 100%. If you had paid cash you still have $5 investment.
Now commodities have enjoyed lower rates and the traders are making a bonanza. The easy credit has prospered many funds to dupe the unsuspecting. If they are so good why do they need your money?
The commodity market was formed for a noble cause. A corn farmer would work hard and then when his crop was harvested along with everyone else’s the monetary value was almost nothing. It is just like your neighbor offering you some tomatoes during the peak summer months. They have more tomatoes than they can eat.
Chapter 5
UP-TICK RULE
Joseph P Kennedy, the first SEC chairman, instituted the Up-tick Rule in shorting stocks as one of his first acts in 1938, which calmed the markets right down. Italy has just recently banned all short sales to stop a run on their markets.
The old rule, which was a good one, went like this: First the broker had to go to his or her back office and get permission to sell short. There had to be stock available for the short sale because it must be delivered to the investor who is buying your stock. Then the stock must have an up-tick in price. This stops raids on securities, or if the stock is in a free fall, the short seller fades into the woodwork. Now a large short position can be considered bullish because sometime in the future the seller must cover, or buy back, to record the profit. Then there is the possibility that the company is deep trouble. The other side of the coin is positive news like an extra dividend, which the short seller has to pay, or a merger, when the seller faces a huge loss. The rule is the downside is limited because it cannot go below zero, but the upside is or can be unlimited. So short sales can be a very risky investment under normal conditions.
Since they have rescinded the up-tick rule the volatility has increase to extremes never seen before. Computers are programmed to go wiz bang in a nanosecond or even faster. This will stop this and the flash crashes too. A flash crash is a computer driven sell program when all the buyers are absent or withdraw their bids. Luckily we have not had one around the close of the market place.
Chapter Six
USURY
Back in the 1970’s, when inflation was just beginning to rear its ugly head, disintermediation took place. This is how it worked. One could max out the credit card credit and legally the credit card companies could only charge 8%. Then the individual would be able to go and buy government agency short-term debt that was yielding 22%. That was a neat 14% return on one’s money. Sadly, individuals do not have lobbyists in Washington D.C. and the law was quietly changed to “protect?” the credit card companies. Most of our representatives in Congress are probably ignorant of the Rule of 72. Bankers love this rule. One takes 72 and divide by the interest rate you are paying. The result is how long it takes for that institution to double its return on your debt. If one has a 7% mortgage rate due in thirty years then every 10.29 years the bank will double its return. So over that 30-year period that bank will double its return 2.92 times. That is almost 3 times on your money over a 30-year period. That is a fair return because the bank has lent their depositor’s funds so you could buy your home. In return they receive interest on their funds and the banks can pay their employees fair wages. This is called velocity of money and how many times a dollar can be turned over. This is a healthy situation.
Now the credit card companies were able to go wild because their restraints were removed. Once a credit card holder failed to pay the entire monthly bill the interest charges kicked in. Just a little bit, but as the delay kicked in and the bill got bigger the rates went up. Your first month delay had now been over 6 months and while your charge on the latest month is probably minor, your late payments are now over 20% in most cases. We are now talking 3.6 years instead of 10.29 years. Once an outside shock awakens the populace they start de-leveraging, or paying down their debts. This is deflationary, because the funds are not buying products except for necessary products.
Now go big time. Governments and their entitlement programs are the same as individual credit cards but with more zeros. Our representatives do this because their perks are fantastic and start compounding the longer they remain in office. They know it is wrong, but who cares as long as they keep the ship floating with debt.
Once a sovereign debt percentage is more than their GDP, then future borrowings are just to pay interest on previous debt. Your ship is sinking. Sell assets at depressed prices? Cut entitlement programs?
Now you see the mess we are in. It starts by credit agencies lowering their credit ratings on debt. That means higher interest rates. Ugh!
SUMMARY OF PART ONE
If you grew as a child during WWII as I did from the ages of 6 to 10 it left a lasting impression. Sixty-six years later my mind still has the horrors of the aftermath of that noble combat.
We as a world now face a similar disaster. This time it is economic. We have greed and we are losing our morals and fairness to our fellow human being.
The solutions are not pleasant. The ones I have mentioned will have the effect of a bombed out European conflict. There were many casualties, but many more survivors in this conflict. Everyone is watching the economic recovery, which is really a house of cards. Its base is marked by greed and corruption of a few that will ultimately destroy the multitude.
The United States is the only country on this planet earth where multitudes would dream of living here. So we must set the standards for the rest of the world.
George Washington took the oath of office with his hand on a bible. We believe in a supreme being, and yet we as a nation espouse freedom of religion. WE as individuals have the choice to make. We as a nation chose separation of Church and state, just as Turkey did in the 20th century. We have both prospered. It is our basic freedom and no court should dictate to us or change our way because of hurting a minority. In a true democracy the minority is listened to but does not necessarily achieve its desire. We have freedom of religion. That is our God given right. Freedom does not mean censorship. Religion that uses violence to flourish is not the American way of life. (Jan 1, 2006 during communion, Jesus Christ spoke to me as I bit down on a piece of bread. HE said, “ You can pray to me too!”)
We must come up with a better way of choosing our national leaders. Graduation from a third rate collage and the ability to lie and pander are not valid credentials. Maybe there should be a bipartisan board to judge perspective candidates
Bankers are a special breed and should be the “watch dog” of the economic community- not a slithering python. Salaries should be based upon a criterion of performances within the bank itself. Bringing back the “Up-tick Rule“ restores a degree of safety to the market place and takes away one of the manipulative forces in the market place that hedge funds enjoy at the public’s expense.
There have been laws going way back in time. They can protect the average citizen from being duped.
All these measures are just a process of slowing event and hoary expectations down. These are hard choices for some and readjustments for many, but just over the short term.
Failure to enact and or reenact these reforms will beam us from a European conflict to a devastating wipe out like Hiroshima.
- Freedom of religion is based upon the old and new testament of the Bible. All the different sects are based upon love of our neighbors. As long as other religions have the same attitude they should be free to worship on our soil. We have a model of government based upon separation of Church and State.
- Reinstate the “Up-tick Rule” immediately.
- Raise interest rates that involve security transactions. No more “carry trades”. This will make derivative trades and high frequency trades obsolete.
- Reinstate the law.
- Establish a minimum standard to issuing credit cards.
- Separate banks and brokers.
These measures will cause havoc among certain groups that will scream bloody murder. The harder they scream will result in a safer place for the public.
We are now the only super power in the world. We have no agenda, no standards for the rest of the world to look up to or follow. Right now we are a rudderless ship of state floundering on the open seas. This in turn allows the world to be in chaos while the mighty rich plunder the defenseless populations at their free will.
Part Two is designed to create a new world order based upon our principals of individual freedoms and rights within the framework of benevolent governments. I call it our Future.
Glossary*
Derivative
derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties.[1][2]
Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form through which to extend credit.[3] However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks.[3] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy.[3][4]
Financial reforms within the US since the financial crisis have served only to reinforce special protections for derivatives, including greater access to government guarantees, while minimizing disclosure to broader financial markets.[5]
When the markets switched from the fractions system to decimals it negated the profit spread for market makers. Thus the street invented to new ways to remain profitable
Hedge Funds
| An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. |
Margin
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Short Sale
In finance, short selling (also known as shorting or going short) is the practice of selling assets that have not been purchased beforehand, but which the seller may have borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller. “Shorting” and “going short” also refer to entering into any derivative or other contract under which the investor similarly profits from a fall in the value of an asset. Mathematically, short selling is equivalent to buying a negative amount of the assets. Short selling is almost always conducted with assets traded in public securities, commodities or currency markets, as on such markets the amount being made or lost can be monitored in real time and it is generally possible to buy back the borrowed assets whenever required. Going short can be contrasted with the more conventional practice of “going long”, whereby an investor profits from any increase in the price of the asset.
A short sale one can make only the price the person sold short at and zero, but the loss is unlimited providing how high the security goes.A buying panic could wipe one’s assets out.
Uptick Rule
The rule went into The uptick rule refers to a trading restriction that disallowed short selling of securities except on an uptick. For the rule to be satisfied, the short must be either at a price above the last traded price of the security, or at the last traded price if that price was higher than the price in the previous trade. The U.S. Securities and Exchange Commission (SEC) defined the rule, and summarized it: “Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.”[1]
effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08.
Reinstating the uptick rule should curb most of the scurrilous practices.
Usury Laws
Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England
The Old Testament
From the King James Version
[Exodus 22:25] If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
[Leviticus 25:36] Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.
[Leviticus 25:37] Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.
[Deuteronomy 23:19] Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury:
[Deuteronomy 23:20] Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
[Ezekiel 18:17] He withholds his hand from sin and takes no usury or excessive interest.
[edit]Torah
Main article: Loans and interest in Judaism
The following quotations are from the Hebrew Bible, 1917 Jewish Publication Society translation:
If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.(Exodus, 22:25)[27]
And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase. (Leviticus, 25:35-37)
Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it. (Deuteronomy, 23:20-21)
[edit]New Testament
| This article may be confusing or unclear to readers. Please help clarify the article; suggestions may be found on the talk page. (March 2011) |
Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.[28]
The New Testament contains references to usury, notably in the Parable of the talents:
“Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”
—Matthew 25:27
“…Out of thine own mouth will I judge thee, thou wicked servant. Thou knewest that I was an austere man, taking up that I laid not down, and reaping that I did not sow. Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?”
—Luke 19:22-23
Finally the master said to him ‘Why then didn’t you put my money on deposit, so that when I came back, I could have collected it with interest?’
—Luke 19:23
[edit]Qur’an
Main articles: Riba and Islamic banking
The following quotations are English translations from the Qur’an:
Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)
God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! Those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)
O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-‘Imran 3:130)
And for practicing usury, which was forbidden, and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)
The usury that is practiced to increase some people’s wealth, does not gain anything at God. But if people give to charity, seeking God’s pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)
[edit]Scholastic theology
The first of the scholastics, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft. Previously usury had been seen as a lack of charity.
St. Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of interest is wrong because it amounts to “double charging”, charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is exchange-medium. It is used up when it is spent. To charge for the money and for its use (by spending) is to charge for the money twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity that anyone can sell. (For a detailed discussion of Aquinas and usury, go to Thought of Thomas Aquinas).
Labor is time, or if preferred, is measured by time. Workers are paid by the hour, by the day, by the week, by the month, rarely by the quarter or year. Labor is not effort, energy, expenditure of fuel (food). It is nothing but one’s time. As an example of labor without the expenditure of energy: A security guard whose job is just to be there. Perhaps nothing happens and he can read a book, assemble model trains, or even sleep, as long as he wakes up when the alarm rings. He has spent not one calorie of energy for the employer above what it takes just to live. Yet he is paid (compensated) for his time, for his labor. Even share-croppers and pieceworkers are compensated for the time they spent adding value to the raw materials. The sharecropper hands over the agreed portion of the increase (crop; harvest) to the owner of the land or the leaseholder in return for whatever the landlord provided: the land, perhaps the seed, farming tools, supplies, etc. The pieceworker is compensated for the labor, the time he spent, in adding value to the raw materials: the tools, the supplies, the workspace, light, heat, etc., according to the agreement made with the boss (client). If one labors for compensation, what he is compensated for is his time. As an even exchange of value, he has neither gained or lost anything. He has merely converted something he was going to lose anyway, time from his life, which, as we all know, is limited though we do not know in advance what the limit is, into something else that he wanted. Whether he is paid in goods, services or money is irrelevant. Money is but a medium of exchange that is much more efficient than straight barter. Only a miser wants money for itself, just to possess it. Normal people want money because it allows them to convert one thing that they are willing to sacrifice into something else that they actively want.
This did not, as some think, prevent investment. What it stipulated was that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all. This is usury. St Thomas quotes Aristotle as saying that “to live by usury is exceedingly unnatural”. Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) – an alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests. Judaism condemns usury towards Jews, but allows it towards non-Jews. St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as “montes pietatis”.[29]
In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral.[30] The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest “to compensate him for profit foregone in investing the money himself.” (Rothbard 1995, p. 46) This idea is very similar to Opportunity Cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena).
- All definitions have been gathered from Wikipedia.com or Investopedia.com by means of using google.com
*****
IT WILL NOT HAPPEN TO ME! GUESS WHAT? IT WILL!!
FORWARD
I am Richard De Graff the second son of John Teller De Graff Sr. and Audrey Brown De Graff of Albany NY, USA. I have been a real stockbroker since 1960. I Completed the Graham and Dodd correspondence course from the New York Institute of Finance while serving in the United States Army for two years. Sept. 1957-Sept. 1959, it was known as the quiet period- no wars. I still remember my dog tag number-FR-12 538396. I am currently a member of the Congregational Church of Eastford Connecticut USA.
We, as residents of this planet earth, have progressed so far in the last 100 years that one can take all the progressions for 5,000 years and combine them into one small round ball and it won’t equal what man has done in the last 100 years. In sum, we have grown too fast and we don’t have new rules, or better yet, we have ignored the old ones that protected our individual freedoms.
I am writing this booklet because I believe the countries of this world believe the economy is rebounding. It is improving, but the market place is where the grasshoppers are playing to their greedy delight. Meanwhile the ants have hunkered down.
The near term solutions will hurt almost everyone for a very short time while we all readjust. Only a few will return to dust. This is Part One of this booklet.
Part Two has to deal with avoiding a total economic tsunami due to worldwide debt enthusiasm. We will have to learn to control our well-meaning intentions or face destruction of our freedoms.
Several of the Programs started when FDR was president worked very well, but the Congress failed to revisit these laws; they failed to correct or to improve these laws every 10 to 15 years. I am referring to the securities laws that were passed in the 1930’s and 1940-1941. In particular, the Investment Company Act of 1940. Protecting Mutual Funds should have been annulled when computers could price Mutual Funds’ holdings instantly. This failure has created a Goliath playing with a turbo-charged club in the securities industry. This is just one example where reform is needed.
FDR also instituted a socialist agenda where our central government welfare programs were aimed to kick-start the economy. Under the Keynesian theory we were supposed to pay down these debts over time when our economy was profitable. Sadly, we created more entitlement programs without saving for them. The rest of the world copied our programs and relied on bankers and the bond markets to finance their dreams.
Europe and the Middle Eastern countries are at the abyss now and that abyss is slowly coming to our shores. There are now giant hedge funds run by unscrupulous managers and they compete with central bankers in a game of self-destruction. The House of Representatives is supposed to have control of our monies.
Our market place is now a board game for the “privileged few” at the expense of entire populations.
We are now having two choices. The easier choice will devastate the sneaky, shady players in our market place over the short term. While we listen to our present leaders we will start falling into that sinkhole and we will all fail. The purpose of this book is for future reference for those non-believers while those who are prudent can take the necessary steps for survival.
The first part of this book is the easy part, but will take intestinal fortitude to implement, but these things must be done before we can re-regulate the entire finance industry.
The passages that I have written are from over 50 years on the battlefields of finance. In the Army they called it OJT- on the job training. It is now up to academics to prove or disprove my thoughts. Remember, Moses’ Ten Commandments were only 297 words and look at how much has been written about them!
We have crossed the raggedy bridge and it has collapsed. There is no way back. We must look forward.
Cheerio!!!!
Part One
THE PAST AND PRESENT
Chapter One Bring Back God!!!
Chapter Two LBJ
Chapter Three Bankers and Banks
Chapter Four Banking Reforms
Chapter Five Broken Bones
Chapter Six Up-tick Rule
Summary for Part One
Glossary
Chapter One
Bring Back God
“With confidence in our armed forces – with the un-bounding determination of our people – we will gain the inevitable triumph – so help us God.
I ask that the Congress declare that since the unprovoked and dastardly attack by Japan on Sunday, Dec. 7, a state of war has existed between the United States and the Japanese empire. “
The above is the last two paragraphs of President Roosevelt’s speech before the US Congress on December 8, 1941.
He is clearly asking God for HIS help. As a student of the Old and New Testament I can see the hand of God at work. The official naval archives listed it as “luck” in the Battle of Midway in May 6&7 1942.
Australians call The Battle of the Coral Sea the battle that saved Australia. The Japanese Naval forces were confidently heading for New Guiana to use a stepping off place to attack Australia and New Zealand.
They ran into an unexpected US Naval force with the USS Lexington aircraft carrier power base. In the ensuing battle the USS Lexington was sunk. What we did not know at that time was that the Japanese had lost about 60 airplanes. So their two aircraft carriers headed north to be re-supplied instead of rejoining the task force heading towards Midway Island.
So the Japanese had four aircraft carriers instead of six for that epic battle. The US had three, but only two were operating in battleship condition. Our backs were to the wall, but with American “can do” spirit we were able to Ambush the Japanese Navy.
Our scout planes found the naval task force and radioed back. While the Japanese planes were being rearmed with torpedoes our naval pilots stuck each time they shot down until the dive-bombers and torpedo planes showed up at the same time. The Japanese lost their four aircraft carriers and the naval ability plummeted.
The turning point in the battle was that two Japanese scout planes found our task force. When they went to radio back the news – their radios went dead. When they did report it was too late, but we did lose the Yorktown. The Naval report calls it “luck”; I say it was an act of God.
D-Day on the beaches of Normandy France was a slaughter until the defenders started running out of ammunition. At first the German High Command was afraid to wake up Hitler and then he would not release the Panzer tank division. I believe it was Déjà vu all over again from the Old Testament. (My complements to Yogi Berra for his honest, savory expressions.)
The United States has always allowed freedom of religion and God has blessed us until recently when we started breaking the Ten Commandments and taking God out of schools. The Lord Almighty has given us a warning shot across our bow with 9/11.
The biggest sacrilege though is leaving “so help us God” off FDR’s monument in Washington DC. We must restore his complete true speech.
Chapter Two
LBJ
The real culprit of today’s mess is Lyndon Baines Johnson, former president of the United States. A graduate of a third rate college, he wrecked our future economy with his “guns and butter” agenda that this country could not afford. The ultra-liberal wing took over the Democratic Party.
I believe LBJ is the “Ahab” of our country.
Robert Caro has been writing his fourth installment and it will be published in 2012. It should bring the house down.
LBJ’s programs forced Richard Nixon to get off the gold standard and this in turn opened the floodgates of Congress where ultimately 435 members control 300,000,000 people’s destinies.
So we went form a “pay as you go” society to one of borrowing from the future. The Social Security fund was already being raided under the guise of “smoke and mirrors”; forget about the interest being earned – it was the principal that was being used. That is the real Ponzi scam.
Chapter Three
“Woe to you, teachers of the law and Pharisees, you hypocrites! You clean the outside of the cup and dish, but inside they are full of greed and self-indulgence.
Matthew 23:24-26
Bankers and Banks
A healthy bank means a healthy community.
Today bankers are in control instead of serving the public. The House of Representatives has control of our purse strings, not the bankers. We should consider nationalizing our banks and buying the shares back at real book value. Their large bonuses should be given to depositors and shareholders. Steve Jobs quoted as the reason he was not taking a salary when returning to Apple Computer was, “ I already have billions of dollars – I don’t need more. I want to build Apple Computer into another Hewlett Packard.”
When one does well, one will earn honest money. We are becoming too greedy and bankers are living off our greed. Bankers used to be respected members of our community.
Today we are teetering on the brink of a worldwide collapse economically. The United States corrected this problem in the 1930’s. Most economic disasters happen because of easy credit and greed. This is a normal psychological cycle. It takes about three generations to happen.
The first generation learns from its mistakes. The second generation prospers because of the solid base built by the first. Then the third generation, which we can call “smarty pants” because they don’t believe it can happen again and they break all the rules put in place by the first.
The Congress of the 1930’s did a magnificent job protecting the investing public from the different kind of abuses that were prevalent back then and today.
When the economic collapse happened in 1973-1974 the Congress congratulated them selves on a job well done. Actually they should have revisited and amended many of the statues, for the seeds of 2000 fiascos were planted then by the survivors.
The formation of OPEC caught the world by surprise. A horrific adjustment would now take place. Many companies were unprepared and slowly sank into oblivion.
Wall Street got smacked. Big Time. 50% of the firms vanished. 50% of employees left for safer endeavors. Schumpeter’s Law of Creative Destruction was working to perfection. (The basic premise is that antiquated businesses are replaced by newer and growing businesses. A prime example is the buggy whip disappeared when the automobile was mass-produced.)
This is where the Congress failed. Instead of going back to Wall Street and seeing what laws need to be revised, or annulled, they went on their merry way, and let Wall Street feather their own nest.
Wall Street survivors vowed this would never happen again to them. The bankers, cozy in their fireside chairs, smugly smiled. They survived in pretty good shape.
Banking and Reforms
Most economic downturns are because of loose credit. Easy money leads to loose standards and eventually immoral behavior.
As I mentioned in the previous chapter, there are usually three stages to a recovery. The first stage everyone remembers the mistake made in the past cycle and are intent on not repeating these mistakes. This was the case in the 1930’s. The problem was that most congressmen that passed these laws retired knowing that they did a job well done. The next generation of Congresspersons believed that the problem had been corrected and never revisited the laws. Times change and conditions improve and standard of living improves with new invention. The computer is a prime example. In 1968 Wall Street embraced the computer as if it was a porn star. They never looked inside to see how it worked. They just pushed buttons and smiled at how easy it was.
The problem that developed was with the unsung heroes of the industry, the back office. They were understaffed and over worked. They had done so much business and a myriad of trades that no one could follow who owed whom. Firms were now rated by how many days they failed to deliver.
One bright young man had been going to night school to learn all about computer programming. He was with Smith Barney and was soon on control of the back office. They became so efficient that the rest of the street marveled at their accuracy. When they called another back office, the clerk hearing the name of Smith Barney would say, “How much do we owe you?”
Other firms would say when someone else called, “Let me check it and I will get back to you in a couple of days.”
Needless to say that young man became the next president of Smith Barney until the third generation took over the street.
My main point here is that when Wall Street had its own depression, this country survived in fine shape. All we had were mini recessions. Congress failed to revisit and improve and maybe justify their existence. The Investment Company Act of 1940 should have been radically changed to protect the customers instead of the mutual funds.
This was a monumental mistake. They failed to investigate what was happening to the street. They would have discovered that the Investment Company Act had created a monster in sheepskin.
The street had taken a 50% haircut all across the board. It was because of dumb foolishness by senior management looking to become the next financial wizard.
Instead of looking for values and the public wellbeing, they decided to feather their own nests with products that created excessive commissions. The first step was options. One out of ten trades is profitable the public, 9 out 10 to the firms. Wall Street has the ability to shoot itself in the foot too. By not supervising the trades and traders there was an explosion and several firms took the final dive.
Once the Street learned how to handle that crisis they went on to bigger and more profitable trading ideas. Program trading led to the Crash of ’87. It had created a perpetual motion machine once it had started and no one thought of pulling the plug on the computers. Computers need electricity to operate. Simple. It was not until the market closed that the firms involved had created lots of commissions, but lost principal. Luckily for the public, this program self-destructed.
My point is that at the end of every minor cycle there is a moment when we go back and correct or enter the second major cycle.
The first cycle is where one has pride in the job and themselves. They want to serve the community that they work in. The second stage can be called “Up your gross”. This has to do with the firm and making sure it is profitable. Team spirit. The firm can do well as a bond trader, or fine research, or stock market technicians. Usually there is one individual who is the firm’s star (GURU) that ends up calling the shots.
Our economy is changing from an inflation mode to a deflation mode. Individuals are now seeking quality and price in the market place. Socialist policies are the wrong fork in the road.
Chapter Four
Broken Bones Fixed
OK the doctor has been called in to fix our broken economy. The problem is that he is from the middle ages. For some the pain is going to be devastating. For many of these players (now called “BANKERS”) it could and should be fatal. Examples must be set for future generations.
The market place is corrupt and the private investor is being smothered. The Private Investor (PI) is the foundation of the economy and must be protected.
The first thing our medieval doctor (Let’s call him Merlin – for there is always hope) is going to raise margin rates. This will shell shock the market place and stocks will dive. Most Hedge funds will fall on their own weight because most are heavily margined with debt. If Merlin raises rates just 10% for stocks, then the new players will have to pay 60% of the price. The 50% players may stay at 50% and if they do same day trades will remain there, but if they fail to do this; then they are at the new rate.
Bond and commodity players will be cut to the quick. Bond traders are not supposed to be on Margin. Recently bonds have been used as a speculative vehicle to promote excessive fees for greedy bankers in convoluted trades that go by various names. The basic form is called a derivative. A derivative “derives” something from one place and gives it to another place; this usually means taking something good and combining it with something bad –so that the combined security looks better instead of junk. One can buy a prostitute a fancy dress, but she is still a prostitute.
Margin rates should be gradually increased so that all speculative fever is erased from the market place.
Most financial disasters have been built around too easy credit. In the 1929 crash, margin debt was 10%. At the end of November 2011 it ranges from 10% for certain commodities and bonds to 50 % for stocks.
If we are in the midst of a panic we should raise all margin debt to 100%. This will end speculation in a hurry. Schumpeter’s law of “creative destruction” should take over. It will be corporations who have been destroyed that will be replaced by ones that are newer and more creative. Big businesses hamper growth in most cases. They are laying-off and “fine tuning” their earnings while a young growing business is hiring and growing. 50% margin works like this. You buy a $10 stock for $5 and the bank, through a broker, lends you $5. Now if the stock goes to $15 and you sell, you would have made 100% once you pay back the $5.
Now if the stock goes to $5, you get a margin call and are sold out. Your loss is 100%. If you had paid cash you still have $5 investment.
Now commodities have enjoyed lower rates and the traders are making a bonanza. The easy credit has prospered many funds to dupe the unsuspecting. If they are so good why do they need your money?
The commodity market was formed for a noble cause. A corn farmer would work hard and then when his crop was harvested along with everyone else’s the monetary value was almost nothing. It is just like your neighbor offering you some tomatoes during the peak summer months. They have more tomatoes than they can eat.
Chapter 5
UP-TICK RULE
Joseph P Kennedy, the first SEC chairman, instituted the Up-tick Rule in shorting stocks as one of his first acts in 1938, which calmed the markets right down. Italy has just recently banned all short sales to stop a run on their markets.
The old rule, which was a good one, went like this: First the broker had to go to his or her back office and get permission to sell short. There had to be stock available for the short sale because it must be delivered to the investor who is buying your stock. Then the stock must have an up-tick in price. This stops raids on securities, or if the stock is in a free fall, the short seller fades into the woodwork. Now a large short position can be considered bullish because sometime in the future the seller must cover, or buy back, to record the profit. Then there is the possibility that the company is deep trouble. The other side of the coin is positive news like an extra dividend, which the short seller has to pay, or a merger, when the seller faces a huge loss. The rule is the downside is limited because it cannot go below zero, but the upside is or can be unlimited. So short sales can be a very risky investment under normal conditions.
Since they have rescinded the up-tick rule the volatility has increase to extremes never seen before. Computers are programmed to go wiz bang in a nanosecond or even faster. This will stop this and the flash crashes too. A flash crash is a computer driven sell program when all the buyers are absent or withdraw their bids. Luckily we have not had one around the close of the market place.
Chapter Six
USURY
Back in the 1970’s, when inflation was just beginning to rear its ugly head, disintermediation took place. This is how it worked. One could max out the credit card credit and legally the credit card companies could only charge 8%. Then the individual would be able to go and buy government agency short-term debt that was yielding 22%. That was a neat 14% return on one’s money. Sadly, individuals do not have lobbyists in Washington D.C. and the law was quietly changed to “protect?” the credit card companies. Most of our representatives in Congress are probably ignorant of the Rule of 72. Bankers love this rule. One takes 72 and divide by the interest rate you are paying. The result is how long it takes for that institution to double its return on your debt. If one has a 7% mortgage rate due in thirty years then every 10.29 years the bank will double its return. So over that 30-year period that bank will double its return 2.92 times. That is almost 3 times on your money over a 30-year period. That is a fair return because the bank has lent their depositor’s funds so you could buy your home. In return they receive interest on their funds and the banks can pay their employees fair wages. This is called velocity of money and how many times a dollar can be turned over. This is a healthy situation.
Now the credit card companies were able to go wild because their restraints were removed. Once a credit card holder failed to pay the entire monthly bill the interest charges kicked in. Just a little bit, but as the delay kicked in and the bill got bigger the rates went up. Your first month delay had now been over 6 months and while your charge on the latest month is probably minor, your late payments are now over 20% in most cases. We are now talking 3.6 years instead of 10.29 years. Once an outside shock awakens the populace they start de-leveraging, or paying down their debts. This is deflationary, because the funds are not buying products except for necessary products.
Now go big time. Governments and their entitlement programs are the same as individual credit cards but with more zeros. Our representatives do this because their perks are fantastic and start compounding the longer they remain in office. They know it is wrong, but who cares as long as they keep the ship floating with debt.
Once a sovereign debt percentage is more than their GDP, then future borrowings are just to pay interest on previous debt. Your ship is sinking. Sell assets at depressed prices? Cut entitlement programs?
Now you see the mess we are in. It starts by credit agencies lowering their credit ratings on debt. That means higher interest rates. Ugh!
SUMMARY OF PART ONE
If you grew as a child during WWII as I did from the ages of 6 to 10 it left a lasting impression. Sixty-six years later my mind still has the horrors of the aftermath of that noble combat.
We as a world now face a similar disaster. This time it is economic. We have greed and we are losing our morals and fairness to our fellow human being.
The solutions are not pleasant. The ones I have mentioned will have the effect of a bombed out European conflict. There were many casualties, but many more survivors in this conflict. Everyone is watching the economic recovery, which is really a house of cards. Its base is marked by greed and corruption of a few that will ultimately destroy the multitude.
The United States is the only country on this planet earth where multitudes would dream of living here. So we must set the standards for the rest of the world.
George Washington took the oath of office with his hand on a bible. We believe in a supreme being, and yet we as a nation espouse freedom of religion. WE as individuals have the choice to make. We as a nation chose separation of Church and state, just as Turkey did in the 20th century. We have both prospered. It is our basic freedom and no court should dictate to us or change our way because of hurting a minority. In a true democracy the minority is listened to but does not necessarily achieve its desire. We have freedom of religion. That is our God given right. Freedom does not mean censorship. Religion that uses violence to flourish is not the American way of life. (Jan 1, 2006 during communion, Jesus Christ spoke to me as I bit down on a piece of bread. HE said, “ You can pray to me too!”)
We must come up with a better way of choosing our national leaders. Graduation from a third rate collage and the ability to lie and pander are not valid credentials. Maybe there should be a bipartisan board to judge perspective candidates
Bankers are a special breed and should be the “watch dog” of the economic community- not a slithering python. Salaries should be based upon a criterion of performances within the bank itself. Bringing back the “Up-tick Rule“ restores a degree of safety to the market place and takes away one of the manipulative forces in the market place that hedge funds enjoy at the public’s expense.
There have been laws going way back in time. They can protect the average citizen from being duped.
All these measures are just a process of slowing event and hoary expectations down. These are hard choices for some and readjustments for many, but just over the short term.
Failure to enact and or reenact these reforms will beam us from a European conflict to a devastating wipe out like Hiroshima.
- Freedom of religion is based upon the old and new testament of the Bible. All the different sects are based upon love of our neighbors. As long as other religions have the same attitude they should be free to worship on our soil. We have a model of government based upon separation of Church and State.
- Reinstate the “Up-tick Rule” immediately.
- Raise interest rates that involve security transactions. No more “carry trades”. This will make derivative trades and high frequency trades obsolete.
- Reinstate the law.
- Establish a minimum standard to issuing credit cards.
- Separate banks and brokers.
These measures will cause havoc among certain groups that will scream bloody murder. The harder they scream will result in a safer place for the public.
We are now the only super power in the world. We have no agenda, no standards for the rest of the world to look up to or follow. Right now we are a rudderless ship of state floundering on the open seas. This in turn allows the world to be in chaos while the mighty rich plunder the defenseless populations at their free will.
Part Two is designed to create a new world order based upon our principals of individual freedoms and rights within the framework of benevolent governments. I call it our Future.
Glossary*
Derivative
derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties.[1][2]
Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form through which to extend credit.[3] However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks.[3] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy.[3][4]
Financial reforms within the US since the financial crisis have served only to reinforce special protections for derivatives, including greater access to government guarantees, while minimizing disclosure to broader financial markets.[5]
When the markets switched from the fractions system to decimals it negated the profit spread for market makers. Thus the street invented to new ways to remain profitable
Hedge Funds
| An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. |
Margin
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Short Sale
In finance, short selling (also known as shorting or going short) is the practice of selling assets that have not been purchased beforehand, but which the seller may have borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller. “Shorting” and “going short” also refer to entering into any derivative or other contract under which the investor similarly profits from a fall in the value of an asset. Mathematically, short selling is equivalent to buying a negative amount of the assets. Short selling is almost always conducted with assets traded in public securities, commodities or currency markets, as on such markets the amount being made or lost can be monitored in real time and it is generally possible to buy back the borrowed assets whenever required. Going short can be contrasted with the more conventional practice of “going long”, whereby an investor profits from any increase in the price of the asset.
A short sale one can make only the price the person sold short at and zero, but the loss is unlimited providing how high the security goes.A buying panic could wipe one’s assets out.
Uptick Rule
The rule went into The uptick rule refers to a trading restriction that disallowed short selling of securities except on an uptick. For the rule to be satisfied, the short must be either at a price above the last traded price of the security, or at the last traded price if that price was higher than the price in the previous trade. The U.S. Securities and Exchange Commission (SEC) defined the rule, and summarized it: “Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.”[1]
effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08.
Reinstating the uptick rule should curb most of the scurrilous practices.
Usury Laws
Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England
The Old Testament
From the King James Version
[Exodus 22:25] If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
[Leviticus 25:36] Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.
[Leviticus 25:37] Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.
[Deuteronomy 23:19] Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury:
[Deuteronomy 23:20] Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
[Ezekiel 18:17] He withholds his hand from sin and takes no usury or excessive interest.
[edit]Torah
Main article: Loans and interest in Judaism
The following quotations are from the Hebrew Bible, 1917 Jewish Publication Society translation:
If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.(Exodus, 22:25)[27]
And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase. (Leviticus, 25:35-37)
Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it. (Deuteronomy, 23:20-21)
[edit]New Testament
| This article may be confusing or unclear to readers. Please help clarify the article; suggestions may be found on the talk page. (March 2011) |
Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.[28]
The New Testament contains references to usury, notably in the Parable of the talents:
“Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”
—Matthew 25:27
“…Out of thine own mouth will I judge thee, thou wicked servant. Thou knewest that I was an austere man, taking up that I laid not down, and reaping that I did not sow. Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?”
—Luke 19:22-23
Finally the master said to him ‘Why then didn’t you put my money on deposit, so that when I came back, I could have collected it with interest?’
—Luke 19:23
[edit]Qur’an
Main articles: Riba and Islamic banking
The following quotations are English translations from the Qur’an:
Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)
God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! Those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)
O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-‘Imran 3:130)
And for practicing usury, which was forbidden, and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)
The usury that is practiced to increase some people’s wealth, does not gain anything at God. But if people give to charity, seeking God’s pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)
[edit]Scholastic theology
The first of the scholastics, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft. Previously usury had been seen as a lack of charity.
St. Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of interest is wrong because it amounts to “double charging”, charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is exchange-medium. It is used up when it is spent. To charge for the money and for its use (by spending) is to charge for the money twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity that anyone can sell. (For a detailed discussion of Aquinas and usury, go to Thought of Thomas Aquinas).
Labor is time, or if preferred, is measured by time. Workers are paid by the hour, by the day, by the week, by the month, rarely by the quarter or year. Labor is not effort, energy, expenditure of fuel (food). It is nothing but one’s time. As an example of labor without the expenditure of energy: A security guard whose job is just to be there. Perhaps nothing happens and he can read a book, assemble model trains, or even sleep, as long as he wakes up when the alarm rings. He has spent not one calorie of energy for the employer above what it takes just to live. Yet he is paid (compensated) for his time, for his labor. Even share-croppers and pieceworkers are compensated for the time they spent adding value to the raw materials. The sharecropper hands over the agreed portion of the increase (crop; harvest) to the owner of the land or the leaseholder in return for whatever the landlord provided: the land, perhaps the seed, farming tools, supplies, etc. The pieceworker is compensated for the labor, the time he spent, in adding value to the raw materials: the tools, the supplies, the workspace, light, heat, etc., according to the agreement made with the boss (client). If one labors for compensation, what he is compensated for is his time. As an even exchange of value, he has neither gained or lost anything. He has merely converted something he was going to lose anyway, time from his life, which, as we all know, is limited though we do not know in advance what the limit is, into something else that he wanted. Whether he is paid in goods, services or money is irrelevant. Money is but a medium of exchange that is much more efficient than straight barter. Only a miser wants money for itself, just to possess it. Normal people want money because it allows them to convert one thing that they are willing to sacrifice into something else that they actively want.
This did not, as some think, prevent investment. What it stipulated was that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all. This is usury. St Thomas quotes Aristotle as saying that “to live by usury is exceedingly unnatural”. Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) – an alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests. Judaism condemns usury towards Jews, but allows it towards non-Jews. St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as “montes pietatis”.[29]
In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral.[30] The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest “to compensate him for profit foregone in investing the money himself.” (Rothbard 1995, p. 46) This idea is very similar to Opportunity Cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena).
- All definitions have been gathered from Wikipedia.com or Investopedia.com by means of using google.com
*****
IT WILL NOT HAPPEN TO ME! GUESS WHAT? IT WILL!!
FORWARD
I am Richard De Graff the second son of John Teller De Graff Sr. and Audrey Brown De Graff of Albany NY, USA. I have been a real stockbroker since 1960. I Completed the Graham and Dodd correspondence course from the New York Institute of Finance while serving in the United States Army for two years. Sept. 1957-Sept. 1959, it was known as the quiet period- no wars. I still remember my dog tag number-FR-12 538396. I am currently a member of the Congregational Church of Eastford Connecticut USA.
We, as residents of this planet earth, have progressed so far in the last 100 years that one can take all the progressions for 5,000 years and combine them into one small round ball and it won’t equal what man has done in the last 100 years. In sum, we have grown too fast and we don’t have new rules, or better yet, we have ignored the old ones that protected our individual freedoms.
I am writing this booklet because I believe the countries of this world believe the economy is rebounding. It is improving, but the market place is where the grasshoppers are playing to their greedy delight. Meanwhile the ants have hunkered down.
The near term solutions will hurt almost everyone for a very short time while we all readjust. Only a few will return to dust. This is Part One of this booklet.
Part Two has to deal with avoiding a total economic tsunami due to worldwide debt enthusiasm. We will have to learn to control our well-meaning intentions or face destruction of our freedoms.
Several of the Programs started when FDR was president worked very well, but the Congress failed to revisit these laws; they failed to correct or to improve these laws every 10 to 15 years. I am referring to the securities laws that were passed in the 1930’s and 1940-1941. In particular, the Investment Company Act of 1940. Protecting Mutual Funds should have been annulled when computers could price Mutual Funds’ holdings instantly. This failure has created a Goliath playing with a turbo-charged club in the securities industry. This is just one example where reform is needed.
FDR also instituted a socialist agenda where our central government welfare programs were aimed to kick-start the economy. Under the Keynesian theory we were supposed to pay down these debts over time when our economy was profitable. Sadly, we created more entitlement programs without saving for them. The rest of the world copied our programs and relied on bankers and the bond markets to finance their dreams.
Europe and the Middle Eastern countries are at the abyss now and that abyss is slowly coming to our shores. There are now giant hedge funds run by unscrupulous managers and they compete with central bankers in a game of self-destruction. The House of Representatives is supposed to have control of our monies.
Our market place is now a board game for the “privileged few” at the expense of entire populations.
We are now having two choices. The easier choice will devastate the sneaky, shady players in our market place over the short term. While we listen to our present leaders we will start falling into that sinkhole and we will all fail. The purpose of this book is for future reference for those non-believers while those who are prudent can take the necessary steps for survival.
The first part of this book is the easy part, but will take intestinal fortitude to implement, but these things must be done before we can re-regulate the entire finance industry.
The passages that I have written are from over 50 years on the battlefields of finance. In the Army they called it OJT- on the job training. It is now up to academics to prove or disprove my thoughts. Remember, Moses’ Ten Commandments were only 297 words and look at how much has been written about them!
We have crossed the raggedy bridge and it has collapsed. There is no way back. We must look forward.
Cheerio!!!!
Part One
THE PAST AND PRESENT
Chapter One Bring Back God!!!
Chapter Two LBJ
Chapter Three Bankers and Banks
Chapter Four Banking Reforms
Chapter Five Broken Bones
Chapter Six Up-tick Rule
Summary for Part One
Glossary
Chapter One
Bring Back God
“With confidence in our armed forces – with the un-bounding determination of our people – we will gain the inevitable triumph – so help us God.
I ask that the Congress declare that since the unprovoked and dastardly attack by Japan on Sunday, Dec. 7, a state of war has existed between the United States and the Japanese empire. “
The above is the last two paragraphs of President Roosevelt’s speech before the US Congress on December 8, 1941.
He is clearly asking God for HIS help. As a student of the Old and New Testament I can see the hand of God at work. The official naval archives listed it as “luck” in the Battle of Midway in May 6&7 1942.
Australians call The Battle of the Coral Sea the battle that saved Australia. The Japanese Naval forces were confidently heading for New Guiana to use a stepping off place to attack Australia and New Zealand.
They ran into an unexpected US Naval force with the USS Lexington aircraft carrier power base. In the ensuing battle the USS Lexington was sunk. What we did not know at that time was that the Japanese had lost about 60 airplanes. So their two aircraft carriers headed north to be re-supplied instead of rejoining the task force heading towards Midway Island.
So the Japanese had four aircraft carriers instead of six for that epic battle. The US had three, but only two were operating in battleship condition. Our backs were to the wall, but with American “can do” spirit we were able to Ambush the Japanese Navy.
Our scout planes found the naval task force and radioed back. While the Japanese planes were being rearmed with torpedoes our naval pilots stuck each time they shot down until the dive-bombers and torpedo planes showed up at the same time. The Japanese lost their four aircraft carriers and the naval ability plummeted.
The turning point in the battle was that two Japanese scout planes found our task force. When they went to radio back the news – their radios went dead. When they did report it was too late, but we did lose the Yorktown. The Naval report calls it “luck”; I say it was an act of God.
D-Day on the beaches of Normandy France was a slaughter until the defenders started running out of ammunition. At first the German High Command was afraid to wake up Hitler and then he would not release the Panzer tank division. I believe it was Déjà vu all over again from the Old Testament. (My complements to Yogi Berra for his honest, savory expressions.)
The United States has always allowed freedom of religion and God has blessed us until recently when we started breaking the Ten Commandments and taking God out of schools. The Lord Almighty has given us a warning shot across our bow with 9/11.
The biggest sacrilege though is leaving “so help us God” off FDR’s monument in Washington DC. We must restore his complete true speech.
Chapter Two
LBJ
The real culprit of today’s mess is Lyndon Baines Johnson, former president of the United States. A graduate of a third rate college, he wrecked our future economy with his “guns and butter” agenda that this country could not afford. The ultra-liberal wing took over the Democratic Party.
I believe LBJ is the “Ahab” of our country.
Robert Caro has been writing his fourth installment and it will be published in 2012. It should bring the house down.
LBJ’s programs forced Richard Nixon to get off the gold standard and this in turn opened the floodgates of Congress where ultimately 435 members control 300,000,000 people’s destinies.
So we went form a “pay as you go” society to one of borrowing from the future. The Social Security fund was already being raided under the guise of “smoke and mirrors”; forget about the interest being earned – it was the principal that was being used. That is the real Ponzi scam.
Chapter Three
“Woe to you, teachers of the law and Pharisees, you hypocrites! You clean the outside of the cup and dish, but inside they are full of greed and self-indulgence.
Matthew 23:24-26
Bankers and Banks
A healthy bank means a healthy community.
Today bankers are in control instead of serving the public. The House of Representatives has control of our purse strings, not the bankers. We should consider nationalizing our banks and buying the shares back at real book value. Their large bonuses should be given to depositors and shareholders. Steve Jobs quoted as the reason he was not taking a salary when returning to Apple Computer was, “ I already have billions of dollars – I don’t need more. I want to build Apple Computer into another Hewlett Packard.”
When one does well, one will earn honest money. We are becoming too greedy and bankers are living off our greed. Bankers used to be respected members of our community.
Today we are teetering on the brink of a worldwide collapse economically. The United States corrected this problem in the 1930’s. Most economic disasters happen because of easy credit and greed. This is a normal psychological cycle. It takes about three generations to happen.
The first generation learns from its mistakes. The second generation prospers because of the solid base built by the first. Then the third generation, which we can call “smarty pants” because they don’t believe it can happen again and they break all the rules put in place by the first.
The Congress of the 1930’s did a magnificent job protecting the investing public from the different kind of abuses that were prevalent back then and today.
When the economic collapse happened in 1973-1974 the Congress congratulated them selves on a job well done. Actually they should have revisited and amended many of the statues, for the seeds of 2000 fiascos were planted then by the survivors.
The formation of OPEC caught the world by surprise. A horrific adjustment would now take place. Many companies were unprepared and slowly sank into oblivion.
Wall Street got smacked. Big Time. 50% of the firms vanished. 50% of employees left for safer endeavors. Schumpeter’s Law of Creative Destruction was working to perfection. (The basic premise is that antiquated businesses are replaced by newer and growing businesses. A prime example is the buggy whip disappeared when the automobile was mass-produced.)
This is where the Congress failed. Instead of going back to Wall Street and seeing what laws need to be revised, or annulled, they went on their merry way, and let Wall Street feather their own nest.
Wall Street survivors vowed this would never happen again to them. The bankers, cozy in their fireside chairs, smugly smiled. They survived in pretty good shape.
Banking and Reforms
Most economic downturns are because of loose credit. Easy money leads to loose standards and eventually immoral behavior.
As I mentioned in the previous chapter, there are usually three stages to a recovery. The first stage everyone remembers the mistake made in the past cycle and are intent on not repeating these mistakes. This was the case in the 1930’s. The problem was that most congressmen that passed these laws retired knowing that they did a job well done. The next generation of Congresspersons believed that the problem had been corrected and never revisited the laws. Times change and conditions improve and standard of living improves with new invention. The computer is a prime example. In 1968 Wall Street embraced the computer as if it was a porn star. They never looked inside to see how it worked. They just pushed buttons and smiled at how easy it was.
The problem that developed was with the unsung heroes of the industry, the back office. They were understaffed and over worked. They had done so much business and a myriad of trades that no one could follow who owed whom. Firms were now rated by how many days they failed to deliver.
One bright young man had been going to night school to learn all about computer programming. He was with Smith Barney and was soon on control of the back office. They became so efficient that the rest of the street marveled at their accuracy. When they called another back office, the clerk hearing the name of Smith Barney would say, “How much do we owe you?”
Other firms would say when someone else called, “Let me check it and I will get back to you in a couple of days.”
Needless to say that young man became the next president of Smith Barney until the third generation took over the street.
My main point here is that when Wall Street had its own depression, this country survived in fine shape. All we had were mini recessions. Congress failed to revisit and improve and maybe justify their existence. The Investment Company Act of 1940 should have been radically changed to protect the customers instead of the mutual funds.
This was a monumental mistake. They failed to investigate what was happening to the street. They would have discovered that the Investment Company Act had created a monster in sheepskin.
The street had taken a 50% haircut all across the board. It was because of dumb foolishness by senior management looking to become the next financial wizard.
Instead of looking for values and the public wellbeing, they decided to feather their own nests with products that created excessive commissions. The first step was options. One out of ten trades is profitable the public, 9 out 10 to the firms. Wall Street has the ability to shoot itself in the foot too. By not supervising the trades and traders there was an explosion and several firms took the final dive.
Once the Street learned how to handle that crisis they went on to bigger and more profitable trading ideas. Program trading led to the Crash of ’87. It had created a perpetual motion machine once it had started and no one thought of pulling the plug on the computers. Computers need electricity to operate. Simple. It was not until the market closed that the firms involved had created lots of commissions, but lost principal. Luckily for the public, this program self-destructed.
My point is that at the end of every minor cycle there is a moment when we go back and correct or enter the second major cycle.
The first cycle is where one has pride in the job and themselves. They want to serve the community that they work in. The second stage can be called “Up your gross”. This has to do with the firm and making sure it is profitable. Team spirit. The firm can do well as a bond trader, or fine research, or stock market technicians. Usually there is one individual who is the firm’s star (GURU) that ends up calling the shots.
Our economy is changing from an inflation mode to a deflation mode. Individuals are now seeking quality and price in the market place. Socialist policies are the wrong fork in the road.
Chapter Four
Broken Bones Fixed
OK the doctor has been called in to fix our broken economy. The problem is that he is from the middle ages. For some the pain is going to be devastating. For many of these players (now called “BANKERS”) it could and should be fatal. Examples must be set for future generations.
The market place is corrupt and the private investor is being smothered. The Private Investor (PI) is the foundation of the economy and must be protected.
The first thing our medieval doctor (Let’s call him Merlin – for there is always hope) is going to raise margin rates. This will shell shock the market place and stocks will dive. Most Hedge funds will fall on their own weight because most are heavily margined with debt. If Merlin raises rates just 10% for stocks, then the new players will have to pay 60% of the price. The 50% players may stay at 50% and if they do same day trades will remain there, but if they fail to do this; then they are at the new rate.
Bond and commodity players will be cut to the quick. Bond traders are not supposed to be on Margin. Recently bonds have been used as a speculative vehicle to promote excessive fees for greedy bankers in convoluted trades that go by various names. The basic form is called a derivative. A derivative “derives” something from one place and gives it to another place; this usually means taking something good and combining it with something bad –so that the combined security looks better instead of junk. One can buy a prostitute a fancy dress, but she is still a prostitute.
Margin rates should be gradually increased so that all speculative fever is erased from the market place.
Most financial disasters have been built around too easy credit. In the 1929 crash, margin debt was 10%. At the end of November 2011 it ranges from 10% for certain commodities and bonds to 50 % for stocks.
If we are in the midst of a panic we should raise all margin debt to 100%. This will end speculation in a hurry. Schumpeter’s law of “creative destruction” should take over. It will be corporations who have been destroyed that will be replaced by ones that are newer and more creative. Big businesses hamper growth in most cases. They are laying-off and “fine tuning” their earnings while a young growing business is hiring and growing. 50% margin works like this. You buy a $10 stock for $5 and the bank, through a broker, lends you $5. Now if the stock goes to $15 and you sell, you would have made 100% once you pay back the $5.
Now if the stock goes to $5, you get a margin call and are sold out. Your loss is 100%. If you had paid cash you still have $5 investment.
Now commodities have enjoyed lower rates and the traders are making a bonanza. The easy credit has prospered many funds to dupe the unsuspecting. If they are so good why do they need your money?
The commodity market was formed for a noble cause. A corn farmer would work hard and then when his crop was harvested along with everyone else’s the monetary value was almost nothing. It is just like your neighbor offering you some tomatoes during the peak summer months. They have more tomatoes than they can eat.
Chapter 5
UP-TICK RULE
Joseph P Kennedy, the first SEC chairman, instituted the Up-tick Rule in shorting stocks as one of his first acts in 1938, which calmed the markets right down. Italy has just recently banned all short sales to stop a run on their markets.
The old rule, which was a good one, went like this: First the broker had to go to his or her back office and get permission to sell short. There had to be stock available for the short sale because it must be delivered to the investor who is buying your stock. Then the stock must have an up-tick in price. This stops raids on securities, or if the stock is in a free fall, the short seller fades into the woodwork. Now a large short position can be considered bullish because sometime in the future the seller must cover, or buy back, to record the profit. Then there is the possibility that the company is deep trouble. The other side of the coin is positive news like an extra dividend, which the short seller has to pay, or a merger, when the seller faces a huge loss. The rule is the downside is limited because it cannot go below zero, but the upside is or can be unlimited. So short sales can be a very risky investment under normal conditions.
Since they have rescinded the up-tick rule the volatility has increase to extremes never seen before. Computers are programmed to go wiz bang in a nanosecond or even faster. This will stop this and the flash crashes too. A flash crash is a computer driven sell program when all the buyers are absent or withdraw their bids. Luckily we have not had one around the close of the market place.
Chapter Six
USURY
Back in the 1970’s, when inflation was just beginning to rear its ugly head, disintermediation took place. This is how it worked. One could max out the credit card credit and legally the credit card companies could only charge 8%. Then the individual would be able to go and buy government agency short-term debt that was yielding 22%. That was a neat 14% return on one’s money. Sadly, individuals do not have lobbyists in Washington D.C. and the law was quietly changed to “protect?” the credit card companies. Most of our representatives in Congress are probably ignorant of the Rule of 72. Bankers love this rule. One takes 72 and divide by the interest rate you are paying. The result is how long it takes for that institution to double its return on your debt. If one has a 7% mortgage rate due in thirty years then every 10.29 years the bank will double its return. So over that 30-year period that bank will double its return 2.92 times. That is almost 3 times on your money over a 30-year period. That is a fair return because the bank has lent their depositor’s funds so you could buy your home. In return they receive interest on their funds and the banks can pay their employees fair wages. This is called velocity of money and how many times a dollar can be turned over. This is a healthy situation.
Now the credit card companies were able to go wild because their restraints were removed. Once a credit card holder failed to pay the entire monthly bill the interest charges kicked in. Just a little bit, but as the delay kicked in and the bill got bigger the rates went up. Your first month delay had now been over 6 months and while your charge on the latest month is probably minor, your late payments are now over 20% in most cases. We are now talking 3.6 years instead of 10.29 years. Once an outside shock awakens the populace they start de-leveraging, or paying down their debts. This is deflationary, because the funds are not buying products except for necessary products.
Now go big time. Governments and their entitlement programs are the same as individual credit cards but with more zeros. Our representatives do this because their perks are fantastic and start compounding the longer they remain in office. They know it is wrong, but who cares as long as they keep the ship floating with debt.
Once a sovereign debt percentage is more than their GDP, then future borrowings are just to pay interest on previous debt. Your ship is sinking. Sell assets at depressed prices? Cut entitlement programs?
Now you see the mess we are in. It starts by credit agencies lowering their credit ratings on debt. That means higher interest rates. Ugh!
SUMMARY OF PART ONE
If you grew as a child during WWII as I did from the ages of 6 to 10 it left a lasting impression. Sixty-six years later my mind still has the horrors of the aftermath of that noble combat.
We as a world now face a similar disaster. This time it is economic. We have greed and we are losing our morals and fairness to our fellow human being.
The solutions are not pleasant. The ones I have mentioned will have the effect of a bombed out European conflict. There were many casualties, but many more survivors in this conflict. Everyone is watching the economic recovery, which is really a house of cards. Its base is marked by greed and corruption of a few that will ultimately destroy the multitude.
The United States is the only country on this planet earth where multitudes would dream of living here. So we must set the standards for the rest of the world.
George Washington took the oath of office with his hand on a bible. We believe in a supreme being, and yet we as a nation espouse freedom of religion. WE as individuals have the choice to make. We as a nation chose separation of Church and state, just as Turkey did in the 20th century. We have both prospered. It is our basic freedom and no court should dictate to us or change our way because of hurting a minority. In a true democracy the minority is listened to but does not necessarily achieve its desire. We have freedom of religion. That is our God given right. Freedom does not mean censorship. Religion that uses violence to flourish is not the American way of life. (Jan 1, 2006 during communion, Jesus Christ spoke to me as I bit down on a piece of bread. HE said, “ You can pray to me too!”)
We must come up with a better way of choosing our national leaders. Graduation from a third rate collage and the ability to lie and pander are not valid credentials. Maybe there should be a bipartisan board to judge perspective candidates
Bankers are a special breed and should be the “watch dog” of the economic community- not a slithering python. Salaries should be based upon a criterion of performances within the bank itself. Bringing back the “Up-tick Rule“ restores a degree of safety to the market place and takes away one of the manipulative forces in the market place that hedge funds enjoy at the public’s expense.
There have been laws going way back in time. They can protect the average citizen from being duped.
All these measures are just a process of slowing event and hoary expectations down. These are hard choices for some and readjustments for many, but just over the short term.
Failure to enact and or reenact these reforms will beam us from a European conflict to a devastating wipe out like Hiroshima.
- Freedom of religion is based upon the old and new testament of the Bible. All the different sects are based upon love of our neighbors. As long as other religions have the same attitude they should be free to worship on our soil. We have a model of government based upon separation of Church and State.
- Reinstate the “Up-tick Rule” immediately.
- Raise interest rates that involve security transactions. No more “carry trades”. This will make derivative trades and high frequency trades obsolete.
- Reinstate the law.
- Establish a minimum standard to issuing credit cards.
- Separate banks and brokers.
These measures will cause havoc among certain groups that will scream bloody murder. The harder they scream will result in a safer place for the public.
We are now the only super power in the world. We have no agenda, no standards for the rest of the world to look up to or follow. Right now we are a rudderless ship of state floundering on the open seas. This in turn allows the world to be in chaos while the mighty rich plunder the defenseless populations at their free will.
Part Two is designed to create a new world order based upon our principals of individual freedoms and rights within the framework of benevolent governments. I call it our Future.
Glossary*
Derivative
derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties.[1][2]
Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form through which to extend credit.[3] However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks.[3] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy.[3][4]
Financial reforms within the US since the financial crisis have served only to reinforce special protections for derivatives, including greater access to government guarantees, while minimizing disclosure to broader financial markets.[5]
When the markets switched from the fractions system to decimals it negated the profit spread for market makers. Thus the street invented to new ways to remain profitable
Hedge Funds
| An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. |
Margin
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Short Sale
In finance, short selling (also known as shorting or going short) is the practice of selling assets that have not been purchased beforehand, but which the seller may have borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller. “Shorting” and “going short” also refer to entering into any derivative or other contract under which the investor similarly profits from a fall in the value of an asset. Mathematically, short selling is equivalent to buying a negative amount of the assets. Short selling is almost always conducted with assets traded in public securities, commodities or currency markets, as on such markets the amount being made or lost can be monitored in real time and it is generally possible to buy back the borrowed assets whenever required. Going short can be contrasted with the more conventional practice of “going long”, whereby an investor profits from any increase in the price of the asset.
A short sale one can make only the price the person sold short at and zero, but the loss is unlimited providing how high the security goes.A buying panic could wipe one’s assets out.
Uptick Rule
The rule went into The uptick rule refers to a trading restriction that disallowed short selling of securities except on an uptick. For the rule to be satisfied, the short must be either at a price above the last traded price of the security, or at the last traded price if that price was higher than the price in the previous trade. The U.S. Securities and Exchange Commission (SEC) defined the rule, and summarized it: “Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.”[1]
effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08.
Reinstating the uptick rule should curb most of the scurrilous practices.
Usury Laws
Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England
The Old Testament
From the King James Version
[Exodus 22:25] If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
[Leviticus 25:36] Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.
[Leviticus 25:37] Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.
[Deuteronomy 23:19] Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury:
[Deuteronomy 23:20] Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
[Ezekiel 18:17] He withholds his hand from sin and takes no usury or excessive interest.
[edit]Torah
Main article: Loans and interest in Judaism
The following quotations are from the Hebrew Bible, 1917 Jewish Publication Society translation:
If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.(Exodus, 22:25)[27]
And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase. (Leviticus, 25:35-37)
Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it. (Deuteronomy, 23:20-21)
[edit]New Testament
| This article may be confusing or unclear to readers. Please help clarify the article; suggestions may be found on the talk page. (March 2011) |
Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.[28]
The New Testament contains references to usury, notably in the Parable of the talents:
“Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”
—Matthew 25:27
“…Out of thine own mouth will I judge thee, thou wicked servant. Thou knewest that I was an austere man, taking up that I laid not down, and reaping that I did not sow. Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?”
—Luke 19:22-23
Finally the master said to him ‘Why then didn’t you put my money on deposit, so that when I came back, I could have collected it with interest?’
—Luke 19:23
[edit]Qur’an
Main articles: Riba and Islamic banking
The following quotations are English translations from the Qur’an:
Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)
God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! Those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)
O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-‘Imran 3:130)
And for practicing usury, which was forbidden, and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)
The usury that is practiced to increase some people’s wealth, does not gain anything at God. But if people give to charity, seeking God’s pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)
[edit]Scholastic theology
The first of the scholastics, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft. Previously usury had been seen as a lack of charity.
St. Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of interest is wrong because it amounts to “double charging”, charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is exchange-medium. It is used up when it is spent. To charge for the money and for its use (by spending) is to charge for the money twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity that anyone can sell. (For a detailed discussion of Aquinas and usury, go to Thought of Thomas Aquinas).
Labor is time, or if preferred, is measured by time. Workers are paid by the hour, by the day, by the week, by the month, rarely by the quarter or year. Labor is not effort, energy, expenditure of fuel (food). It is nothing but one’s time. As an example of labor without the expenditure of energy: A security guard whose job is just to be there. Perhaps nothing happens and he can read a book, assemble model trains, or even sleep, as long as he wakes up when the alarm rings. He has spent not one calorie of energy for the employer above what it takes just to live. Yet he is paid (compensated) for his time, for his labor. Even share-croppers and pieceworkers are compensated for the time they spent adding value to the raw materials. The sharecropper hands over the agreed portion of the increase (crop; harvest) to the owner of the land or the leaseholder in return for whatever the landlord provided: the land, perhaps the seed, farming tools, supplies, etc. The pieceworker is compensated for the labor, the time he spent, in adding value to the raw materials: the tools, the supplies, the workspace, light, heat, etc., according to the agreement made with the boss (client). If one labors for compensation, what he is compensated for is his time. As an even exchange of value, he has neither gained or lost anything. He has merely converted something he was going to lose anyway, time from his life, which, as we all know, is limited though we do not know in advance what the limit is, into something else that he wanted. Whether he is paid in goods, services or money is irrelevant. Money is but a medium of exchange that is much more efficient than straight barter. Only a miser wants money for itself, just to possess it. Normal people want money because it allows them to convert one thing that they are willing to sacrifice into something else that they actively want.
This did not, as some think, prevent investment. What it stipulated was that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all. This is usury. St Thomas quotes Aristotle as saying that “to live by usury is exceedingly unnatural”. Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) – an alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests. Judaism condemns usury towards Jews, but allows it towards non-Jews. St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as “montes pietatis”.[29]
In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral.[30] The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest “to compensate him for profit foregone in investing the money himself.” (Rothbard 1995, p. 46) This idea is very similar to Opportunity Cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena).
- All definitions have been gathered from Wikipedia.com or Investopedia.com by means of using google.com
*****
IT WILL NOT HAPPEN TO ME! GUESS WHAT? IT WILL!!
FORWARD
I am Richard De Graff the second son of John Teller De Graff Sr. and Audrey Brown De Graff of Albany NY, USA. I have been a real stockbroker since 1960. I Completed the Graham and Dodd correspondence course from the New York Institute of Finance while serving in the United States Army for two years. Sept. 1957-Sept. 1959, it was known as the quiet period- no wars. I still remember my dog tag number-FR-12 538396. I am currently a member of the Congregational Church of Eastford Connecticut USA.
We, as residents of this planet earth, have progressed so far in the last 100 years that one can take all the progressions for 5,000 years and combine them into one small round ball and it won’t equal what man has done in the last 100 years. In sum, we have grown too fast and we don’t have new rules, or better yet, we have ignored the old ones that protected our individual freedoms.
I am writing this booklet because I believe the countries of this world believe the economy is rebounding. It is improving, but the market place is where the grasshoppers are playing to their greedy delight. Meanwhile the ants have hunkered down.
The near term solutions will hurt almost everyone for a very short time while we all readjust. Only a few will return to dust. This is Part One of this booklet.
Part Two has to deal with avoiding a total economic tsunami due to worldwide debt enthusiasm. We will have to learn to control our well-meaning intentions or face destruction of our freedoms.
Several of the Programs started when FDR was president worked very well, but the Congress failed to revisit these laws; they failed to correct or to improve these laws every 10 to 15 years. I am referring to the securities laws that were passed in the 1930’s and 1940-1941. In particular, the Investment Company Act of 1940. Protecting Mutual Funds should have been annulled when computers could price Mutual Funds’ holdings instantly. This failure has created a Goliath playing with a turbo-charged club in the securities industry. This is just one example where reform is needed.
FDR also instituted a socialist agenda where our central government welfare programs were aimed to kick-start the economy. Under the Keynesian theory we were supposed to pay down these debts over time when our economy was profitable. Sadly, we created more entitlement programs without saving for them. The rest of the world copied our programs and relied on bankers and the bond markets to finance their dreams.
Europe and the Middle Eastern countries are at the abyss now and that abyss is slowly coming to our shores. There are now giant hedge funds run by unscrupulous managers and they compete with central bankers in a game of self-destruction. The House of Representatives is supposed to have control of our monies.
Our market place is now a board game for the “privileged few” at the expense of entire populations.
We are now having two choices. The easier choice will devastate the sneaky, shady players in our market place over the short term. While we listen to our present leaders we will start falling into that sinkhole and we will all fail. The purpose of this book is for future reference for those non-believers while those who are prudent can take the necessary steps for survival.
The first part of this book is the easy part, but will take intestinal fortitude to implement, but these things must be done before we can re-regulate the entire finance industry.
The passages that I have written are from over 50 years on the battlefields of finance. In the Army they called it OJT- on the job training. It is now up to academics to prove or disprove my thoughts. Remember, Moses’ Ten Commandments were only 297 words and look at how much has been written about them!
We have crossed the raggedy bridge and it has collapsed. There is no way back. We must look forward.
Cheerio!!!!
Part One
THE PAST AND PRESENT
Chapter One Bring Back God!!!
Chapter Two LBJ
Chapter Three Bankers and Banks
Chapter Four Banking Reforms
Chapter Five Broken Bones
Chapter Six Up-tick Rule
Summary for Part One
Glossary
Chapter One
Bring Back God
“With confidence in our armed forces – with the un-bounding determination of our people – we will gain the inevitable triumph – so help us God.
I ask that the Congress declare that since the unprovoked and dastardly attack by Japan on Sunday, Dec. 7, a state of war has existed between the United States and the Japanese empire. “
The above is the last two paragraphs of President Roosevelt’s speech before the US Congress on December 8, 1941.
He is clearly asking God for HIS help. As a student of the Old and New Testament I can see the hand of God at work. The official naval archives listed it as “luck” in the Battle of Midway in May 6&7 1942.
Australians call The Battle of the Coral Sea the battle that saved Australia. The Japanese Naval forces were confidently heading for New Guiana to use a stepping off place to attack Australia and New Zealand.
They ran into an unexpected US Naval force with the USS Lexington aircraft carrier power base. In the ensuing battle the USS Lexington was sunk. What we did not know at that time was that the Japanese had lost about 60 airplanes. So their two aircraft carriers headed north to be re-supplied instead of rejoining the task force heading towards Midway Island.
So the Japanese had four aircraft carriers instead of six for that epic battle. The US had three, but only two were operating in battleship condition. Our backs were to the wall, but with American “can do” spirit we were able to Ambush the Japanese Navy.
Our scout planes found the naval task force and radioed back. While the Japanese planes were being rearmed with torpedoes our naval pilots stuck each time they shot down until the dive-bombers and torpedo planes showed up at the same time. The Japanese lost their four aircraft carriers and the naval ability plummeted.
The turning point in the battle was that two Japanese scout planes found our task force. When they went to radio back the news – their radios went dead. When they did report it was too late, but we did lose the Yorktown. The Naval report calls it “luck”; I say it was an act of God.
D-Day on the beaches of Normandy France was a slaughter until the defenders started running out of ammunition. At first the German High Command was afraid to wake up Hitler and then he would not release the Panzer tank division. I believe it was Déjà vu all over again from the Old Testament. (My complements to Yogi Berra for his honest, savory expressions.)
The United States has always allowed freedom of religion and God has blessed us until recently when we started breaking the Ten Commandments and taking God out of schools. The Lord Almighty has given us a warning shot across our bow with 9/11.
The biggest sacrilege though is leaving “so help us God” off FDR’s monument in Washington DC. We must restore his complete true speech.
Chapter Two
LBJ
The real culprit of today’s mess is Lyndon Baines Johnson, former president of the United States. A graduate of a third rate college, he wrecked our future economy with his “guns and butter” agenda that this country could not afford. The ultra-liberal wing took over the Democratic Party.
I believe LBJ is the “Ahab” of our country.
Robert Caro has been writing his fourth installment and it will be published in 2012. It should bring the house down.
LBJ’s programs forced Richard Nixon to get off the gold standard and this in turn opened the floodgates of Congress where ultimately 435 members control 300,000,000 people’s destinies.
So we went form a “pay as you go” society to one of borrowing from the future. The Social Security fund was already being raided under the guise of “smoke and mirrors”; forget about the interest being earned – it was the principal that was being used. That is the real Ponzi scam.
Chapter Three
“Woe to you, teachers of the law and Pharisees, you hypocrites! You clean the outside of the cup and dish, but inside they are full of greed and self-indulgence.
Matthew 23:24-26
Bankers and Banks
A healthy bank means a healthy community.
Today bankers are in control instead of serving the public. The House of Representatives has control of our purse strings, not the bankers. We should consider nationalizing our banks and buying the shares back at real book value. Their large bonuses should be given to depositors and shareholders. Steve Jobs quoted as the reason he was not taking a salary when returning to Apple Computer was, “ I already have billions of dollars – I don’t need more. I want to build Apple Computer into another Hewlett Packard.”
When one does well, one will earn honest money. We are becoming too greedy and bankers are living off our greed. Bankers used to be respected members of our community.
Today we are teetering on the brink of a worldwide collapse economically. The United States corrected this problem in the 1930’s. Most economic disasters happen because of easy credit and greed. This is a normal psychological cycle. It takes about three generations to happen.
The first generation learns from its mistakes. The second generation prospers because of the solid base built by the first. Then the third generation, which we can call “smarty pants” because they don’t believe it can happen again and they break all the rules put in place by the first.
The Congress of the 1930’s did a magnificent job protecting the investing public from the different kind of abuses that were prevalent back then and today.
When the economic collapse happened in 1973-1974 the Congress congratulated them selves on a job well done. Actually they should have revisited and amended many of the statues, for the seeds of 2000 fiascos were planted then by the survivors.
The formation of OPEC caught the world by surprise. A horrific adjustment would now take place. Many companies were unprepared and slowly sank into oblivion.
Wall Street got smacked. Big Time. 50% of the firms vanished. 50% of employees left for safer endeavors. Schumpeter’s Law of Creative Destruction was working to perfection. (The basic premise is that antiquated businesses are replaced by newer and growing businesses. A prime example is the buggy whip disappeared when the automobile was mass-produced.)
This is where the Congress failed. Instead of going back to Wall Street and seeing what laws need to be revised, or annulled, they went on their merry way, and let Wall Street feather their own nest.
Wall Street survivors vowed this would never happen again to them. The bankers, cozy in their fireside chairs, smugly smiled. They survived in pretty good shape.
Banking and Reforms
Most economic downturns are because of loose credit. Easy money leads to loose standards and eventually immoral behavior.
As I mentioned in the previous chapter, there are usually three stages to a recovery. The first stage everyone remembers the mistake made in the past cycle and are intent on not repeating these mistakes. This was the case in the 1930’s. The problem was that most congressmen that passed these laws retired knowing that they did a job well done. The next generation of Congresspersons believed that the problem had been corrected and never revisited the laws. Times change and conditions improve and standard of living improves with new invention. The computer is a prime example. In 1968 Wall Street embraced the computer as if it was a porn star. They never looked inside to see how it worked. They just pushed buttons and smiled at how easy it was.
The problem that developed was with the unsung heroes of the industry, the back office. They were understaffed and over worked. They had done so much business and a myriad of trades that no one could follow who owed whom. Firms were now rated by how many days they failed to deliver.
One bright young man had been going to night school to learn all about computer programming. He was with Smith Barney and was soon on control of the back office. They became so efficient that the rest of the street marveled at their accuracy. When they called another back office, the clerk hearing the name of Smith Barney would say, “How much do we owe you?”
Other firms would say when someone else called, “Let me check it and I will get back to you in a couple of days.”
Needless to say that young man became the next president of Smith Barney until the third generation took over the street.
My main point here is that when Wall Street had its own depression, this country survived in fine shape. All we had were mini recessions. Congress failed to revisit and improve and maybe justify their existence. The Investment Company Act of 1940 should have been radically changed to protect the customers instead of the mutual funds.
This was a monumental mistake. They failed to investigate what was happening to the street. They would have discovered that the Investment Company Act had created a monster in sheepskin.
The street had taken a 50% haircut all across the board. It was because of dumb foolishness by senior management looking to become the next financial wizard.
Instead of looking for values and the public wellbeing, they decided to feather their own nests with products that created excessive commissions. The first step was options. One out of ten trades is profitable the public, 9 out 10 to the firms. Wall Street has the ability to shoot itself in the foot too. By not supervising the trades and traders there was an explosion and several firms took the final dive.
Once the Street learned how to handle that crisis they went on to bigger and more profitable trading ideas. Program trading led to the Crash of ’87. It had created a perpetual motion machine once it had started and no one thought of pulling the plug on the computers. Computers need electricity to operate. Simple. It was not until the market closed that the firms involved had created lots of commissions, but lost principal. Luckily for the public, this program self-destructed.
My point is that at the end of every minor cycle there is a moment when we go back and correct or enter the second major cycle.
The first cycle is where one has pride in the job and themselves. They want to serve the community that they work in. The second stage can be called “Up your gross”. This has to do with the firm and making sure it is profitable. Team spirit. The firm can do well as a bond trader, or fine research, or stock market technicians. Usually there is one individual who is the firm’s star (GURU) that ends up calling the shots.
Our economy is changing from an inflation mode to a deflation mode. Individuals are now seeking quality and price in the market place. Socialist policies are the wrong fork in the road.
Chapter Four
Broken Bones Fixed
OK the doctor has been called in to fix our broken economy. The problem is that he is from the middle ages. For some the pain is going to be devastating. For many of these players (now called “BANKERS”) it could and should be fatal. Examples must be set for future generations.
The market place is corrupt and the private investor is being smothered. The Private Investor (PI) is the foundation of the economy and must be protected.
The first thing our medieval doctor (Let’s call him Merlin – for there is always hope) is going to raise margin rates. This will shell shock the market place and stocks will dive. Most Hedge funds will fall on their own weight because most are heavily margined with debt. If Merlin raises rates just 10% for stocks, then the new players will have to pay 60% of the price. The 50% players may stay at 50% and if they do same day trades will remain there, but if they fail to do this; then they are at the new rate.
Bond and commodity players will be cut to the quick. Bond traders are not supposed to be on Margin. Recently bonds have been used as a speculative vehicle to promote excessive fees for greedy bankers in convoluted trades that go by various names. The basic form is called a derivative. A derivative “derives” something from one place and gives it to another place; this usually means taking something good and combining it with something bad –so that the combined security looks better instead of junk. One can buy a prostitute a fancy dress, but she is still a prostitute.
Margin rates should be gradually increased so that all speculative fever is erased from the market place.
Most financial disasters have been built around too easy credit. In the 1929 crash, margin debt was 10%. At the end of November 2011 it ranges from 10% for certain commodities and bonds to 50 % for stocks.
If we are in the midst of a panic we should raise all margin debt to 100%. This will end speculation in a hurry. Schumpeter’s law of “creative destruction” should take over. It will be corporations who have been destroyed that will be replaced by ones that are newer and more creative. Big businesses hamper growth in most cases. They are laying-off and “fine tuning” their earnings while a young growing business is hiring and growing. 50% margin works like this. You buy a $10 stock for $5 and the bank, through a broker, lends you $5. Now if the stock goes to $15 and you sell, you would have made 100% once you pay back the $5.
Now if the stock goes to $5, you get a margin call and are sold out. Your loss is 100%. If you had paid cash you still have $5 investment.
Now commodities have enjoyed lower rates and the traders are making a bonanza. The easy credit has prospered many funds to dupe the unsuspecting. If they are so good why do they need your money?
The commodity market was formed for a noble cause. A corn farmer would work hard and then when his crop was harvested along with everyone else’s the monetary value was almost nothing. It is just like your neighbor offering you some tomatoes during the peak summer months. They have more tomatoes than they can eat.
Chapter 5
UP-TICK RULE
Joseph P Kennedy, the first SEC chairman, instituted the Up-tick Rule in shorting stocks as one of his first acts in 1938, which calmed the markets right down. Italy has just recently banned all short sales to stop a run on their markets.
The old rule, which was a good one, went like this: First the broker had to go to his or her back office and get permission to sell short. There had to be stock available for the short sale because it must be delivered to the investor who is buying your stock. Then the stock must have an up-tick in price. This stops raids on securities, or if the stock is in a free fall, the short seller fades into the woodwork. Now a large short position can be considered bullish because sometime in the future the seller must cover, or buy back, to record the profit. Then there is the possibility that the company is deep trouble. The other side of the coin is positive news like an extra dividend, which the short seller has to pay, or a merger, when the seller faces a huge loss. The rule is the downside is limited because it cannot go below zero, but the upside is or can be unlimited. So short sales can be a very risky investment under normal conditions.
Since they have rescinded the up-tick rule the volatility has increase to extremes never seen before. Computers are programmed to go wiz bang in a nanosecond or even faster. This will stop this and the flash crashes too. A flash crash is a computer driven sell program when all the buyers are absent or withdraw their bids. Luckily we have not had one around the close of the market place.
Chapter Six
USURY
Back in the 1970’s, when inflation was just beginning to rear its ugly head, disintermediation took place. This is how it worked. One could max out the credit card credit and legally the credit card companies could only charge 8%. Then the individual would be able to go and buy government agency short-term debt that was yielding 22%. That was a neat 14% return on one’s money. Sadly, individuals do not have lobbyists in Washington D.C. and the law was quietly changed to “protect?” the credit card companies. Most of our representatives in Congress are probably ignorant of the Rule of 72. Bankers love this rule. One takes 72 and divide by the interest rate you are paying. The result is how long it takes for that institution to double its return on your debt. If one has a 7% mortgage rate due in thirty years then every 10.29 years the bank will double its return. So over that 30-year period that bank will double its return 2.92 times. That is almost 3 times on your money over a 30-year period. That is a fair return because the bank has lent their depositor’s funds so you could buy your home. In return they receive interest on their funds and the banks can pay their employees fair wages. This is called velocity of money and how many times a dollar can be turned over. This is a healthy situation.
Now the credit card companies were able to go wild because their restraints were removed. Once a credit card holder failed to pay the entire monthly bill the interest charges kicked in. Just a little bit, but as the delay kicked in and the bill got bigger the rates went up. Your first month delay had now been over 6 months and while your charge on the latest month is probably minor, your late payments are now over 20% in most cases. We are now talking 3.6 years instead of 10.29 years. Once an outside shock awakens the populace they start de-leveraging, or paying down their debts. This is deflationary, because the funds are not buying products except for necessary products.
Now go big time. Governments and their entitlement programs are the same as individual credit cards but with more zeros. Our representatives do this because their perks are fantastic and start compounding the longer they remain in office. They know it is wrong, but who cares as long as they keep the ship floating with debt.
Once a sovereign debt percentage is more than their GDP, then future borrowings are just to pay interest on previous debt. Your ship is sinking. Sell assets at depressed prices? Cut entitlement programs?
Now you see the mess we are in. It starts by credit agencies lowering their credit ratings on debt. That means higher interest rates. Ugh!
SUMMARY OF PART ONE
If you grew as a child during WWII as I did from the ages of 6 to 10 it left a lasting impression. Sixty-six years later my mind still has the horrors of the aftermath of that noble combat.
We as a world now face a similar disaster. This time it is economic. We have greed and we are losing our morals and fairness to our fellow human being.
The solutions are not pleasant. The ones I have mentioned will have the effect of a bombed out European conflict. There were many casualties, but many more survivors in this conflict. Everyone is watching the economic recovery, which is really a house of cards. Its base is marked by greed and corruption of a few that will ultimately destroy the multitude.
The United States is the only country on this planet earth where multitudes would dream of living here. So we must set the standards for the rest of the world.
George Washington took the oath of office with his hand on a bible. We believe in a supreme being, and yet we as a nation espouse freedom of religion. WE as individuals have the choice to make. We as a nation chose separation of Church and state, just as Turkey did in the 20th century. We have both prospered. It is our basic freedom and no court should dictate to us or change our way because of hurting a minority. In a true democracy the minority is listened to but does not necessarily achieve its desire. We have freedom of religion. That is our God given right. Freedom does not mean censorship. Religion that uses violence to flourish is not the American way of life. (Jan 1, 2006 during communion, Jesus Christ spoke to me as I bit down on a piece of bread. HE said, “ You can pray to me too!”)
We must come up with a better way of choosing our national leaders. Graduation from a third rate collage and the ability to lie and pander are not valid credentials. Maybe there should be a bipartisan board to judge perspective candidates
Bankers are a special breed and should be the “watch dog” of the economic community- not a slithering python. Salaries should be based upon a criterion of performances within the bank itself. Bringing back the “Up-tick Rule“ restores a degree of safety to the market place and takes away one of the manipulative forces in the market place that hedge funds enjoy at the public’s expense.
There have been laws going way back in time. They can protect the average citizen from being duped.
All these measures are just a process of slowing event and hoary expectations down. These are hard choices for some and readjustments for many, but just over the short term.
Failure to enact and or reenact these reforms will beam us from a European conflict to a devastating wipe out like Hiroshima.
- Freedom of religion is based upon the old and new testament of the Bible. All the different sects are based upon love of our neighbors. As long as other religions have the same attitude they should be free to worship on our soil. We have a model of government based upon separation of Church and State.
- Reinstate the “Up-tick Rule” immediately.
- Raise interest rates that involve security transactions. No more “carry trades”. This will make derivative trades and high frequency trades obsolete.
- Reinstate the law.
- Establish a minimum standard to issuing credit cards.
- Separate banks and brokers.
These measures will cause havoc among certain groups that will scream bloody murder. The harder they scream will result in a safer place for the public.
We are now the only super power in the world. We have no agenda, no standards for the rest of the world to look up to or follow. Right now we are a rudderless ship of state floundering on the open seas. This in turn allows the world to be in chaos while the mighty rich plunder the defenseless populations at their free will.
Part Two is designed to create a new world order based upon our principals of individual freedoms and rights within the framework of benevolent governments. I call it our Future.
Glossary*
Derivative
derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties.[1][2]
Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form through which to extend credit.[3] However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks.[3] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy.[3][4]
Financial reforms within the US since the financial crisis have served only to reinforce special protections for derivatives, including greater access to government guarantees, while minimizing disclosure to broader financial markets.[5]
When the markets switched from the fractions system to decimals it negated the profit spread for market makers. Thus the street invented to new ways to remain profitable
Hedge Funds
| An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. |
Margin
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Short Sale
In finance, short selling (also known as shorting or going short) is the practice of selling assets that have not been purchased beforehand, but which the seller may have borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller. “Shorting” and “going short” also refer to entering into any derivative or other contract under which the investor similarly profits from a fall in the value of an asset. Mathematically, short selling is equivalent to buying a negative amount of the assets. Short selling is almost always conducted with assets traded in public securities, commodities or currency markets, as on such markets the amount being made or lost can be monitored in real time and it is generally possible to buy back the borrowed assets whenever required. Going short can be contrasted with the more conventional practice of “going long”, whereby an investor profits from any increase in the price of the asset.
A short sale one can make only the price the person sold short at and zero, but the loss is unlimited providing how high the security goes.A buying panic could wipe one’s assets out.
Uptick Rule
The rule went into The uptick rule refers to a trading restriction that disallowed short selling of securities except on an uptick. For the rule to be satisfied, the short must be either at a price above the last traded price of the security, or at the last traded price if that price was higher than the price in the previous trade. The U.S. Securities and Exchange Commission (SEC) defined the rule, and summarized it: “Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.”[1]
effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08.
Reinstating the uptick rule should curb most of the scurrilous practices.
Usury Laws
Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England
The Old Testament
From the King James Version
[Exodus 22:25] If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
[Leviticus 25:36] Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.
[Leviticus 25:37] Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.
[Deuteronomy 23:19] Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury:
[Deuteronomy 23:20] Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
[Ezekiel 18:17] He withholds his hand from sin and takes no usury or excessive interest.
[edit]Torah
Main article: Loans and interest in Judaism
The following quotations are from the Hebrew Bible, 1917 Jewish Publication Society translation:
If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.(Exodus, 22:25)[27]
And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase. (Leviticus, 25:35-37)
Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it. (Deuteronomy, 23:20-21)
[edit]New Testament
| This article may be confusing or unclear to readers. Please help clarify the article; suggestions may be found on the talk page. (March 2011) |
Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.[28]
The New Testament contains references to usury, notably in the Parable of the talents:
“Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”
—Matthew 25:27
“…Out of thine own mouth will I judge thee, thou wicked servant. Thou knewest that I was an austere man, taking up that I laid not down, and reaping that I did not sow. Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?”
—Luke 19:22-23
Finally the master said to him ‘Why then didn’t you put my money on deposit, so that when I came back, I could have collected it with interest?’
—Luke 19:23
[edit]Qur’an
Main articles: Riba and Islamic banking
The following quotations are English translations from the Qur’an:
Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)
God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! Those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)
O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-‘Imran 3:130)
And for practicing usury, which was forbidden, and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)
The usury that is practiced to increase some people’s wealth, does not gain anything at God. But if people give to charity, seeking God’s pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)
[edit]Scholastic theology
The first of the scholastics, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft. Previously usury had been seen as a lack of charity.
St. Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of interest is wrong because it amounts to “double charging”, charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is exchange-medium. It is used up when it is spent. To charge for the money and for its use (by spending) is to charge for the money twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity that anyone can sell. (For a detailed discussion of Aquinas and usury, go to Thought of Thomas Aquinas).
Labor is time, or if preferred, is measured by time. Workers are paid by the hour, by the day, by the week, by the month, rarely by the quarter or year. Labor is not effort, energy, expenditure of fuel (food). It is nothing but one’s time. As an example of labor without the expenditure of energy: A security guard whose job is just to be there. Perhaps nothing happens and he can read a book, assemble model trains, or even sleep, as long as he wakes up when the alarm rings. He has spent not one calorie of energy for the employer above what it takes just to live. Yet he is paid (compensated) for his time, for his labor. Even share-croppers and pieceworkers are compensated for the time they spent adding value to the raw materials. The sharecropper hands over the agreed portion of the increase (crop; harvest) to the owner of the land or the leaseholder in return for whatever the landlord provided: the land, perhaps the seed, farming tools, supplies, etc. The pieceworker is compensated for the labor, the time he spent, in adding value to the raw materials: the tools, the supplies, the workspace, light, heat, etc., according to the agreement made with the boss (client). If one labors for compensation, what he is compensated for is his time. As an even exchange of value, he has neither gained or lost anything. He has merely converted something he was going to lose anyway, time from his life, which, as we all know, is limited though we do not know in advance what the limit is, into something else that he wanted. Whether he is paid in goods, services or money is irrelevant. Money is but a medium of exchange that is much more efficient than straight barter. Only a miser wants money for itself, just to possess it. Normal people want money because it allows them to convert one thing that they are willing to sacrifice into something else that they actively want.
This did not, as some think, prevent investment. What it stipulated was that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all. This is usury. St Thomas quotes Aristotle as saying that “to live by usury is exceedingly unnatural”. Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) – an alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests. Judaism condemns usury towards Jews, but allows it towards non-Jews. St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as “montes pietatis”.[29]
In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral.[30] The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest “to compensate him for profit foregone in investing the money himself.” (Rothbard 1995, p. 46) This idea is very similar to Opportunity Cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena).
- All definitions have been gathered from Wikipedia.com or Investopedia.com by means of using google.com
*****
IT WILL NOT HAPPEN TO ME! GUESS WHAT? IT WILL!!
FORWARD
I am Richard De Graff the second son of John Teller De Graff Sr. and Audrey Brown De Graff of Albany NY, USA. I have been a real stockbroker since 1960. I Completed the Graham and Dodd correspondence course from the New York Institute of Finance while serving in the United States Army for two years. Sept. 1957-Sept. 1959, it was known as the quiet period- no wars. I still remember my dog tag number-FR-12 538396. I am currently a member of the Congregational Church of Eastford Connecticut USA.
We, as residents of this planet earth, have progressed so far in the last 100 years that one can take all the progressions for 5,000 years and combine them into one small round ball and it won’t equal what man has done in the last 100 years. In sum, we have grown too fast and we don’t have new rules, or better yet, we have ignored the old ones that protected our individual freedoms.
I am writing this booklet because I believe the countries of this world believe the economy is rebounding. It is improving, but the market place is where the grasshoppers are playing to their greedy delight. Meanwhile the ants have hunkered down.
The near term solutions will hurt almost everyone for a very short time while we all readjust. Only a few will return to dust. This is Part One of this booklet.
Part Two has to deal with avoiding a total economic tsunami due to worldwide debt enthusiasm. We will have to learn to control our well-meaning intentions or face destruction of our freedoms.
Several of the Programs started when FDR was president worked very well, but the Congress failed to revisit these laws; they failed to correct or to improve these laws every 10 to 15 years. I am referring to the securities laws that were passed in the 1930’s and 1940-1941. In particular, the Investment Company Act of 1940. Protecting Mutual Funds should have been annulled when computers could price Mutual Funds’ holdings instantly. This failure has created a Goliath playing with a turbo-charged club in the securities industry. This is just one example where reform is needed.
FDR also instituted a socialist agenda where our central government welfare programs were aimed to kick-start the economy. Under the Keynesian theory we were supposed to pay down these debts over time when our economy was profitable. Sadly, we created more entitlement programs without saving for them. The rest of the world copied our programs and relied on bankers and the bond markets to finance their dreams.
Europe and the Middle Eastern countries are at the abyss now and that abyss is slowly coming to our shores. There are now giant hedge funds run by unscrupulous managers and they compete with central bankers in a game of self-destruction. The House of Representatives is supposed to have control of our monies.
Our market place is now a board game for the “privileged few” at the expense of entire populations.
We are now having two choices. The easier choice will devastate the sneaky, shady players in our market place over the short term. While we listen to our present leaders we will start falling into that sinkhole and we will all fail. The purpose of this book is for future reference for those non-believers while those who are prudent can take the necessary steps for survival.
The first part of this book is the easy part, but will take intestinal fortitude to implement, but these things must be done before we can re-regulate the entire finance industry.
The passages that I have written are from over 50 years on the battlefields of finance. In the Army they called it OJT- on the job training. It is now up to academics to prove or disprove my thoughts. Remember, Moses’ Ten Commandments were only 297 words and look at how much has been written about them!
We have crossed the raggedy bridge and it has collapsed. There is no way back. We must look forward.
Cheerio!!!!
Part One
THE PAST AND PRESENT
Chapter One Bring Back God!!!
Chapter Two LBJ
Chapter Three Bankers and Banks
Chapter Four Banking Reforms
Chapter Five Broken Bones
Chapter Six Up-tick Rule
Summary for Part One
Glossary
Chapter One
Bring Back God
“With confidence in our armed forces – with the un-bounding determination of our people – we will gain the inevitable triumph – so help us God.
I ask that the Congress declare that since the unprovoked and dastardly attack by Japan on Sunday, Dec. 7, a state of war has existed between the United States and the Japanese empire. “
The above is the last two paragraphs of President Roosevelt’s speech before the US Congress on December 8, 1941.
He is clearly asking God for HIS help. As a student of the Old and New Testament I can see the hand of God at work. The official naval archives listed it as “luck” in the Battle of Midway in May 6&7 1942.
Australians call The Battle of the Coral Sea the battle that saved Australia. The Japanese Naval forces were confidently heading for New Guiana to use a stepping off place to attack Australia and New Zealand.
They ran into an unexpected US Naval force with the USS Lexington aircraft carrier power base. In the ensuing battle the USS Lexington was sunk. What we did not know at that time was that the Japanese had lost about 60 airplanes. So their two aircraft carriers headed north to be re-supplied instead of rejoining the task force heading towards Midway Island.
So the Japanese had four aircraft carriers instead of six for that epic battle. The US had three, but only two were operating in battleship condition. Our backs were to the wall, but with American “can do” spirit we were able to Ambush the Japanese Navy.
Our scout planes found the naval task force and radioed back. While the Japanese planes were being rearmed with torpedoes our naval pilots stuck each time they shot down until the dive-bombers and torpedo planes showed up at the same time. The Japanese lost their four aircraft carriers and the naval ability plummeted.
The turning point in the battle was that two Japanese scout planes found our task force. When they went to radio back the news – their radios went dead. When they did report it was too late, but we did lose the Yorktown. The Naval report calls it “luck”; I say it was an act of God.
D-Day on the beaches of Normandy France was a slaughter until the defenders started running out of ammunition. At first the German High Command was afraid to wake up Hitler and then he would not release the Panzer tank division. I believe it was Déjà vu all over again from the Old Testament. (My complements to Yogi Berra for his honest, savory expressions.)
The United States has always allowed freedom of religion and God has blessed us until recently when we started breaking the Ten Commandments and taking God out of schools. The Lord Almighty has given us a warning shot across our bow with 9/11.
The biggest sacrilege though is leaving “so help us God” off FDR’s monument in Washington DC. We must restore his complete true speech.
Chapter Two
LBJ
The real culprit of today’s mess is Lyndon Baines Johnson, former president of the United States. A graduate of a third rate college, he wrecked our future economy with his “guns and butter” agenda that this country could not afford. The ultra-liberal wing took over the Democratic Party.
I believe LBJ is the “Ahab” of our country.
Robert Caro has been writing his fourth installment and it will be published in 2012. It should bring the house down.
LBJ’s programs forced Richard Nixon to get off the gold standard and this in turn opened the floodgates of Congress where ultimately 435 members control 300,000,000 people’s destinies.
So we went form a “pay as you go” society to one of borrowing from the future. The Social Security fund was already being raided under the guise of “smoke and mirrors”; forget about the interest being earned – it was the principal that was being used. That is the real Ponzi scam.
Chapter Three
“Woe to you, teachers of the law and Pharisees, you hypocrites! You clean the outside of the cup and dish, but inside they are full of greed and self-indulgence.
Matthew 23:24-26
Bankers and Banks
A healthy bank means a healthy community.
Today bankers are in control instead of serving the public. The House of Representatives has control of our purse strings, not the bankers. We should consider nationalizing our banks and buying the shares back at real book value. Their large bonuses should be given to depositors and shareholders. Steve Jobs quoted as the reason he was not taking a salary when returning to Apple Computer was, “ I already have billions of dollars – I don’t need more. I want to build Apple Computer into another Hewlett Packard.”
When one does well, one will earn honest money. We are becoming too greedy and bankers are living off our greed. Bankers used to be respected members of our community.
Today we are teetering on the brink of a worldwide collapse economically. The United States corrected this problem in the 1930’s. Most economic disasters happen because of easy credit and greed. This is a normal psychological cycle. It takes about three generations to happen.
The first generation learns from its mistakes. The second generation prospers because of the solid base built by the first. Then the third generation, which we can call “smarty pants” because they don’t believe it can happen again and they break all the rules put in place by the first.
The Congress of the 1930’s did a magnificent job protecting the investing public from the different kind of abuses that were prevalent back then and today.
When the economic collapse happened in 1973-1974 the Congress congratulated them selves on a job well done. Actually they should have revisited and amended many of the statues, for the seeds of 2000 fiascos were planted then by the survivors.
The formation of OPEC caught the world by surprise. A horrific adjustment would now take place. Many companies were unprepared and slowly sank into oblivion.
Wall Street got smacked. Big Time. 50% of the firms vanished. 50% of employees left for safer endeavors. Schumpeter’s Law of Creative Destruction was working to perfection. (The basic premise is that antiquated businesses are replaced by newer and growing businesses. A prime example is the buggy whip disappeared when the automobile was mass-produced.)
This is where the Congress failed. Instead of going back to Wall Street and seeing what laws need to be revised, or annulled, they went on their merry way, and let Wall Street feather their own nest.
Wall Street survivors vowed this would never happen again to them. The bankers, cozy in their fireside chairs, smugly smiled. They survived in pretty good shape.
Banking and Reforms
Most economic downturns are because of loose credit. Easy money leads to loose standards and eventually immoral behavior.
As I mentioned in the previous chapter, there are usually three stages to a recovery. The first stage everyone remembers the mistake made in the past cycle and are intent on not repeating these mistakes. This was the case in the 1930’s. The problem was that most congressmen that passed these laws retired knowing that they did a job well done. The next generation of Congresspersons believed that the problem had been corrected and never revisited the laws. Times change and conditions improve and standard of living improves with new invention. The computer is a prime example. In 1968 Wall Street embraced the computer as if it was a porn star. They never looked inside to see how it worked. They just pushed buttons and smiled at how easy it was.
The problem that developed was with the unsung heroes of the industry, the back office. They were understaffed and over worked. They had done so much business and a myriad of trades that no one could follow who owed whom. Firms were now rated by how many days they failed to deliver.
One bright young man had been going to night school to learn all about computer programming. He was with Smith Barney and was soon on control of the back office. They became so efficient that the rest of the street marveled at their accuracy. When they called another back office, the clerk hearing the name of Smith Barney would say, “How much do we owe you?”
Other firms would say when someone else called, “Let me check it and I will get back to you in a couple of days.”
Needless to say that young man became the next president of Smith Barney until the third generation took over the street.
My main point here is that when Wall Street had its own depression, this country survived in fine shape. All we had were mini recessions. Congress failed to revisit and improve and maybe justify their existence. The Investment Company Act of 1940 should have been radically changed to protect the customers instead of the mutual funds.
This was a monumental mistake. They failed to investigate what was happening to the street. They would have discovered that the Investment Company Act had created a monster in sheepskin.
The street had taken a 50% haircut all across the board. It was because of dumb foolishness by senior management looking to become the next financial wizard.
Instead of looking for values and the public wellbeing, they decided to feather their own nests with products that created excessive commissions. The first step was options. One out of ten trades is profitable the public, 9 out 10 to the firms. Wall Street has the ability to shoot itself in the foot too. By not supervising the trades and traders there was an explosion and several firms took the final dive.
Once the Street learned how to handle that crisis they went on to bigger and more profitable trading ideas. Program trading led to the Crash of ’87. It had created a perpetual motion machine once it had started and no one thought of pulling the plug on the computers. Computers need electricity to operate. Simple. It was not until the market closed that the firms involved had created lots of commissions, but lost principal. Luckily for the public, this program self-destructed.
My point is that at the end of every minor cycle there is a moment when we go back and correct or enter the second major cycle.
The first cycle is where one has pride in the job and themselves. They want to serve the community that they work in. The second stage can be called “Up your gross”. This has to do with the firm and making sure it is profitable. Team spirit. The firm can do well as a bond trader, or fine research, or stock market technicians. Usually there is one individual who is the firm’s star (GURU) that ends up calling the shots.
Our economy is changing from an inflation mode to a deflation mode. Individuals are now seeking quality and price in the market place. Socialist policies are the wrong fork in the road.
Chapter Four
Broken Bones Fixed
OK the doctor has been called in to fix our broken economy. The problem is that he is from the middle ages. For some the pain is going to be devastating. For many of these players (now called “BANKERS”) it could and should be fatal. Examples must be set for future generations.
The market place is corrupt and the private investor is being smothered. The Private Investor (PI) is the foundation of the economy and must be protected.
The first thing our medieval doctor (Let’s call him Merlin – for there is always hope) is going to raise margin rates. This will shell shock the market place and stocks will dive. Most Hedge funds will fall on their own weight because most are heavily margined with debt. If Merlin raises rates just 10% for stocks, then the new players will have to pay 60% of the price. The 50% players may stay at 50% and if they do same day trades will remain there, but if they fail to do this; then they are at the new rate.
Bond and commodity players will be cut to the quick. Bond traders are not supposed to be on Margin. Recently bonds have been used as a speculative vehicle to promote excessive fees for greedy bankers in convoluted trades that go by various names. The basic form is called a derivative. A derivative “derives” something from one place and gives it to another place; this usually means taking something good and combining it with something bad –so that the combined security looks better instead of junk. One can buy a prostitute a fancy dress, but she is still a prostitute.
Margin rates should be gradually increased so that all speculative fever is erased from the market place.
Most financial disasters have been built around too easy credit. In the 1929 crash, margin debt was 10%. At the end of November 2011 it ranges from 10% for certain commodities and bonds to 50 % for stocks.
If we are in the midst of a panic we should raise all margin debt to 100%. This will end speculation in a hurry. Schumpeter’s law of “creative destruction” should take over. It will be corporations who have been destroyed that will be replaced by ones that are newer and more creative. Big businesses hamper growth in most cases. They are laying-off and “fine tuning” their earnings while a young growing business is hiring and growing. 50% margin works like this. You buy a $10 stock for $5 and the bank, through a broker, lends you $5. Now if the stock goes to $15 and you sell, you would have made 100% once you pay back the $5.
Now if the stock goes to $5, you get a margin call and are sold out. Your loss is 100%. If you had paid cash you still have $5 investment.
Now commodities have enjoyed lower rates and the traders are making a bonanza. The easy credit has prospered many funds to dupe the unsuspecting. If they are so good why do they need your money?
The commodity market was formed for a noble cause. A corn farmer would work hard and then when his crop was harvested along with everyone else’s the monetary value was almost nothing. It is just like your neighbor offering you some tomatoes during the peak summer months. They have more tomatoes than they can eat.
Chapter 5
UP-TICK RULE
Joseph P Kennedy, the first SEC chairman, instituted the Up-tick Rule in shorting stocks as one of his first acts in 1938, which calmed the markets right down. Italy has just recently banned all short sales to stop a run on their markets.
The old rule, which was a good one, went like this: First the broker had to go to his or her back office and get permission to sell short. There had to be stock available for the short sale because it must be delivered to the investor who is buying your stock. Then the stock must have an up-tick in price. This stops raids on securities, or if the stock is in a free fall, the short seller fades into the woodwork. Now a large short position can be considered bullish because sometime in the future the seller must cover, or buy back, to record the profit. Then there is the possibility that the company is deep trouble. The other side of the coin is positive news like an extra dividend, which the short seller has to pay, or a merger, when the seller faces a huge loss. The rule is the downside is limited because it cannot go below zero, but the upside is or can be unlimited. So short sales can be a very risky investment under normal conditions.
Since they have rescinded the up-tick rule the volatility has increase to extremes never seen before. Computers are programmed to go wiz bang in a nanosecond or even faster. This will stop this and the flash crashes too. A flash crash is a computer driven sell program when all the buyers are absent or withdraw their bids. Luckily we have not had one around the close of the market place.
Chapter Six
USURY
Back in the 1970’s, when inflation was just beginning to rear its ugly head, disintermediation took place. This is how it worked. One could max out the credit card credit and legally the credit card companies could only charge 8%. Then the individual would be able to go and buy government agency short-term debt that was yielding 22%. That was a neat 14% return on one’s money. Sadly, individuals do not have lobbyists in Washington D.C. and the law was quietly changed to “protect?” the credit card companies. Most of our representatives in Congress are probably ignorant of the Rule of 72. Bankers love this rule. One takes 72 and divide by the interest rate you are paying. The result is how long it takes for that institution to double its return on your debt. If one has a 7% mortgage rate due in thirty years then every 10.29 years the bank will double its return. So over that 30-year period that bank will double its return 2.92 times. That is almost 3 times on your money over a 30-year period. That is a fair return because the bank has lent their depositor’s funds so you could buy your home. In return they receive interest on their funds and the banks can pay their employees fair wages. This is called velocity of money and how many times a dollar can be turned over. This is a healthy situation.
Now the credit card companies were able to go wild because their restraints were removed. Once a credit card holder failed to pay the entire monthly bill the interest charges kicked in. Just a little bit, but as the delay kicked in and the bill got bigger the rates went up. Your first month delay had now been over 6 months and while your charge on the latest month is probably minor, your late payments are now over 20% in most cases. We are now talking 3.6 years instead of 10.29 years. Once an outside shock awakens the populace they start de-leveraging, or paying down their debts. This is deflationary, because the funds are not buying products except for necessary products.
Now go big time. Governments and their entitlement programs are the same as individual credit cards but with more zeros. Our representatives do this because their perks are fantastic and start compounding the longer they remain in office. They know it is wrong, but who cares as long as they keep the ship floating with debt.
Once a sovereign debt percentage is more than their GDP, then future borrowings are just to pay interest on previous debt. Your ship is sinking. Sell assets at depressed prices? Cut entitlement programs?
Now you see the mess we are in. It starts by credit agencies lowering their credit ratings on debt. That means higher interest rates. Ugh!
SUMMARY OF PART ONE
If you grew as a child during WWII as I did from the ages of 6 to 10 it left a lasting impression. Sixty-six years later my mind still has the horrors of the aftermath of that noble combat.
We as a world now face a similar disaster. This time it is economic. We have greed and we are losing our morals and fairness to our fellow human being.
The solutions are not pleasant. The ones I have mentioned will have the effect of a bombed out European conflict. There were many casualties, but many more survivors in this conflict. Everyone is watching the economic recovery, which is really a house of cards. Its base is marked by greed and corruption of a few that will ultimately destroy the multitude.
The United States is the only country on this planet earth where multitudes would dream of living here. So we must set the standards for the rest of the world.
George Washington took the oath of office with his hand on a bible. We believe in a supreme being, and yet we as a nation espouse freedom of religion. WE as individuals have the choice to make. We as a nation chose separation of Church and state, just as Turkey did in the 20th century. We have both prospered. It is our basic freedom and no court should dictate to us or change our way because of hurting a minority. In a true democracy the minority is listened to but does not necessarily achieve its desire. We have freedom of religion. That is our God given right. Freedom does not mean censorship. Religion that uses violence to flourish is not the American way of life. (Jan 1, 2006 during communion, Jesus Christ spoke to me as I bit down on a piece of bread. HE said, “ You can pray to me too!”)
We must come up with a better way of choosing our national leaders. Graduation from a third rate collage and the ability to lie and pander are not valid credentials. Maybe there should be a bipartisan board to judge perspective candidates
Bankers are a special breed and should be the “watch dog” of the economic community- not a slithering python. Salaries should be based upon a criterion of performances within the bank itself. Bringing back the “Up-tick Rule“ restores a degree of safety to the market place and takes away one of the manipulative forces in the market place that hedge funds enjoy at the public’s expense.
There have been laws going way back in time. They can protect the average citizen from being duped.
All these measures are just a process of slowing event and hoary expectations down. These are hard choices for some and readjustments for many, but just over the short term.
Failure to enact and or reenact these reforms will beam us from a European conflict to a devastating wipe out like Hiroshima.
- Freedom of religion is based upon the old and new testament of the Bible. All the different sects are based upon love of our neighbors. As long as other religions have the same attitude they should be free to worship on our soil. We have a model of government based upon separation of Church and State.
- Reinstate the “Up-tick Rule” immediately.
- Raise interest rates that involve security transactions. No more “carry trades”. This will make derivative trades and high frequency trades obsolete.
- Reinstate the law.
- Establish a minimum standard to issuing credit cards.
- Separate banks and brokers.
These measures will cause havoc among certain groups that will scream bloody murder. The harder they scream will result in a safer place for the public.
We are now the only super power in the world. We have no agenda, no standards for the rest of the world to look up to or follow. Right now we are a rudderless ship of state floundering on the open seas. This in turn allows the world to be in chaos while the mighty rich plunder the defenseless populations at their free will.
Part Two is designed to create a new world order based upon our principals of individual freedoms and rights within the framework of benevolent governments. I call it our Future.
Glossary*
Derivative
derivative instrument is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments, or payoffs, are to be made between the parties.[1][2]
Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form through which to extend credit.[3] However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks.[3] Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy.[3][4]
Financial reforms within the US since the financial crisis have served only to reinforce special protections for derivatives, including greater access to government guarantees, while minimizing disclosure to broader financial markets.[5]
When the markets switched from the fractions system to decimals it negated the profit spread for market makers. Thus the street invented to new ways to remain profitable
Hedge Funds
| An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. |
Margin
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Short Sale
In finance, short selling (also known as shorting or going short) is the practice of selling assets that have not been purchased beforehand, but which the seller may have borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller. “Shorting” and “going short” also refer to entering into any derivative or other contract under which the investor similarly profits from a fall in the value of an asset. Mathematically, short selling is equivalent to buying a negative amount of the assets. Short selling is almost always conducted with assets traded in public securities, commodities or currency markets, as on such markets the amount being made or lost can be monitored in real time and it is generally possible to buy back the borrowed assets whenever required. Going short can be contrasted with the more conventional practice of “going long”, whereby an investor profits from any increase in the price of the asset.
A short sale one can make only the price the person sold short at and zero, but the loss is unlimited providing how high the security goes.A buying panic could wipe one’s assets out.
Uptick Rule
The rule went into The uptick rule refers to a trading restriction that disallowed short selling of securities except on an uptick. For the rule to be satisfied, the short must be either at a price above the last traded price of the security, or at the last traded price if that price was higher than the price in the previous trade. The U.S. Securities and Exchange Commission (SEC) defined the rule, and summarized it: “Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.”[1]
effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08.
Reinstating the uptick rule should curb most of the scurrilous practices.
Usury Laws
Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England Usury ( /ˈjuːʒəri/[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates onloans.[2][3]
Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrewword.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money[4]: particularly the 1545 act “An Act Against Usurie” (37 H.viii 9) of King Henry VIII of England
The Old Testament
From the King James Version
[Exodus 22:25] If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
[Leviticus 25:36] Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.
[Leviticus 25:37] Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.
[Deuteronomy 23:19] Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury:
[Deuteronomy 23:20] Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
[Ezekiel 18:17] He withholds his hand from sin and takes no usury or excessive interest.
[edit]Torah
Main article: Loans and interest in Judaism
The following quotations are from the Hebrew Bible, 1917 Jewish Publication Society translation:
If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest.(Exodus, 22:25)[27]
And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase. (Leviticus, 25:35-37)
Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it. (Deuteronomy, 23:20-21)
[edit]New Testament
| This article may be confusing or unclear to readers. Please help clarify the article; suggestions may be found on the talk page. (March 2011) |
Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.[28]
The New Testament contains references to usury, notably in the Parable of the talents:
“Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”
—Matthew 25:27
“…Out of thine own mouth will I judge thee, thou wicked servant. Thou knewest that I was an austere man, taking up that I laid not down, and reaping that I did not sow. Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?”
—Luke 19:22-23
Finally the master said to him ‘Why then didn’t you put my money on deposit, so that when I came back, I could have collected it with interest?’
—Luke 19:23
[edit]Qur’an
Main articles: Riba and Islamic banking
The following quotations are English translations from the Qur’an:
Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)
God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! Those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)
O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-‘Imran 3:130)
And for practicing usury, which was forbidden, and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)
The usury that is practiced to increase some people’s wealth, does not gain anything at God. But if people give to charity, seeking God’s pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)
[edit]Scholastic theology
The first of the scholastics, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft. Previously usury had been seen as a lack of charity.
St. Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of interest is wrong because it amounts to “double charging”, charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is exchange-medium. It is used up when it is spent. To charge for the money and for its use (by spending) is to charge for the money twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity that anyone can sell. (For a detailed discussion of Aquinas and usury, go to Thought of Thomas Aquinas).
Labor is time, or if preferred, is measured by time. Workers are paid by the hour, by the day, by the week, by the month, rarely by the quarter or year. Labor is not effort, energy, expenditure of fuel (food). It is nothing but one’s time. As an example of labor without the expenditure of energy: A security guard whose job is just to be there. Perhaps nothing happens and he can read a book, assemble model trains, or even sleep, as long as he wakes up when the alarm rings. He has spent not one calorie of energy for the employer above what it takes just to live. Yet he is paid (compensated) for his time, for his labor. Even share-croppers and pieceworkers are compensated for the time they spent adding value to the raw materials. The sharecropper hands over the agreed portion of the increase (crop; harvest) to the owner of the land or the leaseholder in return for whatever the landlord provided: the land, perhaps the seed, farming tools, supplies, etc. The pieceworker is compensated for the labor, the time he spent, in adding value to the raw materials: the tools, the supplies, the workspace, light, heat, etc., according to the agreement made with the boss (client). If one labors for compensation, what he is compensated for is his time. As an even exchange of value, he has neither gained or lost anything. He has merely converted something he was going to lose anyway, time from his life, which, as we all know, is limited though we do not know in advance what the limit is, into something else that he wanted. Whether he is paid in goods, services or money is irrelevant. Money is but a medium of exchange that is much more efficient than straight barter. Only a miser wants money for itself, just to possess it. Normal people want money because it allows them to convert one thing that they are willing to sacrifice into something else that they actively want.
This did not, as some think, prevent investment. What it stipulated was that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all. This is usury. St Thomas quotes Aristotle as saying that “to live by usury is exceedingly unnatural”. Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) – an alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests. Judaism condemns usury towards Jews, but allows it towards non-Jews. St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as “montes pietatis”.[29]
In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral.[30] The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest “to compensate him for profit foregone in investing the money himself.” (Rothbard 1995, p. 46) This idea is very similar to Opportunity Cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena).
- All definitions have been gathered from Wikipedia.com or Investopedia.com by means of using google.com
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