fraud « Citizen Economists

Government Debt = Terrorism?

By Thomas Knapp, on February 20th, 2012

The US government’s post-9/11 “war on terror” breathed new life into its long, failed “war on drugs.” An American public showing signs of increasing disenchantment with the latter was told that drug money fueled and financed terrorism, and that the “war on drugs” was part and parcel of the war on al Qaeda.

Now this, via Reuters:

Italian police said on Friday they had seized about $6 trillion worth of fake U.S. Treasury bonds and other securities in Switzerland, and arrested eight Italians accused of international fraud and other financial crimes. … Potenza’s prosecutor Giovanni Colangelo said an international network “in many countries” was behind the forgeries. Italian daily Corriere della Sera said on its website that the criminal network was believed to be interested in acquiring plutonium, citing sources at the prosecutors’ office.

I can only think of a limited number of reasons why someone would want plutonium, and all of them except for use in atomic/nuclear weapons would more likely run through legal/”official” channels of securities fraud, theft, etc.

Or, to put it a different way, if the US government didn’t visibly run some serious debt, al Qaeda and so forth couldn’t try to finance its nuclear terror aspirations by faking instruments of that debt.

If heroin cultivation in Afghanistan is a “war on terror” concern, so is an unbalanced US government budget and $15 trillion + in US government debt. But I’d advise against holding your breath while you wait to see if Congress declares “war” on those things.

Profit from Peak Oil: Bob Moriarty

By The Energy Report, on December 21st, 2011

Bob Moriarty With resource stocks extraordinarily cheap, 321energy.com Founder Bob Moriarty calls them “an opportunity of a lifetime,” in this exclusive interview with The Energy Report. However, investors need to steer clear of the dangers of derivatives. Moriarty explains how the hypothecation hobgoblins associated with these instruments can sneak up on investors and zero out accounts in a flash.

The Energy Report: Peak oil has returned as a popular topic of conversation, and you’ve been talking about it for some time. Are we really in the era of peak oil, with oil production diminishing? Or do we just lack cheap oil?
Bob Moriarty: It’s both. We’ve reached the peak of oil production, which doesn’t mean we’re going to run out of oil, but we’ve run out of cheap oil. When the Saudi oil fields opened in the 1940s and 1950s, their return on investment was $350 per barrel. When OPEC formed in 1959, they were profitable selling Saudi oil at $0.10 a barrel. The cheap, high-grade, high-quality oil is all gone now, and the days of finding giant oil fields with high-grade oil that was relatively inexpensive —such as Ghawar in Saudi Arabia and the Cantarell off Mexico—are gone. They’re history.

With the resources in the tar sands of Canada, we’re going to have oil for another 100 years of production, but it’s very expensive. It’s very dirty, with a number of political issues in focus, such as the Keystone XL pipeline to the United States. Production will be problematic.

TER: Besides the tar sands, oil appears to be available offshore both in North and South America.

BM: Yes, but these projects carry ferociously expensive costs. Some of the wells BP was drilling a year and a half ago, going 25,000 feet (ft) deep, cost hundreds of millions of dollars each.

TER: You mentioned that the Canadian tar sands probably hold enough oil—albeit expensive to extract and dirty—to last 100 years. Meanwhile, the U.S. sits atop some major natural gas fields, and natural gas is unbelievably cheap right now. Why aren’t oil-powered vehicles and other machines being converted to run on natural gas?

BM: Natural gas is handy for some things. It’s used in a lot of power generation. It’s very valuable to replace heat or coal or diesel. But you couldn’t power an aircraft with natural gas under any circumstances; it simply wouldn’t work.

Gasoline and oil are very portable and very cheap. You can go to the hardware store, buy an inexpensive container and carry around five gallons of oil or gasoline. To get the same amount of energy from natural gas probably would cost $1,000 for a container. All kinds of technical and temperature issues make natural gas ineffective as a portable energy source.

TER: So if natural gas is not the solution, we’re stuck with the more expensive alternatives. And if it’s dirty and expensive, what are the economic implications of getting oil from the Canadian tar sands to the U.S.?

BM: Dirty is expensive. And when you start talking about getting the oils from the tar sands to the United States, which is the major market, you run into all kinds of issues. Politicians and lobbyists will spend years delaying the pipeline until their personal agendas are satisfied.

TER: Senator Mitch McConnell called the Keystone XL Pipeline, which is proposed to carry tar sands oil from Canada down through the U.S. to Texas for processing, the single greatest “shovel-ready” project in America. He said it’s ready to go, but Obama doesn’t want to deal with it until after the 2012 elections. In an era when we need oil and people need jobs so badly, why the political slowdown?

BM: Every organization and every government official has an agenda, and not necessarily your agenda. You and I may want the tar sands oil as soon as possible and as cheap as possible. Obama has his own agenda—to get reelected.

TER: There also have been discussions about building a pipeline across Canada to bring it to Vancouver and potentially ship it to China. In terms of an investment opportunity, what does that mean for the tar sands oil producers?

BM: There will be a lot of investment opportunities. The question is when. The longer the transportation issue—a pipeline—is delayed, the more expensive it will be to operate and lower the return on the investment will be. Ultimately, though, I think there’s a good chance that Canada will decide that China and Japan and Asia are better, more dependable markets than the United States.

TER: Over what timeframe do you suppose that pipeline will be built?

BM: We are facing some pretty serious economic issues right now. Should we go into a depression soon, which is my belief, the decrease in energy demand could kill this project and others for years.

TER: But your writings suggest that you’re interested in some Canada-based energy companies based on what you consider their good potential for return. Don’t these companies face the same margin squeeze with the prospect of higher transportation costs?

BM: Not at all. The tar sands are in a pretty inaccessible part of Canada. The junior companies I deal with have access to pipelines, refineries and major markets, so it’ won’t affect them.

TER: Would demand come to them first as lower-cost producers, and help their profit pictures?

BM: Of course. It would be a very good thing for them. Everything that’s bad for one group is good for another.

TER: What are some other companies with good prospects?

BM: Two juniors I’d like to talk about are doing a really excellent job. A few months ago the stock of Aroway Energy Inc. (ARW:CVE) was $0.32 a share. It’s doubled since then, and it’s another easy double from here. It “should” probably be worth $1–$1.20 a share right now. These guys have done a bang-up job. They’re producing 669 barrels a day at Peace River in Alberta.

TER: Is your analysis of what the stock should be worth just based on Aroway’s current production times the barrel of oil equivalent (boe) price in the marketplace?

BM: Yes. Oil fields are actually relatively homogeneous, so people can know on a daily basis what a barrel in the ground or barrel of production is worth.

TER: What’s the other company you wanted to mention?

BM: Blackdog Resources Ltd. (DOG:TSX.V) just finished a well within the past couple of weeks. Its stock is at $0.40 a share and the company has about 26 million shares, so market cap of about $10 million (M). Based in Calgary, Blackdog could be $1 a share easily.

TER: Aroway has projections to increase production over the next 12-months. Is Blackdog producing yet or just drilling and exploring?

BM: Blackdog is doing exactly the same thing as Aroway, producing and exploring. It’s just a little bit earlier stage. The company is producing something like 150 barrels a day now, but literally has wells coming into production as we speak.

Production is critical, because the world’s financial system is blowing up and counterparty risk is enormous. If you’re not invested in something real, you’re going to wake up and find yourself poor.

TER: Could you expand on that counterparty risk and the concept of investing in something real to minimize investors’ chances of waking up poor?

BM: With the collapse of the major global commodities broker MF Global at the end of October, up to $2.5 billion worth of its customers’ money evaporated. Investors as financially sophisticated as Trends Journal Publisher Gerald Celente went to bed rich and woke up to worthless accounts.

Some very important concepts, hypothecation and re-hypothecation, are involved when it comes to derivatives, which are financial instruments that gain their value from something else. Suppose that you open a commodities account because you expect the price of gold, silver or oil will go up. You deposit $100,000 margin and buy a contract for gold, silver or oil. Let’s say things go wrong because of hypothecation, re-hypothecation and counterparty risk.

Here’s what happens with hypothecation. The broker-dealer usually goes to a bank and borrows money to loan you. But in this scenario you put up twice as much as the margin required, so he doesn’t even loan money to you. Regardless, you are required to sign a statement saying you will allow the broker-dealer to hypothecate the account. This pledges everything in your account to the bank. Broker-dealers borrow money from the bank at, say, 3% and loan it to customers at maybe 6%. That’s how they make money. In this scenario, the problem is that the broker-dealer created a risk for you that never occurred to you. If the broker dealer reneges on the loan, the bank can demand all the assets you have deposited even if they are in your account and you don’t owe anyone anything.

With re-hypothecation, the broker-dealer can take money from a number of customers—let’s say $1B from 10,000 customers—and buy something like Greek one-year bonds that are paying 352% today. The broker-dealer pledges your assets against that bet. That gets really slick, because if the Greek bonds actually pay 352%, he or she pockets that money. But if the bonds blow up—which some people have been predicting for years—you lose all your money.

TER: Is this true on any bank account?

BM: It’s true of any margin account. If you open a margin account with Schwab, put up $1M and buy $500,000 worth of securities, you’re not using margin but you’ve still signed that agreement. You can wake up one morning and find all your money gone.

For years and years I’ve been saying that derivatives of this magnitude are not sustainable in a rational economic system. We have a $64 trillion (T) world economy, and we’re basically up to $708T in derivatives. You cannot have $708T in derivatives unless most of it is fraud.

MF Global was defrauding its customers and its customers didn’t even know it. There could be another 100 MF Globals out there. At the end of the day, a lot of brokerage accounts will blow up and people are going to go to bed rich and wake up poor. The danger today is not buying Aroway or Blackdog and seeing the value of your stock cut in half. The danger is that your broker will blow up.

TER: Is it fraud because investors don’t know about the hypothecation and re-hypothecation? That they don’t know what’s being done with their money?

BM: That’s correct. Literally until weeks before MF Global’s collapse, I think on the books they were showing $70M being used for re-hypothecation when in fact it was $6.5B.

TER: Why such a big gap?

BM: The way they do the books creates that gap. Greece and Italy and Spain got into the EU because JP Morgan and Sachs cooked the books by leaving their assets on the books and moving their liabilities off the books. Jon Corzine moved $6.5B in liabilities off the books and nobody realized they had enormous exposure, and when the financial system in the EU blew up it took $6.5B of MF Globals’ money with it. What’s really scary is that nobody’s in jail is because all of this is perfectly legal—a scam, but a legal scam. If they make money, they keep it; if they lose money, you pay.

TER: This is easy money with no risk for brokers.

BM: Exactly. And the danger is somebody at Schwab or E-Trade or Merrill Lynch or 100 other institutions can go out and do the same thing tomorrow. It’s just as legal. They can speculate on something like Greek bonds paying 352% and some fool will think that’s a good deal.

TER: Wow. That’s a very compelling argument and it certainly underscores your point of buying real assets.

BM: But if you go out and buy shares of Aroway or Blackdog, you may want to get a share certificate in your name in your hands because you can count on some stock brokerage accounts to disappear in the same way the Gerald Celente’s hundreds of thousands of dollars disappeared. You’re at enormous risk if you have a margin account with any kind of a broker.

TER: Do you run the same risk in a non-margined account?

BM: In theory, no; in practice, yes.

TER: And what’s the practice?

BM: The practice is that $708T in derivatives, probably 80% of which is fraud, and nobody but me, Jim Sinclair and maybe Jim Rogers understands the potential risk. In theory, there’s $210T in debt in the world and $150T in assets. I think in practice there’s up to $400T worth of debt and the system is going to blow sky-high. Our financial system is on the precipice of an absolute, total collapse. And it’s going to be catastrophic to the wealth of most people. This is the most serious I have ever been about anything. Derivatives are a giant casino. It’s a crap game. It’s all fraud.

Back in 1997 the head of the U.S. Commodity Futures Trading Commission (CFTC) was extremely concerned at the size of the derivatives market and battled to get regulations in place to control it. The head of JP Morgan, as well as Robert Rubin, who was Treasury Secretary and the head of Goldman Sachs, and Alan Greenspan, chairman of the Federal Reserve, all fought her. She lost. By 2002 derivatives had grown to $100T, and clearly were going to blow the system sky-high. Now—and these numbers are really staggering—the Bank for International Settlements reports that derivatives grew $107T between January and July of this year. That’s 18% in a six-month period, which means derivatives are growing about 40% a year.

TER: Now that you have everybody shaking in their boots, let’s shift gears a bit. One of your articles equated peak energy to peak food. Earlier you reminded us that we’re not about to run out of oil, but cheap oil is a different story. Is it the same with food? That we aren’t going to run out of food, but the days of cheap food are history?

BM: Exactly. And when the cost of food goes up the costs of the additives literally goes down in relative terms. Let me give you a perfect example. It takes 81,000 calories of energy to produce 75,000 calories of energy in the form of ethanol—for a net loss. It has to be subsidized. Regardless of the conditions, production of ethanol is a net loser. The U.S. government has literally been bribed by corn producers and big food companies, doling out subsidies for the production of ethanol that drove corn prices up literally all over the world.

I went to a vegetable market in Guyana, for instance, that was selling four really scrawny ears of corn for $5. That’s a result of these silly practices in the United States. Increases in the prices of corn and wheat throughout the Middle East triggered the Arab Spring. I think three billion people in the world survive on less than $2 a day, so when the cost of food goes up 50%—as it has in the last year—many of those who were marginal before are starving now. That leads to revolutions.

TER: You’ve been big on potash. Because potash in fertilizers helps increase food production per acre, do you think potash is due for another run-up in price?

BM: Potash is a form of energy. Food is a form of energy. To make more food you need more energy and you need more potash. There are enormous potash deposits, basins of sedimentary deposits—basically a variation of salt—that date back tens of millions of years. We know where they are. They’re easy to drill. A lot of people are going to make a lot of money in potash.

You can bet on some things in the short term and others in the long term. I don’t think anyone would conclude the cost of energy is going to go down over the long term, because there are no cheap energy sources. There is no magic bullet. So the cost of food is going to go up.

Real safe investments for 5, 10 or 15 years would be food, potash, water, oil and natural gas. Good shorter-term investments would be anything real—gold, silver, platinum and anything that you can actually hold in your hand.

TER: According to John Williams of ShadowStats, inflation is running around 11% if fuel and food are included. Where’s the upside if you’re looking at investments in potash, oil and such that could play out in five to 10 years and you’re dealing with double-digit inflation?

BM: I love it when something goes down in price. I love it when shoes or socks or coats or boats or airplanes go down in price. I don’t have any particular problem with it when a stock I really like goes down in price, either, because it makes it possible to buy more. So I think the fact that potash is down now in relative terms is wonderful.

TER: So suppose you buy potash on sale at today’s prices. It’s not worth anything unless you can sell it, so when would you expect a return on that investment? Five years?

BM: No, no, soon—three months, six months, a year.

TER: Because your underlying assumption is that the costs of energy and food will go up in the near term, how do you recommend playing the potash market dynamic?

BM: I think any potash company would be a good investment right now.

TER: When we chatted at the Hard Assets Conference in San Francisco you mentioned being intrigued by another potash company in addition to those you’ve been following for some time.

BM: Yes, North American Potash Developments Inc. (NPD:TSX.V; RNGTF:OTCQX; 3OZ:Fkft) just released drilling results this month. It had a 3,450-foot rotary drill and core hole on its Lisbon Valley property in Utah, and reported 15 ft total thickness and 10.4% potash at 2,600 ft deep, which is very good. There were two potash beds; one was 19 ft and one was 24 ft. Two different holes, one was 5 ft at 13%. Those are good results. That’s going to be an interesting story. Because the potash was laid down as water evaporated, it doesn’t take many holes of it to be good.

TER: So this company is basically going after a deep-shaft type of potash versus an open pit?

BM: No. Actually it’s in-situ leaching. The right kind of potash can be leached in place by pumping hot water down, bringing the brine to the surface, spreading it out in big pads to air-dry, and then just harvesting it with scoop loaders. It’s a very cheap way of doing it.

TER: How does that compare to the other companies?

BM: Well, Passport Potash Inc. (PPI:TSX.V; PPRTF:OTCQX) has been doing a lot of drilling and is finally coming out with some results. The issue there is not technical; it’s management and communications. They simply have to release more information. Eventually they’ll start telling the story. I have discussions with management about what they do well and what they do poorly, and what Passport’s done poorly over the last year is communicate.

TER: You said that any potash company would be a good investment right now. What are some more names?

BM: They’re easy to find. Buy the potash companies because they’ve been hammered like gold stocks, silver stocks and other resource stocks. Buy resource stocks, anything in resources—water, energy, food and land. The resource stocks are cheaper in real terms now than they were at the bottoms of the market in both 2001 and 2008. They’re extraordinarily cheap. I think it’s an opportunity of a lifetime.

TER: You’re not the only one to say that. People are talking about precious metals and rare earth metal stocks all being on sale—large ones, juniors, pretty much the whole sector. Would you say the same thing of oil and gas?

BM: Yes. But here’s the deal in terms of the global economy: All these people are swinging at this giant piñata loaded with nitroglycerin. One day soon, somebody’s going to hit the piñata and when that happens, you want your finances under control. I would recommend against having a margin account with any broker under any circumstances right now unless you’re prepared to write off 100% of your investment.

TER: Any other thoughts you’d like to leave with our readers?

BM: We’re at the most dangerous time financially in the world’s history. There are enormous risks. A lot of people are going to lose a lot of money. This is not a time for speculation or borrowing. It’s time to head for the bunker. It’s time to be aware of what’s going on financially. And it’s time to be especially conservative.

Convinced that gold and silver were at their bottoms, and wanting to give others a foundation for investing in resource stocks, Bob and Barb Moriarty brought 321gold.com to the Internet 10 years ago, and later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on relevant current events. Before his Internet career, Moriarty was a Marine F 4B pilot and O 1C/G forward air controller with more than 820 missions in Vietnam. A captain at age 22, he was the youngest naval aviator in Vietnam and one of the war’s most highly decorated. He holds 14 international aviation records, and once flew an airplane through the Eiffel Tower’s pillars “just for fun.”

MF Global and HSBC case

By Bron Suchecki, on December 13th, 2011

As usual, Zero Hedge and others hype a story way beyond the reality (see here for the Bloomberg story), such as:

ZH: ”is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances.”

TF: “A lawsuit such as this one could easily bring about the total destruction of the Comex/LBMA-based, fractional bullion banking system”

Here is a suggestion, read the actual Interpleader Complaint for the facts:

1. Mr. Fane and MFGI entered into five COMEX gold contracts and three COMEX silver contracts relating to the Property. HSBC is the depository for the Property pursuant to a certain Gold Delivery Point Agreement and a certain Silver Delivery Point Agreement entered into between HSBC and the New York Mercantile Exchange, Inc.

2. By e-mail dated October 25, 2011, MFGI notified HSBC that “MF Global’s customer Mr. Fane would like to take possession of [the Property] and move [the Property] to his account at Brinks (sic). I have already canceled for load out. Customer will advise of date and time.”

3. Mr. Fane did not contact HSBC to request that the Property be transferred to his account at Brink’s prior to the Commencement Date.

4. By letter dated November 18, 2011, HSBC, through its undersigned counsel, notified the Trustee that it had possession of the Property. HSBC also notified the Trustee, in light of HSBC having received instructions from MFGI prior to the Commencement Date to transfer the property to Mr. Fane upon his request, that HSBC would act in accordance with MFGI’s prior instructions barring an injunction or contrary instructions from the Trustee.

5. By letter dated November 21, 2011, Mr. Fane requested that HSBC transfer the Property to his account at Brink’s.

6. By letter dated November 22, 2011, the Trustee, through his counsel, asserted to HSBC that the Property constitutes customer property under Part 190 Regulations of the Commodity Futures Trading Commission and that the treatment of the Property must be administered by the Trustee. The Trustee further instructed HSBC not to release the Property to Mr. Fane.

7. By letter dated November 22, 2011, HSBC notified Mr. Fane that the Trustee had instructed HSBC not to release the Property to him and that the Trustee asserted an interest in and claim to the Property.

Not being a lawyer, I read this as “before you went bankrupt, you said I could have my metal”, “yeah, well, you didn’t take it before I went bankrupt, so it is now part of the bankruptcy proceedings”.

So no rehypothecation or loaning, no “suing” by HSBC, no stealing or counterfeiting of the bars and certainly not the total destruction of bullion banking. Just another lesson in counterparty exposure and possession is nine tenths of the law.

Fraud

By Simon Grey, on November 23rd, 2011

Pay close attention to this chart:

[Source]

This is a problem. As a libertarian, I generally view regulation as pointless, needlessly expensive, counterproductive, and anti-liberty. As such, I oppose a good portion of government interference in the economy. However, committing fraud is not simply a matter of failing to comply with ticky-tack regulation. Fundamentally, it is a violation of property rights. As shown by the chart above, the current vitriol directed at the banks is wholly deserved since every major bank in the united states has committed fraud (i.e. violated property rights) multiple times each.

Merriam-Webster defines fraud thusly:

deceit, trickery; specifically : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right.

In essence, fraud is attempting to lay claim to the property of another under false pretenses. If you are selling a house and offer $50,000 for it but only pay $25,000, then my attempt to claim your property is fraudulent because I lied about what I would give in exchange for your house. Your decision to sell your house to me was made in the belief that I would pay you $50,000 for it. If I take title of the house without following through on my promise, then I have essentially cheated you out of your house.

Now, if the government must exist, then it is reasonable to expect the government to defend and enforce property rights. This means that the government should prosecute murder, theft, rape, and other crimes wherein one violates another’s property rights. This should also include fraud.

Fraud may not be coercive in the manner that, say, theft is, but fraud is no different than theft in that one takes something that does not belong to one’s self, in violation of the terms of the exchange. As such, fraud is most definitely a crime the government should wholeheartedly prosecute.

All the major banks have committed massive amounts of fraud. Every last one of them. Sometimes this has consisted of foreclosing on homes that were not even collateral for any loan. Sometimes this has consisted of knowingly lying about the quality of financial instruments. There are a variety of ways in which fraud has been perpetrated by the major banks, and I refer you to The Market Ticker (run a search for “bank fraud’)for a much more comprehensive view on the matter. Essentially, the banks have stolen from a large number of people and therefore deserve to be prosecuted to the fullest extent of the law. They have violated the property rights of far too many people, and they need to be jailed.

The assertion that the banksters deserve jail is not predicated on the complaint that banks have ignored trivial regulations; it is predicated on the fact that they have stolen from people. As such, it is not “socialistic” or “anti-market” to demand the prosecution of banksters. In fact, it is just the opposite. It is pro-market to demand that the government prosecute fraud and thereby uphold property rights. The time has come to stop the looting and start the prosecuting.

Sounds Good To Me

By Simon Grey, on October 17th, 2011

The OWSers finally have a good idea:

The social uprising — called “Bank Transfer Day” — encourages bank customers to take their cash out of big banks and put it in smaller banks and credit unions instead. The movement is ostensibly in response to aggressive fees institutions are rolling out to recover profits lost from new financial regulations, notably Bank of America’s (BAC – News) decision to stick debit card users with a $5 monthly fee and Wells Fargo’s (WFC – News) $3 test of the same.

Of course, one need not be a pot-smoking leftist to think that putting one’s money in a bank that doesn’t charge you usage fees is a good idea. And one need not view opening up a checking account with a cheaper bank as a way to show solidarity or prove one’s radicalism. Going to a cheaper bank is simply good business.

At any rate, if you’re going to bank, you may as well bank with an institution that hasn’t perpetrated massive fraud against its customers or the American people. To that end, I also recommend putting your money in a credit union; I’m very happy with mine. I haven’t gotten ripped off, and no one who works at my credit union has been arrested on fraud charges, nor is anyone calling for such a thing.

Better yet, transferring your money from one of the big banks to a local bank or credit union strikes me as a way to a) end the “too big to fail” nonsense once and for all and b) strike back at the criminals running the major banks. In the case of the former, taking your money elsewhere means that any future bailouts will ostensibly be used for fat cat traders who didn’t have enough foresight to cover their risks, since the “little people” with bank accounts will be elsewhere. In regards to the latter, it will considerably harder for the major banks to turn a non-fraudulent profit if they have no customers.

I’m with the OWSers on this.

GreyMail: Is It immoral to Play the Stock Market?

By Simon Grey, on October 11th, 2011

The other day, my brother emailed me to ask if it was wrong to play the stock market. Since I was going to take the time to write him, I thought I’d share my response on my blog.

In the first place, it’s important to note that the stock market is inherently neutral, morally. By this I mean that the stock market, as a non-human entity, cannot go to heaven or hell and, as such, cannot be inherently moral or immoral by its own state of nature.

In the second place, it’s important to note the sources of immorality within the stock market. Karl Denninger has documented massive amounts of fraud among traders, particularly among firms that engage in automated trades. Furthermore, many companies traded on the stock exchange engage in illegal and immoral business practices. Many trades are based on fraud (think of businesses that lie about their balance sheets and income statements). Also, many people engaging stock trades are highly immoral.

Does this then mean that one can never trade stocks? Of course not. If it were immoral to trade with those who are immoral, then no one could buy groceries or clothes, or engage in any kind of trade. And it is not inherently immoral to be the victim of fraud (though it is foolish). Interacting with those who are immoral does not cause their immorality to transfer to you by the merits of trade.

However, those who are immoral can end up having an influence simply by the virtue of your continued interaction with them. This does not mean that the venue of your interaction is immoral. Rather, your decision to allow those who are immoral to drag you down to their level is immoral, and it is you who will bear the guilt and blame for that decision, not the stock market.

It is worth noting, though, that if playing the stock market troubles your conscience then you should refrain from playing the stock market (cf. Romans 14). And it is also worth noting that there are many major players in the stock market who are simply looking for a sucker of which to take advantage, and that the government has often turned a blind eye to the fraud that usually accompanies this. As such, though it is perfectly moral to play the market, it is at this point in time quite foolish to do so.

Reputational Capital

By Simon Grey, on July 19th, 2011

ASI:

One example he used was of Jonathan’s Coffeehouse, a private club that preceded the London Stock Exchange. In the 18th century, the government refused to enforce stock exchange contracts, seeing them as a form of gambling. Nevertheless, the Coffeehouse became a centre of commerce and contracts were usually upheld voluntarily. If you were a trader, you could rip somebody off once, but would be barred from the club. For people whose livelihoods were based on stock trading, it wasn’t worth it.

The same phenomenon exists today in a whole range of exchanges. When I go to a restaurant and get a bland meal, it’s practically certain that I won’t sue. Does this mean that profit-maximising restaurants will constantly give out bland meals? No – if it serves bad food, I’ll stop going and tell my friends not to go either. Reputational capital, so to speak, is enormously valuable, and losing it can be worse than just losing a court case. As a side-point, the reason that restaurants in touristy areas are usually so bad is down to this fact as well. Tourists typically don’t know anything about the restaurants they go to – could things like TripAdvisor bring an end to tasteless, expensive tourist food?

One complaint about the unfettered free market is that there is no way to “make sure” that people behave ethically and fairly in their business dealings. The unspoken assumption is that only government can provide the final guarantee against fraud, presumably through the use of force. What’s neglected in this fairly shallow analysis is that most people expect to participate in the market over the long term, the market can exert plenty of force, and the government is far from perfect anyway.

Since most people expect to participate in the market over the long term, it would be foolish for them to do things that would cause consumers to distrust them. As was already noted, if someone were to even sell a shoddy product, they would presumably suffer negative consequences. And if they intentionally defrauded customers, they would find that they would go out of business quite quickly.

The reason for this is due to the effect of social pressure, which exists outside of the state. Most people with decent faculties will find that it is in their best interest to “play by the rules” because doing so ensures that will have social acceptance, which in turn ensures that there is some degree of implicit trust which then enables trade. This social pressure ensures that most people conform to social norms, and this is itself a form of force.

Unlike the state, though, the market does not have coercive power, in the sense that conformity can be forced. Anyone can opt out of the society in which they live, if they so choose. Incidentally, if one were to opt out of a given society, the market in that society would improve because those who opted out would no longer participate in that market.

Finally, the coercive force of the government is not always used for good. Even if the market cannot ensure that no one ever gets hurt when engaging in market transactions, it does not follow that the government will. As such, the argument that the government needs to regulate the market for the good of consumers is simply specious.