The horizon is not so far as we can see, but as far as we can imagine

Meanwhile, in China, There’s a Huge Stock Market Crash

It has dropped about 30 percent in the past three weeks, and today:



And this:

In an extraordinary weekend of policy moves, brokerages and fund managers vowed to buy massive amounts of stocks, helped by China’s state-backed margin finance company which in turn would be aided by a direct line of liquidity from the central bank.

China has also orchestrated a halt to new share issues, with dozens of firms scrapping their IPO plans in separate but similarly worded statements over the weekend, in a tactic authorities have used before to support markets.

Do I need to explain that this is really, really stupid? The Chinext had higher price-to-earnings ratios than Nasdaq when it crashed. These valuations are insane; they do not make sense. This is stock market as ponzi scheme.

Stock markets are socially useful for only three things:

1) IPOs—so that companies can get money unencumbered by debt to undertake large projects. (These days, usually so the founders can cash out, which is at best a limited social good.)

2) Secondary stock offerings; same thing.

3) As Keynes pointed out, to give sociopaths something to do.

There are better ways to deal with these and all of the other supposed advantages of stock markets. (For example, if you want people to be able to share in the success of companies, just tax them and distribute. We would be hard-pressed for a more uneven method than the one we’re using today.)

Stock markets are largely useless to the real economy at this point. But when they go wrong, they can do immense damage to the real economy IF regulators and politicians and central bankers treat them as anything but a game in which money is moved from one set of hands (investors), to another set of hands (brokers, bankers, and since the introduction of stock options as the main way of paying executives, high ranking corporate wankers). Stock markets are snake pits of fraud and conflict of interest and everyone professionally involved in them must be treated as “a criminal the second they can get away with it.”

It’s time to change stock markets entirely so that they are useful again for raising funds for new companies or major new projects without debt and are not so dangerous to the rest of the economy. I suspect the best way to do this is to shut the entire current racket down, mandate dividends and controlled buybacks for all remaining stock companies (public stock companies in the US have dropped by half in the last 20 years anyway), and move to a new model, whatever that will be.

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  1. Terence McKenna

    While stock markets do less that they promise, I believe the issue in China is the complete lack of honesty, transparency or the rule of law. The Chinese (for reasons that are probably impenetrable to Europeans and Americans) are not honest with regard to either what they disclose on documents and forms, or even with regard to much of anything else. If we compare this to Germans, we can see that Germans were truthful even with regard to logging in the details of the holocaust. They also could pass beer purity laws and expect most to follow them. For the Chinese, they lie and cheat in so many ways (from the production of dry wall – made with sulfurous slag, to the production of milk powder made with ground up plastic). If we see the arc of honesty at its highest with the fussy Scandinavians, and mediocre in the US, it is at a low ebb in China. So yes, the stock market is a Ponzi scheme.

    The better off Chinese themselves are placing assets in the US.

  2. First, let us calmly note that the exchanges in China are designed to make greedy horse obsessed gamblers be commonly shorn from their money by communist party officials. They are designed that way. There for the way that you make money from them is by figuring out which shares the government once you to keep your money in.

    What the problem is, is that the government officials designed to manage these places have done a remarkably poor job in doing so of late, and even horse gamblers wake up and realize that there money was snatched. stock markets in the West allowed people to put their money in to equities, and were designed to let people who deserved rewards them, and if they were lucky, allowed them to reap the rewards that were otherwise being donated to the fewest. Now however the Western style is now about where the Hong Kong exchange was 30 years ago, and the Communist party has had to ampere up the volume, and even in the best of times this would be difficult. The stock market bears no relationship to the actual economy. This is a feature of the conservative worldview. Think of it as the stock market between 1870 and 1930. It is designed to throw monkey wrenches into people who have very small amounts of money.

  3. I should note that you have already been had if you were in the commonest party rake off scheme.

  4. nihil obstet

    It’s not just stock markets that need to be changed. The corporation itself is toxic in its present form. It gives enormous power to a small group of unaccountable (mostly) men, and shields them from prosecution for criminal behavior. To the extent that limited liability companies are useful for major projects, they should be limited to those projects and not granted immortality as collections of financial power.

    My problem with the current campaigns for a constitutional amendment to overturn the Citizens United ruling is that the campaign should be aimed at corporate structure and financial privileges. We’re wasting too much time and energy on a temporary fix to a marginal issue.

  5. hvd

    Although I completely agree with you about the primacy of the need to reform corporate structure and financial privilege, the citizens united ruling remains a problem that needs to be dealt with. There are huge fortunes, unprotected by the corporate form, that have been granted the power of speech . It is the equation of spending money and speech that would remain even after reform of corporate structure and privilege.

  6. zot23

    nihil – If it wasn’t for short sighted incremental change, we wouldn’t have any change at all. 😉

    It’s always been so. Very rare that a people set out to exact radical and fundamental change from the get go, usually a small change is the straw that breaks the camel’s back and leads to free fall and radical change. The tea party in Boston didn’t want a massive and bloody war with England to establish a new democratic state from scratch; they just wanted representation in their (colonial) taxation to the Empire. But A -> B … -> Z and a revolutionary war is what they got. When there is dry tinder piling up on the ground, any tiny spark can start a huge fire. Trying to guess which spark is the “one” is almost impossible, predicting that one will eventually catch though is a safe prediction.

    Going after Citizens United is a valuable and necessary step to attempting to retake USA representation, we’ll see how it works out. If it works, great. If it doesn’t, it’s not like the impulse to change things goes away – you try something else. The elites aren’t going to lighten their grips any time soon, so the dry tinder continues to build.

  7. It is interesting that people are more concerned with Greece then with China.

  8. Hairhead

    China is on the cusp of something really nasty. It is estimated that over $320 billion (US) has been spirited out of the country in the last year. The “elite” (the crookedest of the crooks) are getting ready to leave. They might not leave, the situation might stabilize. But if they do leave — the power vacuum will be filled, probably with blood.

  9. nihil obstet

    On ending Citizens United, 2 comments. I think corporate structure can be dealt with legislatively; restricting the so-called “rights” of corporations as now constituted requires a constitutional amendment. I think that’s a much more difficult and long-term campaign, rather than a simpler incremental one. And second, the Citizens United petitions I’ve seen are limited to a statement that corporations are not persons. They don’t deal with the speech = money issue, or the other issues that the concentration of money and power raise. There’s nothing wrong with the effort, except that it doesn’t seem to me so much a step towards reform as it is a means of delaying and trivializing reform.

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