Bill the Capitalist writes:

“After another routine ban by Facebook – don’t look at me, we’re all hatemongers by this point – it’s time to resume operations. Speaking of operations – and hate – today I’m going to take a little break from the Marxism series to talk about the whole Wallstreetbets situation.

Most people I’ve talked to so far are thoroughly confused. They don’t really understand what happened, they really don’t understand how they should feel about the parts involved – and most liberty-related intellectuals are doing a lousy job at explaining it. So, to help clear things up, I’ll talk a little bit about both parties involved, their actions and their motivations.

The first thing you need to have in mind is that, in theory, there’s absolutely nothing wrong with the stock market, hedge funds, or shorting stocks. The second thing you need to know is that, in practice, there’s virtually every thing wrong with hedge funds and shorting stocks. A stock market is simply a place where public companies are traded – they are a vital part of any market economy, which provide multiple types of funding, to multiple types of companies in an honest way, while limiting the risk of those doing the funding.

Hedge funds are companies that specialize in managing risk, in the context of the stock market. They analyze the yield, volatility and liquidity of all available financial operations, and craft complex investment strategies meant to maximize profit while minimizing risk. ‘Don’t put all your eggs in the same basket’ is how the saying goes – hedge funds specialize in allocating eggs in baskets. One of those financial operations is shorting, which consists of agreeing to purchase someone’s stock at a specific price, in the future.

If I short a stock you own, what we’re doing is entering an agreement. I will buy it from you for, say, 20 bucks, a month from now, and you have to sell it to me. If the stock is worth less than 20 bucks, you’ll be making money – if it’s worth more, I’ll be. It’s not a ‘bet’, as many people have been calling it, and there’s nothing sketchy or wrong about it. It’s an insurance device – I am buying your risk at a premium, and you’re buying the certainty that your investment will have a specific yield.

Well, the theory looks awesome, so what changes in practice?

Only one thing: Government intervention in the financial system.

For over 100 years now, the government has been gradually turning the stock market into a fraudulent casino. Debt-based currency has driven honest commodity money out of the market, making it impossible for people to save – their choice is to either watch their money lose value, or invest it haphazardly, creating an artificial, uneducated demand for investments. Artificially low interest rates have flooded the market with easy money, making unreasonable leveraging the norm, both for companies/funds and for individuals. Lastly, direct government intervention in the form of subsidies, regulations and, most notably, bail-outs have driven honest traders out of the market. If you act honestly towards the existing risk, you don’t profit enough to compete – if you take unreasonable risks, and bribe the right government officials, you will get bailed out when reality comes knocking.

There are no honest traders in the stock market any more. There might be people with honest motivations, such as ‘I’ll do my best in a system I know to be rotten’, or ‘I’ll try to protect my wealth as best I can, which includes trading stocks’. Every single person in the stock market now, however, can and should know that they’re engaging in an irrational system – and irrational systems pose irrational risks, such as the one we just saw.

What about the reddit people?

As with any loosely selected, decentralized group, they are far from homogeneous. From what I’ve seen, there’s a minority of people who understand what’s going on – including a few seasoned traders – and are deliberately playing against the system. They have my most sincere praise – making obscene profit while delivering an economic, political and cultural blow to a corrupt system is as moral and beautiful as it gets. The vast majority, however, seems to have a sort of ‘eat the rich’ mob mentality, which one of the worst mentalities one can have.

They do not despise hedge funds because they’re corrupt – they do so because hedge funds are successful, and they’re not. They do not care to understand what it is they’re doing – they saw a ‘loophole’, and decided to blindly exploit it. They are engaging in the very same second-handed irrationality that makes the financial system rotten in the first place, and most of those people will end up losing their money to it – just like any gambling junkie who’s won a few hands.

As for the future, you guys can expect lots of authoritarian regulation. We’re not in a metallist free-market system, and money does not belong to the individual – we’re in a chartalist state-controlled system, and ‘money’ is a government token used to allocate resources. The State will protect its assets, and maintain control over its financial system, by force. You can also expect to see an increasing number of bizarre occurrences such as this one. Whether we’re talking about a psychology, culture, politics or economics, a system close to collapse always behaves in a bizarre fashion, due to the disintegration of its tendencies.”

The stock market saw an example of the classic short squeeze last Friday organized by GameStop enthusiasts on the Internet to massacre short sellers. Business Insider:

Mark-to-market losses for GameStop shorts on a year-to-date basis reached $3.3 billion when trading closed on Friday, according to data from the financial-analytics firm S3 Partners. Losses totaled nearly $1.6 billion on Friday alone as shares rocketed 51% higher into the close.

GameStop stock has continued to climb as Reddit users and day traders have extended the unusual momentum trade into its third week. The company’s shares initially leaped on January 11 after it agreed with an activist investor to add three new directors to its board. The day’s gains drew in swaths of retail traders, including members of the popular WallStreetBets subreddit.

Online posts urging other investors to join the trade have since driven outsize bullish momentum for GameStop. The stock traded 115% higher as of 10:40 a.m. ET on Monday and is up more than 500% year-to-date.

As old Daniel Drew once remarked: “He who sells what isn’t his’n must buy it back or go to prison.”

RTWT

Giovanni Battista Piranesi, View of Paestum from L’ancienne Ville de Pesto, 1778

The Wall Street Journal reported that the end of the era of New York City and the United States as the world’s leading center of finance is not just imminent, it is here right now.

After 219 years as the citadel of American capitalism, the New York Stock Exchange was near an agreement to be acquired by Deutsche Börse AG in a deal that would create the world’s largest financial exchange.

With the parent of the New York Stock Exchange and Germany’s Deutsche Borse in advanced talks to merge, Aaron Lucchetti and Dennis Berman look at the likely impact on Wall Street as the financial capital of the world.

If a deal is reached and regulators approve, the combined company would trade more stocks and futures than any rival in the world and more options than any U.S. exchange. The takeover would culminate a decade of tie-ups by exchanges around the world eager to find new sources of growth and catch up with smaller rivals that have been quicker to embrace new and lucrative kinds of trading.

For New York, the move is symbolic of the city’s fading dominance on the world stage as other countries are drawing investors directly to their markets. The move also is a recognition that securities trading today goes on at all hours and in all time zones, making the actual bricks and mortar of Wall Street far less important than before.

“New York is going to be important, but it’s not the financial center. Capital markets are everywhere now,” said Michael LaBranche, CEO of LaBranche & Co, the family-run firm that traded on the floor of the New York Stock Exchange for 87 years before it sold that part of its business to Britain’s Barclays Capital in 2010. …

The exchanges, which are presenting the deal as a merger of equals, said the combination would leave 60% of the company in the hands of Deutsche Börse shareholders, with NYSE Euronext shareholders holding the remaining 40%. The combined company, with a putative market capitalization of some $25 billion as of Wednesday, would be incorporated in the Netherlands and split its headquarters between Frankfurt and New York.

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To put all this into perspective, take this little news item into account.

Dow Jones:

The U.S. budget deficit grew in January, heading for an expected record in 2011 amid warnings about the nation’s burgeoning debt and wrangling over government spending.

The Treasury Department’s regular monthly statement, released Thursday, showed the U.S. spent $49.80 billion more than it collected last month.

That’s right. In one single month, your government spent an amount of money in excess of its actual income totaling twice what it would cost to buy the combination of the New York Stock Exchange and the German Deutsche Börse, the largest merged securities trading entity in the world.

Liberal policies are not only tremendously economically destructive. Their impact is far more rapid than is commonly recognized. New York City’s financial industry has been been propping up not only New York’s tremendously misgoverned city and state for decades, but the entire region. Picture the financial district of New York before long coming to resemble the manufacturing districts of the Northeast. Then picture the US in the position of post-WWII Britain, obliged to dismantle its military and retreat from its traditional role of world leadership permanently, because it just cannot afford military power or a major international role.