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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

January 3, 2013 at 10:30 AM

Behind the offer to buy the NYSE, sick capitalism

Lost in the fiscal puppet show and the subsequent big gains by the Dow Jones Industrial Average is last month’s announcement that an Atlanta-based outfit wants to acquire what was once the temple of capitalism, the New York Stock Exchange. IntercontinentalExchange, or ICE, would pay $8.2 billion for NYSE Euronext.

Once upon a time, stock exchanges engaged in the buying and selling of shares in companies, engaging in price discovery about those share’s value, and allowing the listed firm to assemble capital for productive enterprises that created jobs. After former stock shark Joseph P. Kennedy set up the Securities and Exchange Commission in the 1930s, stock markets gained more trust and safety. But that’s so twentieth century. ICE wants to become a more substantial player in the $600 trillion derivatives market. That’s right, $600 trillion (remember that when people say “we’re broke” and must cut wages and the social safety net for the middle class and poor).

Warren Buffett famously called derivatives “financial weapons of mass destruction,” a prophecy borne out in the panic ahead of the Great Recession. Unlike a stock, a derivative represents mostly air and anticipation. It’s value is “derived” from the value of an underlying asset, such as oil or, say, subprime mortgages. This doesn’t keep derivatives from being traded, bought and sold, with big fees going to the Wall Street and London playerz.

Here’s an analogy. I have $1 in my pocket, and sell a $1 derivative to commenter “h bear.” After making his usual cranky attack on me, he creates another derivative based on the bet that I’ll still keep my job despite his fondest hopes and the dollar will double in value. He sells this derivative to “PurrlGurrl,” who bundles it with others and, with overall derivative values rising, resells it to “modestguy1,” pocketing a tidy profit. But there’s nothing there “underlying” the value but the buck in my pocket. Like any hustle, the returns are superior as long as the wheel turns. If things go south, whoopsie.

Still, in the real world, real money changes hands, is made and lost. The derivatives market is the biggest casino in the world and yet it does little to fund job-creating, innovating enterprises. It is where the super-rich, too-big-to-fail banks and giant corporations often put their money to make even more money. Derivatives are also highly opaque and difficult to regulate. While some can be useful hedges, if properly regulated and transparent to investors, the overall edifice is a racket, highly fragile, and when trouble happens the financial system and world economy are at risk. Taxpayers are left to clean up the mess (see “Recession, Great”). The credit default swaps at the heart of so much trouble in October 2008 were derivatives.

The ICE deal is bad for a host of reasons, including further concentration of finance and antitrust. But it illuminates that casino capitalism is doing very well, even if you can’t find a job or get a decent raise or a loan for your small company. And that, dear readers, is neither healthy for real capitalism, most businesses or the national interest.

And Don’t Miss: Bill Gates just can’t seem to get rid of all this pesky money || NY Magazine

Today’s Econ Haiku:

We’ll drill, baby, drill

A stiff climate-change cocktail

And on the rocks, please

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