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The underlying reason for the sudden collapse in the worlds banking system is the need to reappraise the value of securities every time the interest rates change and the borrowers of money have to renew their financial package. This was no problem at all as long as the underlying value was always upward. But once the underlying asset values start to fall, the system automatically declines the reapplication and the borrower is rejected from the system; causing a default. As the asset values continue to reduce, the number of defaulters rise, the system automatically collapses. It is these automatic defaults that are driving the collapse.
Imagine please. You bought a new vehicle three years ago and now the auto dealer, (yes, the auto dealer not the finance company); has come back to you to insist that you pay more money for the vehicle. You would say they are crazy. The car has had three years use and is worth less money. You will say immediately that free market rules demand that you owned the vehicle entirely, from the moment you signed the deal. That the auto dealer has absolutely no right to demand more money for the vehicle and you would be correct.
I make this point as this is exactly what is happening with financial deals made in your financial market place. Your financial system is not running under free market rules. If all financial transactions were set fixed at the moment of the deal taking place, without any changes to the deal afterwards, the financial system would be stable and there would not be a collapse of values and confidence. So the only way out of this is to change the rules to those for a free market. When you do that, you will immediately put a stop to the automatic collapse of the entire system.
All you need to do is insert a rule to any new bill to say:
Let us see a simple free market in action.
You are all familiar with a free market. A free market is open to anyone. Naturally depresses the potential for excess. Always has change occurring as prices rise and fall according to demand. Never stops evolving as the natural competitive rivalry swings the balance of opportunity to and fro. Today’s winner is often tomorrow’s loser and vice versa.
A free market in anything demands that the seller can always get the best price of the day, most usually via an auction, where goods and services are sold in lots at the fall of a hammer. That sale price is determined by creating an opportunity for the maximum number of potential buyers to immediately bid based upon the perceived worth, (of their purchase), to them downstream from that purchase. We call that a free marketplace. The moment the bid is accepted the sale takes place; payment is made and immediately the ownership of what is being sold changes.
This is important. If the seller retained ownership, the free market would not work as there would be an obligation upon the buyer that transferred value created by the buyer back to the seller beyond the power of the market to adjust.
The immediate transfer of ownership is thus a fundamental aspect of a free market.
The seller has to accept the price the market will deliver that day for the concept of the free market to work. The price paid must be the market price of that day. The buyer has priced his bid based upon their knowledge of the cost of whatever onward process they have in mind. The price to the final consumer is adjusted accordingly. If that buyer fails to sell on at their final market price, then they cannot afford to go back and buy more at that price and must adjust their bid accordingly.
This is the essential element. Paying too much to the original producer may secure the supply, but suppresses the onward sale of the finished product at the end marketplace. It is this natural check and balance that keeps the whole process of rivalry competitive. The only way to win over the long term is to keep your margins to the minimum that will secure a steady income. Raise prices too far and you are automatically excluded by another that prices below you. Reduce prices too much and you cannot continue to pay your way. Your money runs out before you can replace the original deal with another.
It is the decisions made at the time of purchase that make for viability downstream. You cannot gain an unfair advantage in a free marketplace.
I charge that government has an absolute duty to see that at all times; a fully competitive free marketplace is maintained for anything and everything that is traded in society. We all know the rules for a democracy but what is a free market? What should the rules say? Have you ever seen them writ large on a wall? I cannot find them so let us create some here and now.
2. No one who is a legitimate producer of product or service for sale, nor, anyone who is a legitimate user of the product or service, downstream of the sale; can be prevented from buying or selling goods or services.
3. All sales and purchases must be to the highest bid at the moment of sale.
4. Ownership must immediately pass to the purchaser.
5. No seller can be permitted to influence any transaction beyond the sale.
6. You cannot deal against the market outside of the market.
7. It is the duty of everyone associated with the creation of free markets to see that there are as many as possible independent producers of all goods and services provided to society.
8. Any restriction upon the number of independent producers of goods and services acts against the interests of a free society.
The seller has no further lien upon the potatoes. This is very significant.
We all know about such transactions. They repeat in our everyday lives. But it is important to recognise the basic principles. For a true free market to operate the legitimate seller of the goods must not:
· Retain ownership of that which was sold.
· Be able to in any other way influence the progress of the competitive process downstream of the original purchase.
2. Because there is a need for due diligence when creating that new deal, downstream of the sale, the asset purchased with the loan has to be re-valued and it is this revaluation that has driven the values upwards in good times, (and thus creating additional profits for the financial institutions by permitting them to take a proportion of this additional value as additional interest on the loans), but which is the devil in the detail when the asset values fall. Any reduction in the value creates an automatic default. But when the overall marketplace value falls as we see today, these automatic defaults swamp the entire system and the whole banking system collapses.
The practice distorts the free market, making it impossible for any purchaser to control their costs for the long term. This is no different to the auto dealer asking for more money for the purchase of the vehicle several years after the vehicle was sold. This is not legitimate competition. Not a free market.
Now I turn to speculation.
In rules 1 and 2 there was a very specific reason for my delineation of the legitimate producer or user. If you take a look at the simple street marketplace selling food to the local community you will see that if say, a hundred thousand others stood between the seller of the product and the final purchaser and traded the same product between themselves without any intention of actually taking delivery as a legitimate user; that marketplace would not, ever, reflect the true free market conditions, but would instead, reflect the speculative power of the other thousands to drive the price in whichever direction they wished.
Again, the farmer buying a contract to supply corn, say, in a year’s time, makes a trade where, ultimately, he is the supplier to a user who will manufacture a product, such as bread, also in that next year. But if you permit perhaps millions of trades by anyone who is not either the farmer or the final user, you introduce complex distortions to the final market price that are not predicated by the decisions of either the farmer or the final user. The market is thus distorted by speculation.
Today we see many trading speculatively and such practices are so widespread, they are frequently bragged about.
"Sept. 3 (Bloomberg) -- Dot-coms? Done that. Property? Oil? Corn? Been there, got the T-shirt and nursed the losses, as well. One thing we know for sure about today's global economy is that there is always an investment bubble somewhere. If you get in early enough, you can make a fortune riding the boom." Five Places to Look for Next Investment Bubble: Matthew Lynn http://www.bloomberg.com/apps/news?p...Rhk&refer=home
I believe this aspect of the misuse of a free marketplace is of particular interest. Today, speculative trades of financial instruments have reached astronomical levels and have deeply destabilised money markets. Similarly; the same applies to commodities such as food and oil. Non legitimate speculators make a mockery of a free marketplace and constantly drive the formation of new price bubbles in otherwise free markets.
The free marketplace must be a true marketplace, where the original producer sells to the final user. Once you permit anyone else, outside of the true free marketplace to come between the two legitimate parties to the trade to speculate simply for profit made in the trade itself, rather than as a primary producer or user, you open the door to the compete abuse of the free market; where a trade is not made to purchase for actual use, but simply as a way of influencing the price to the final user. Rules 5 and 6 must be firmly applied.
Competition, real, legitimate competition, not artificial speculation, not being able to change the deal against the interests of legitimate competition must be seen as being the fundamental foundation stone; the principle purpose of a free society. For that to occur you have to have as many as possible legitimately competing in that market; any market, all markets. The more you artificially swamp legitimate competition with speculation, the more you eventually reduce the natural quality of your nation. The less competitive you become and the opportunity for anyone, from whatever background, to rise to the top and succeed consequentially reduces. Failure will become endemic. In such an uncompetitive environment, it is an easy illusion to believe that the few that are succeeding are all that can succeed. This is the great delusion created by any feudal society designed specifically to keep the group at the top exclusively their own.
Feudalism is an economic system where the most powerful use their economic power to swamp and distort the legitimate free marketplace by false trades and speculation. Feudalism naturally excludes success for the majority. Keeps control of the marketplace in the hands of a few.
Legitimate competition must be established in every marketplace, particularly the markets that channel new investment into the wider society. Freedom, as we all know, does not necessarily stem from democracy, it stems from free markets.
This is a condensed and reworked edition of a recent post on iTulip which may be found here:
http://www.itulip.com/forums/showthread.php?t=5166