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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (111629)	5/16/2010 4:24:00 PM
From: Hawkmoon	5 Recommendations Respond to of 116555

Value is what a free market would pay. To whom is the product/service create value? To their shareholders/investors, or to the overall society? That's seems to be the question. Teachers, as custodians hired to educate and prepare our children for productive adulthood, have a social value to all of society. Fire and Police also provide a valuable social good, protecting society from disaster and criminality. With regard to unions, I don't think that's the problem. Where the problem lies is when public servants, union or not, receive salaries that are far in excess of the mean average of the taxpayers who pay their salaries. Is society overpaying for their specialized services (a fair amount of training, and danger is obviously involved). We also have to ask if they should be able to retire at 20-25 years while collecting such a high salary, or should that benefit come as compensation for receiving lower salaries. We also have to be concerned when these departments form their own "mafias" where they defy accountability to elected officials and ultimately the electorate. That's probably where union power is most disturbing (eg: the case of the teachers in Rhode Island). Volunteer ANYTHING has a social value. So thats a "no-duh" statement. Any service/good provided to society without cost is beneficial. But do you volunteer to provide financial advice to Sitka? Did you volunteer your expertise as a computer programmer? Church-based charities are probably one of the greatest social values because most managers of these programs receive very little, or no, compensation. Other charities/NGOs are normally manned by paid staff. Now... to the REAL QUESTION. Do Hedge Fund managers provide a social good (or do they have any obligation to provide such)? These managers are tasked with making money by any means they can. Take John Paulson and Goldman Sachs.. Did they provide a "social good" by packaging that Abacus CDO in such a manner that it was destined to fail and transfer billions in wealth to Paulson's account once his Credit Default Swaps paid off? Others, it could be argued, DO provide a social good, when they take long positions in corporations and become activist shareholders forcing inefficient/ineffective management to restructure so the company become profitable. Those who get caught up in the repercussions of that restructuring might argue against that social good, if they are among the ones who are laid off. Is there a social good for CDS and those who make money buying them? I would say no because from my reading they seek only to profit on betting on a company's default, not restructuring it to become profitable again. In fact, as I understand it, CDS holders now have precedence in any bankruptcy proceeding, during which it would seem they have little incentive to restructure the underlying asset. This becomes even more exacerbated when Naked CDS speculation comes into play because these CDS holders have no insurable interest against the underlying asset, therefore having every incentive to see it fail/default. Who does that benefit? Does it benefit society at large? Or does it benefit only the CDS holder/speculator? Does it result in a massive transfer of wealth from one sector of the economy to another? Does it create hesitation among entrepreneurs and venture capital to invest when they know they face the risk of having their investment targeted for destruction by CDS speculation? Some, and I suspect you're one of them, might claim that CDS contracts are a deterrent to excessive risk taking, and/or debt creation. That CDS are the means to eliminate non-productive debt (debt that does not result in profitable/productive return by the borrower). I wonder if this is why I don't hear you make any negative statements against CDS derivatives (correct me if I'm mistaken). We all know that the big hedge funds are the major players in the CDS markets. They take excessive risks with insufficient capital playing in markets which are opaque. They put the entire financial system at risk with their gambling. Does that serve a "social good"? businessweek.com If those underlying assets default/collapse, we know that speculators, like Paulson, can't make incredible fortunes. But they are doing so, IMO, at the expense of the overall economy. Do we have problems in the banking system that leads these CDS speculators to make such bets under the belief that these assets are worthless? Certainly.. But you don't put out a financial "forest fire" by cutting down all the trees. You target your response to those problem areas, selectively pruning the excess fuel, and preserve the overall forest. Lastly, I think we need to recognize that hedge funds are "supranational" financial entities. They have no loyalties to any sovereign government or society. Yet, the financial resources they can muster are able to target and decimate smaller sovereign economies/societies, often to the point of forcing defaults (which is their ultimate means of maximizing their profit, and therefore their salaries). I fear that these hedge funds, unless restrained, are going to lead to tremendous economic instabilities, forcing countries to default on debt that normally they could service. Or it could force devaluations of currencies, when restructuring of debt could have sufficed. These are my current opinions/fears based upon what my readings. Your free markets, opaque and unregulated, are burning down economic "forests" when necessary "pruning" (austerity/restructuring) might be all that was required. Free markets do not exist, nor will they ever exist. Because monopolist powers will not permit them without government regulation to protect the interests of the society they were ELECTED to represent. I, for one, do not want to sacrifice the sovereignty of our country/constitution to your supranational free market. This country was not founded to serve the interest of hedge funds, bankers, or any corporation. All of those entities only have social value if they serve the people of that sovereign state in bettering their lives, creating economic opportunity, and preserving political and economic stability. Hawk