Well Japan Post isn't something I'm intimately familiar with thus why i asked for more information. So there's a few things that I would propose, versus privatising it (which defeats the entire purpose)
- The standard calculator was meant to be public and with the explosion of internet technology recently, any person should be able to just pump in their information in an HTML form and get an answer. Using this, you can prevent perfectly legitimate loans from being blocked and sue the bank.
- Unfortunately, without government regulation, banks actually don't really care if a loan performs or not because that's not really the point. They just want more loans out there because under a fractional reserve banking system they're not loaning out money they have anyway. That is, for example how sub-prime mortgages worked. Loan out money to people who couldn't possibly pay it back. Government banks would have the same issue, loaning out money that doesn't exist (thus creating it out of thin air), the only thing stopping them is regulation on what loans are allowed and what is considered too risky.
Mind you, there's a certain percentage expected for non-performing loans and my answer to all problems is: auditor general :) Like any corporation, the government bank would have to be audited to ensure it is performing at an expected level.
In addition it can loan money to the government at low interest rates or give a portion of its profits to cover government shortfall. Normally you wouldn't want crown corporations to do this, so either we only allow the central bank to do so, or we have the bank simply invest any profit and the interest earned is given to the government.
About Derivatives
Futures
This is where I was complaining, about longs and shorts. Price speculation is meant to inject liquidity into the market but my point wasn't that they destroy or create value, it's that they take society's resources away to speculators who produce nothing for society. If we could do away with them and maintain the liquidity in the markets, we'd be good. These are intelligent people sitting there doing nothing more than literally betting all day long, except it's usually not on horses.
I don't think there's any empirical evidence these stabilise prices in any way if we took them out. They were meant for liquidity not price stability.
Options
These don't seem to really do much one way or another so I'm of no big opinion here.
Swaps
As these are usually used to reduce risk and considering my limited knowledge of how they work, I'm not against them in any particular way.
Well fiat currency is a hard one to improve. In any case about overprinting, we've basically already solved the problem... it causes inflation so it's not really an issue.
Take, for example, your talk about USA and China. In order to keep the Chinese RMB low, they would have to print more RMB but if they want the exchange rate with USA low, then they need to buy US assets with RMB. Typically, the Chinese have done so via purchasing bonds and t-bills (now to a tune of trillions). That floods the US market with RMB and lowers the value of RMB to the USD. This allows Chinese exports to look more attractive to American buyers. In order to gain that trade advantage they had to invest heavily in America, so Americans receive the benefits of Chinese savings. So overall, they're both profiting.
edited 11th May '11 7:25:54 AM by breadloaf
I don't understand why you think speculators are taking resources away from society... in most cases, with commodities anyway which you claimed was the biggest reason it exists, the commodity doesn't actually exist at the time the deal is made. Buy a contract on corn on march 1 for delivery june 1, the corn doesn't exist until shortly before june. Sure the speculator's going to reverse the deal so he doesn't take shipment, but that doesn't mean he took anything away. The speculator provided stability for the farmer by locking in the price of the grain in march. The farmer's not exposed to price fluctuations anymore. Since most farms nowadays are actually corporations, that allows them to stabilize a cash flow and helps ensure meeting target goals, makes evaluating management easier and has a whole bunch of other positive effects.
Neither the US nor China are really profiting from China's peg and the US' inflation because there's more than these two countries out there. Europe's getting pissed that China's goods are severely underpriced and China has to pay more for anything it's importing from anyone that isn't the US. One of the consequences of this is it's accelerating the gap between rich and poor which in China is already getting big. Then, consider gas prices in the US, which we aren't getting from China. Dollar value goes down and it affects the economy in its entirety at a bigger impact than China's money is doing for us, especially since we aren't even really investing it in anything just using it for government expenses.
Yeah but you were talking about derivatives, not the first point contract between commodities producers and buyers. The contract is an iron mine mining iron and has to ship iron to a steel plant that consumes it. Derivative comes in when people start buying and selling that contract, thus only making money via price differences (hence derivative). Those people earn money. If you earn money, you get a share of society's resources. If you become rich doing this (longs and shorts require you to have a crap ton of money in the bank, so by definition ONLY the rich can do this) then you're taking away a lot of society's resources.
I'm talking about a standard forward contract, which is a derivative. Agree now to pay at a later date for an exchange at a later date. The derivative part comes in because of the price fluctuation in the spot market between now and then. To be clear, you're not making money just because, and again it's a zero sum game so no money is really lost or gained. The point of entering a forward contract from an iron ore miner's point of view is to mitigate the exposure to a price decrease in iron ore which could kill potential profits. The miner doesn't care if the buyer is a speculator or steel plant because all that matters is payment. The speculator who bought the miner's ore and locked in the price is providing value for the miner.
Ultimately, from the producer to the end user perspective you're looking for insurance. If the prices were to go your way your business could boon and double, but if it's going the other way you might be forced to fold. You're insuring you won't go out of business and giving up on a potential positive outcome in return, and even then you don't really have to since you could pay for a put to keep the upside, but would have to pay a premium for the put.
Finally, you actually don't have to already be rich to take part in derivatives. Looking at short selling for example, you're borrowing shares then selling them, then repurchasing the shares at a lower price. You don't need money until the last step. The thing is, no one's going to trust you when borrowing shares if you have no money of course, but it's not a prereq.
Derivatives can also greatly accelerate how fast money gets in your bank and you don't necessarily need that much to start. I'll illustrate:
Stock XYZ sells for $90 a share now and you think it'll go up to $100 a share in 6 months, with a call option for $2.50 a share at a strike price of $95. You can spend $9000 to buy 100 shares, then if you're right in 6 months you sell and have $10,000, or a return of 11.1%. Instead, if you bought 3600 call options and the result was the price of the stock rose to $100. What you do here is get your banker/company/whatever to to actually pay for the stock when buying and you get the difference between strike and market (there's a term for this but I can't remember it right now, if you're wondering the person who actually buys the stock makes money on transaction fees). Ultimately, you get 3600*$5=$18,000 back (the difference between strike and market) and all it cost you was $9000, for a 100% return. The obvious difference is risk. If the price didn't go up above $95 you lose all of the $9000 investment, while had you actually bought the stock you can sell it for whatever its value is six months later.
Yeah but I'm a lot more specific.
While speculators might buy the iron, that's not really the case these days. That's not how it works in the current market. The vast majority of trading is done on top of the actual contract.
Miner A sells iron to Smelter B for a fixed price, despite how the market might fluctuate. Done. There's your contract, guy mines 100 units of iron to sell at price of 10 magic-dollars each at a set date.
Now this contract goes up for bidding. For short/long sellers, Smelter B then loans out his iron (which he doesn't have yet) to Short Seller C. The Short Seller immediately sells the contract and then at a later date, rebuys an equivalent iron contract and gives it back to Smelter B. He makes money based on price fluctuates in the iron prices. Never does he touch iron. It's tolerated because Iron Miner A and Smelter B likes the liquidity that such sales inject into the market. Lots of people with money trading contracts. Iron Miner A and Smelter B get nothing out of this directly.
Further, Short Seller C must be able to prove he can actually buy that iron at a later date. Don't need to be rich? Think again. In Canada for instance, the rule for short selling is that you must have at least one million dollars in your bank account (amongst other regulations). Million dollars certainly isn't "I never have to do anything again" rich, but it's certainly not what I'd even call middle class.
As for speculators being rich guys who're making money off the backs of the companies... again, it's a zero sum game. If one speculator deals to another one, one of them will have lost money. If the speculator deals exclusively with companies, he's mitigating their exposure at his own risk, so he/she deserves something for that. And even then it's not a sure thing. It's a lot like an insurance company, only more volatile. Companies speculate all the time on their own too... Southwest speculated fuel prices were going up, got forwards, and turned that into an advantage.
Miner A and Smelter B benefit from having less exposure, and the high liquidity of contracts allows them to react and respond more quickly to things as well. I don't understand why you're bent on making speculators out as evil rich guys.
Your claim was only rich guys can use derivatives, and that was wrong. Calls and puts are derivatives, and don't require a million dollars. You might need 1 million in the bank to short sell in Canada, but I don't think it'll be the same everywhere. Short selling as an opportunity only exists when the price is going down anyway, and if someone identifies that the price drop is artificial they can make money by buying and holding.
Lastly... short and long are just positions, not actions, so by definition don't require money. If I offer to sell a friend a video game for 20 bucks when I'm done with it in two weeks, I'm in the short position since I'm the seller. He's long because he's buying. That's all that means.
The idea isn't that speculators are evil, but that they're a drain on society when these people make up quite a lot of the workforce could be doing something else; anything that produces something for society. In essence, your society only produces a set pool of goods/services per year and it is divided via prices/money. So if money goes toward people who produce nothing, they're essentially complete parasites. They themselves aren't the problem but rather the existence of their jobs.
So the claim is that speculation is a zero-sum game and therefore overall it is fine. But when the main purpose of derivatives is to create leveraged speculation (like short selling), that just doesn't ring true. It creates price bubbles followed by major crashes. That's not healthy at all to the economy and causes a lot of real hardship. Then you have the big guys just get bailouts which is utterly unfair. And you can't avoid that because otherwise you just drop into another deep recession.
We gotta have the financial instruments more closely tied to the real world. If someone were selling Toys at Funland Store, nobody does anything fancy to stabilise prices or whatever. If people don't buy the toy, the price drops. If people buy it a lot, the price goes up. Derivative market would be like if I were to go to ten homeowners, borrowed their houses and then sold them immediately and then a week later rebought equivalent houses for them (profiting because the price of real estate went down). I just made money outta producing nothing. How does that make sense?
What I am suggesting is not that speculators are evil, I am asking for an alternative for the liquidity, the reduced exposure for commodities traders and so on, without a system that necessarily creates boom/bust cycles every 10 years. It's win only for the rich because they get bail outs and lose only for the middle class as their savings are destroyed.
edited 11th May '11 5:18:56 PM by breadloaf
> Well Japan Post isn't something I'm intimately familiar with thus why i asked for more information.
actually i am not that much, either, i only read it a lot controversy about it during Koyzumi attempt several years ago.
> The standard calculator was meant to be public and with the explosion of internet technology recently, any person should be able to just pump in their information in an HTML form and get an answer. Using this, you can prevent perfectly legitimate loans from being blocked and sue the bank.
How do you stop the calculator from being politicized ? It is possible calculation favoring certain industries, despite being public. for ex : the calculator favor rural industries against electronic industries. what if public want gov-bank to invest and giving loan on certain industry despite failure ?
> Unfortunately, without government regulation, banks actually don't really care if a loan performs or not because that's not really the point. They just want more loans out there because under a fractional reserve banking system they're not loaning out money they have anyway.
Agree with that, i am not supporting private bank with no gov regulation. Just pointing out gov-bank will also make the same mistake.
> Mind you, there's a certain percentage expected for non-performing loans and my answer to all problems is: auditor general
it will depends on how they select the auditor. Regulatory capture could happen. USA supposed to have regulator to watch the bank after all.
Certainly, and you have combine a lot of lobbying rules (or else you get the US version of the through and through corrupt SEC).
So one thing would be banning them from, once entering the auditor job, they can't go back to any industry to get another job where they are working in the same industry they used to inspect.
The public calculator would still be politicised as you say, but at least in a "transparent" manner. So everyone can see the formulas and see what is favoured and so on. It's up to the public to decide (via voting) what they want. So basically the people are directing whether the government is allowed to give easier loans to rural areas than urban areas. The other concept is maybe to have a mixed environment (though I'm not sure how effective that would be either).
So basically I don't want a system that is too tight, or lacks redundancy (therefore reducing stability) which the non-performing loans talks about. This one is a tough issue to handle.
> The public calculator would still be politicised as you say, but at least in a "transparent" manner. So everyone can see the formulas and see what is favoured and so on. It's up to the public to decide (via voting) what they want.
it would mean gov-bank will still hit a trouble sometimes, although i agree it appear there are no better solution than this.
Well the trouble it would hit is basically the same as when voters put in a leader who is basically a dictator into power and are too apathetic about his abuses to do anything (like vote him out again next election). It happens rather frequently but I haven't a solution to rampaging stupidity yet. (I would think restricting the right to vote in any way would be far worse)
edited 13th May '11 7:47:11 AM by breadloaf
in Japan Post, loan are not granted to all business, loan are granted to business that have support from politician or local gov. this cause variety of effect : - straight nepotism, if you friendly with politician, loan more likely to be granted. - pork barrel project. business that supported by local gov more likely granted loan, even if business is unlikely to succeed, - rural support its easier to gain loan if the business is in certain area (usually rural ), especially if the politician want to revitalize certain area.
this cause huge number of non-performing loan because loan not granted on the ability of businesses to pay back the loan, but wasted mostly in pork-barrel / bridge to nowhere project.
you mention that gov-bank using standard calculator to calculate who could / could not get loan. but there will be extreme incentive for politician to create calculation that benefit certain political goal. for example : giving farmer much easier loan in Japan.
in private bank this could also happen (redlining / refuse to give loan to blacks ) but since the incentive is profit, business ability to pay back loan will hopefully become prime consideration in giving loan.
Sorry if confusing. i using Japan Post as example to show that gov-bank would likely have incentive to give loan according to political consideration.