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Why Stock Markets are Collapsing

by Open-Publishing - Wednesday 11 March 2009

Trade-Exchange Rates USA Italy


The stock market began as a means for companies to raise money and for “shareholders to invest in business ventures and get a share of profits.” At some point, it turned into a casino resembling a Ponzi scheme, which held true until 2008 when the Ponzi scheme collapsed.

The causes for this collapse are diverse. Some of its aspects and repercussions have already been discussed here, and will be discussed further in the future. If you would like to know how far the markets have slipped, then see the following 2 March 2009 Bloomberg report. Let’s, however, go beyond the daily, weekly, monthly, or even yearly fluctuations for now.

The most important thing that we should be asking ourselves is not if the markets will be going up or down in the short or long term, but if our trading system will continue to exist in its current form in the future. Based on what has transpired in the last few months, the future of the markets is uncertain, and their dominance of our society unlikely.

Rewriting the Rules of International Finance

On 10 October 2008, Italian Prime Minister Silvio Berlusconi stated that “political leaders are discussing the idea of closing the world’s financial markets while they ‘rewrite the rules of international finance.’”:

* “‘The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,’ Berlusconi said today (10 Oct) after a Cabinet meeting in Naples, Italy. A solution to the financial crisis ‘can’t just be for one country, or even just for Europe, but global.’…

* “Berlusconi didn’t give any details about what kind of rules leaders were looking to change, except to say that leaders are ‘talking about a new Bretton Woods.’

* “The Bretton Woods Agreements were adopted to rebuild the international economic system after World War II.”

“730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944. Setting up a system of rules, institutions, and procedures to regulate the international monetary system.”

This is how serious the situation has become, a Bretton Woods type of restructuring is being proposed for global markets. This proposal implies that the system is inherently flawed. It is due to this flaw that many have been predicting the collapse of stock markets, not because government watchdogs are failing to catch Ponzi schemes like Madoff because they do not understand the mathematics of the game.

The Implications of the Short Selling Ban

The clearest sign that there was something seriously wrong with the markets came in 2008 when the US Securities and Exchange Commission banned the practice of naked short selling of loans for 19 stocks “including Lehman Brothers Holdings Inc. and Fannie Mae and Freddie Mac from July 21 to Aug. 12 as share prices plunged. New York-based Lehman, once the fourth-biggest securities firm, eventually went bankrupt and Fannie and Freddie, the two largest mortgage-finance providers, were brought under government conservatorship.”

And in September 2008, both the US’s Securities and Exchange Commission and the UK’s Financial Services Authority put a temporary ban on short-selling.

* “Despite the FSA’s attempt to justify them on grounds of the ‘extreme circumstances’ prevailing in the financial markets after Lehman Brothers’ collapse, the measures have been highly controversial and their effectiveness open to dispute. At the time of their introduction, the FSA promised to conduct a comprehensive review of the rules in January 2009.

* “On 5 January 2009 the FSA published a consultation paper proposing to lift the short-selling ban from 16 January 2009 but to extend the disclosure obligation, in a slightly relaxed version, until 30 June 2009. In addition, the FSA reserves the right to reinstate the ban if it considers it warranted.”

This interference in the financial markets by UK and US regulators is one of the main reasons why the markets are collapsing.

The Short selling ban was market manipulation for which the end result was that market integrity was lost. The ban meant that these same regulators would, in the future, change the rules anytime they wanted, without warning, for the benefit of the elite.

Would you continue to invest your life savings in such a game?

The short selling ban meant that the multi-trillion dollar derivatives market was now deemed to be ‘incompatible’ with the current economic system, which would explain why Italian Prime Minister Silvio Berlusconi stated that political leaders are discussing the idea of closing the world’s financial markets while they “rewrite the rules of international finance.”

As the pending lawsuits against UK’s Financial Services Authority indicates, those who control trillions of dollars in the global markets are not happy about the rules changing in the middle of the game. And I don’t blame them, would you be happy about it?

Rules of the Game have Changed

With the credit crunch and the disappearance of liquidity from the markets, the rules of the game are changing. Centralized banks and financial institutions around the world are at present trying to prevent a rapid global economic meltdown - the key phrase here being ’rapid’, since a meltdown is all but certain.

The game has changed, the only question that remains is if the change will wipe out the established economic system or will the transition be moderate enough for centralized powers to consolidate assets?

Many investors, both large and small, will now flee markets in which the rules are changed at the whim of those in power. They will look for greener pastures where there is potential for profit and established rules and regulations without deception.

The most important thing to keep in mind is that it is our technological evolution that is bringing about this economic metamorphosis that we see manifesting itself as a global financial crisis. It is also this same technological evolution that is introducing new markets to investors, and has the potential to create a sustainable economy for our collective.