Saving Wall Street, From Wall Street, For Wall Street, By Wallstreet – A Financial History? by Navin Doshi (September, 2008)

After Bear Stearns was saved from bankruptcy, Martin Wolf, of the Financial Times, London, wrote, “ This is the day the dream of global free market capitalism died.”

The Federal Reserve can now influence to help or save any financial institution in one way or another. The Federal Reserve has become, probably, the most powerful branch of the government. So now, here we have the fifth branch of the government.

Executive branch- wanting to keep people employed (analogous to the human body), the Legislative Branch wanting to keep spending money (analogous to human emotions), Judiciary, implements the law (analogous to human intellect and reasoning), and the undeclared branch- the media which provides information and influences the peoples opinions (analogous to human genetics, the human blue print). And finally, the Federal Reserve- the all-encompassing savior of all, i.e. providing the currency to make sure that the economic machinery does not fall apart.

Economics is not a science; economists try hard to make it like physicists trying to make nature a slave of science. Economics is closely connected to human psychology and therefore to nature. Recall the rule that hindsight is 20/20 but nature is 80/20. We try to predict tsunamis and earthquakes, but with little success. Humanity has taken Nature’s rule of 80/20 in many different ways. Natures’ non-linear functioning is applied to leveraged investments that give leveraged profit. However, leveraging is like a double-edged sword- it could also wipe out the total investments. Violent fluctuations seen in markets are because of very high degree of leveraging. Investment instruments like options, also known as derivatives, are leveraged investments.

Evidently there are not enough controlling mechanisms in place to maintain stability in financial markets. So the current treasury secretary Paulson wants the Fed to become a “Market Stabilizer” policeman. Paulson recommends that the Fed could have broad powers to go anywhere in the economic system that they may need to go.

We do not know whether his recommendation will be accepted or not. But it is important to note that a major change of historic proportion is taking place and we are witnessing it. The implication here is that the real power is more probably going to the Chairman of the Federal Reserve. The Commander in Chief and all the current candidates for the most part, are clueless as to how the Federal Reserve works on a nuts and bolts level.

So the Money Men of Wall Street will soon gain more control of America’s financial system. Not only the current and future presidents, but also the congress and the courts will more or less be powerless unless there is some divine intervention. So the result will be that Wall Street will save Wall Street from Wall Street for Wall Street first, and maybe, secondly for Americans.

The reason Bear Stern was saved was because if it failed, the so-called “Side effect” to the entire system would be disastrous. The current economic system is a system of entanglement due to the complexity caused by derivates. There is a belief among experts that in saving Wall Street from Wall Street, the Fed is taking the right action since Wall Street has become the beating heart of the financial system. The real economy, spanning from the centers of technology, manufacturing and retail shopping malls, is so intertwined with the electronic bits and paper economy of Wall Street the disaster on Wall Street spreads like a fire spreading from the heart towards the peripheral economic body. We have currently lots of “Flation” going on. Flation? Yes, deflation is happening in housing and financial assets including long term bond. However we have inflation in food, oil, and metals. And for years, we know that the value of labor in the western economy has been going down, thanks to the cheap labor in Asia. We need a miracle to bring back the balance of two pairs of economic opposites; the four elements of two pairs are GDP growth, unemployment rate, interest rate and inflation rate.

Navin Doshi (May 16, 2008)
(Mr. Doshi is a financial market trader, writer, and a philanthropist)

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