The mechanisms of financial speculation and the illusion of market security

Over many decades, the global financial markets have developed into a highly complex network that appears stable and efficient when viewed superficially. However, a closer look reveals a system characterized by constant fluctuations, risky bets and an immense increase in money. The players in these markets have created tools that enable realdecoupling economic values from the actual goods and enabling pure speculation. These developments have led to devastating economic downturns in the past, the consequences of which had to be borne by the entire society. In order to understand the underlying mechanisms of these crises, it is necessary to understand the functioning of the passing on of receivables, the measurement ofMarket fluctuations as well as attempts to regulate proprietary trading and money creation.

The fatal consequences of passing on the claim

The conversion of receivables into negotiable securities is one of the age-old processes that were already used in ancient times in the form of simple promissory notes. In modern finance, this process involves the creation of deeds documenting certain payment entitlements. Over time, this simple principle has been greatly refined and expanded. When states issue bonds inhuge volume, these totals are securitized by collective deeds, creating smaller tradable units. The same procedure applies to company shares that are divided into small nominal values.

The pure transfer of risk to unsuspecting buyers

For the individual investor, however, the physical existence of these deeds does not matter, as he only receives a digital extract of his shares. Special service providers handle the technical processing of these huge amounts of paper in the background. In the context of the great financial crisis of 2007, this procedure gained a sad fame.all real estate financing in packages and resold. These loans included particularly risky loans that were granted to completely uncreditworthy persons.

Measuring future market fluctuations

In order to generate ever new sales, greedy securities traders laced these rotten loans into large bundles and equipped them with official papers. These debt packages were subsequently sold to unsuspecting investors worldwide. When the real estate market collapsed, the losses hit the entire global economy, as the risky securities were distributed globally. Many observers andeven government representatives at the time completely underestimated the enormous explosive power of these sales of receivables and initially considered the crisis a problem for one region. The real problem, however, was the pure transfer of risk.

The vicious circle of speculation

The original lenders no longer bore the default risk themselves, but shifted it onto the buyers of the securities, who ended up empty-handed. Another central problem of today’s capital markets is the constant and increasing volatility of financial instruments. This range of price fluctuations is not regarded by speculatively oriented market participants asWarning signal, but as a welcome opportunity to maximize profits. To measure the extent of these fluctuations, analysts compare different securities with each other. Even if two stocks see the same aggregate increase in value over that particular period, the daily spikes can be completely different.

Investor fear as a tradable commodity

A speculative trader prefers the paper with the strongest daily fluctuations, as high profits can be achieved in a short time. However, he always bears the risk of equally high losses. Since speculators do not want to rely on the past, they use instruments that are intended to predict the future fluctuation range.Fluctuation susceptibility is derived from the prices of call and put options, as these prices reflect investors’ risk expectations. Corresponding fluctuation indices are published daily for the major stock market indices.

The inadequate implementation of trade restrictions

After the collapse of this large American bank in 2008, this uncertainty index for the leading German index jumped from 30 to 80 points and marked this historic high. As a rule, the base index and its fluctuation counterpart develop in opposite directions. If prices rise, the measured uncertainty decreases, and if market sentiment is bad, theUncertainty index. Due to the increasing greed for quick profits, the susceptibility to fluctuation in all global markets is steadily increasing. Speculators only see this opportunity in this rising uncertainty and continue to expand their risky business, which further fuels the fluctuations.

The risk of unregulated proprietary trading

This creates this dangerous vicious cycle that makes markets increasingly unstable. However, juggling fluctuating papers is no longer enough for traders. You bet directly on the uncertainty indices themselves to make profits. If you want to bet on falling prices, you buy products that benefit from rising uncertainty values, and vice versa. In this way,the fear of investors themselves of the tradable good and the object of speculation.

The classification of system-threatening institutions

In order to curb this speculative madness, the idea of this legal limitation of banks’ proprietary trading was developed. Named after this former chairman of the US Central Bank, this rule aims for financial institutions to severely restrict their risky bets on their own account. Banks should return to their actual task of looking afterCustomer orders, and do not build up dangerous positions with the money of savers. This demand triggered this massive resistance among securities traders and their lobbyists. The legal implementation of these restrictions was carried out by this comprehensive US banking law, but fell far short of the original expectations.

The mathematical multiplier of money multiplication

Institutions were allowed to continue to use up to three percent of their Common Equity Tier 1 capital for speculative transactions. This loophole in the law was enough to allow for massive losses. For example, in the spring of 2012, this largest American bank lost more than two billion units of money due to complicated bets on the default of corporate debt.clearly that the remaining loopholes are sufficient for risky business. The explosiveness of such proprietary transactions is particularly evident against the background of the banks’ generally inadequate capital base.

The principle of 100% reserve

A high proportion of speculative activities with unpredictable default insurance can lead to extreme liquidity bottlenecks that endanger the entire institution. Anyone who is against this strict limitation of this speculative madness ignores the obvious realities of the financial system. Political representatives who advocate completely unregulated markets only favorthe construction of this gigantic global betting office. Although the affected bank was still able to cope with the massive loss of two billion monetary units, the institution would inevitably have collapsed in the event of higher losses or this series of misguided speculations. It is precisely this scenario that would plunge the entire global economy into this new crisis.

The end of unchecked money multiplication

Therefore, this bank is classified as systemic by this International Financial Stability Board. Due to their sheer size and speculative structure, such institutions will have to meet stricter capital requirements in the future to prevent this renewed collapse. Another crucial lever for containing financial crises lies in the way andWay money is created in the first place. Banks can increase the money supply almost unchecked through their lending. Only this minimum reserve ratio of the European Central Bank slows down this process slightly.

Combating financial bubbles through sovereign money

Banks must hold this small portion of deposits as a reserve in order to remain solvent. The potential for money creation decreases with increasing reserve rate and increases with decreasing rate. This potential is expressed by this simple mathematical multiplier resulting from dividing 100 by the reserve set. If the central bank were to apply this reserve rate of 10Percent, banks could increase the money supply tenfold. With this mandatory reserve of 20 percent, only this multiplication by 5 would be possible.

The complete withdrawal of banks from money creation

Since the central bank currently only requires this minimum reserve from this single percent, the multiplier is 100. This means that theoretically 100 times this amount of new money can be created from this original deposit. This is where the basic idea of full money comes in. The term stands for this counter-model to current policy, namely for thisMinimum reserve ratio of 100 percent. In this system, the money creation multiplier would be limited to 1, and lending would only be possible in the amount of the actual available deposits.

The effective weapon against the excesses of the financial markets

The banks would be completely removed from money creation, and the central government would control the money supply. With this customer deposit of 100 euros, the bank would have to hold the full amount as a cash reserve and should not pass on a penny as a loan. Currently, the money created by this loan travels as a deposit to the next bank, which in turn takes the majority asnew credit. This mechanism would theoretically continue indefinitely and inflate the money supply tremendously. With the introduction of full money, this process would end directly with the first bank, as it would have to maintain the full amount as a reserve.

The definitive prevention of systemic crises

The banks would be completely excluded from lending and would no longer be able to create additional bank money. Against this system, the argument is often put forward that this central government agency cannot manage the supply of credit competently. Although this control is undoubtedly difficult, Vollgeld offers this extremely effective weapon against the excesses of theFinancial markets. Ultimately, it is this excessive lending by banks for questionable purposes that leads to the formation of huge financial bubbles. When banks are no longer able to lend to speculative funds or to completely uncreditworthy real estate buyers, the emergence of new systemic crises is effectively prevented.