Macro Economics
"This is, by definition, a corrupt system."

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By yttire
October 20, 2008

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Is it worth investing in the American stock market anymore?

The underlying problem here is not that too many sub prime mortgages were offered (they were), it is not that investment banks would get 50 credit default swaps per bad mortgage to rake in millions on a single default (they were), it is not that the banks are suddenly short of cash (they are). The problem is that we have a legislative system which has laws written by any special interest who can confuse the politicians and give them a few bucks to get any law they want.

This is, by definition, a corrupt system. And investing into any corrupt system has large hazards, as you are well aware of by now.

Everyone is arguing about how big the bailout should be, who is responsible for offering the bad mortgages, who is responsible for creating the credit default swap system, but this is all meaningless when the underlying economic system is corrupt.

Let's say you were offered an investment in a company which had good free cash flow, great innovative ideas, great patent protection to protect those ideas, and a great protective moat. It is selling at a P/E of around 12 despite a long history of high growth. But there is one small catch- the owner is known to walk off with all the money through legal loopholes, which will bring the company crashing down at any time. Would you invest your life savings into this company? You have been.

This is exactly the situation you are facing at this moment looking at investing in the market. Do you really want to invest your money in a system where the "owner" (banks) can walk off with your money over and over again?

They can do so because they can write themselves whatever legislation they want. If they want to take commercial money (like your savings account) and gamble it like an investment bank, they can- because they wrote themselves this law in 1999 as both parties accepted campaign contributions to write the laws.

If the banks want to offer insurance but have no regulations on this insurance, they can do so, because they got this passed as a law in 2000. This was due to just a few million in campaign contributions!

If mortgage lenders want to offer tons of subprime mortgages and make money off every closing deal because they can hide the risk behind Tranches, they can, because they got this legislation through for just a few million.

We live in a society where the laws can be written to favor those who will make billions of short term money off a few million invested in political campaigns. This is a corrupt system. Is it worthwhile to invest in a corrupt system? Is it worthwhile to invest everything you have ever earned into such corruption?

Do you really think that the new regulatory system will be able to overcome the future fear of politicians not getting their job back and allow them to see through the confusing double speak of high finance and not allow them to accept more campaign contributions?

Do you really think future politicians will turn down their future job prospects because they are suddenly able to see through the posturing?

Do you really think the future will somehow be different when it plays out exactly the same over and over, and you are investing into a house of cards where the weakness is dictated by the level of corruption in the foundation?

In the past, extreme corruption made it impossible to get ahead by investing in the securities. The SEC was created initially not to favor the bankers, but rather to make an environment conducive to investing in equities. Extreme corruption created the SEC to encourage the growth of capitalism as a whole.

Of course, if you can write whatever law you want you can and will do an end run around the SEC, pay for a few campaigns, and then you personally are in the money as you collect millions for a few years then sit on the side and laugh while the general investing public gets creamed.

Their "investments" were into an instable system that was created to allow bankers to get rich. The owner has walked off with a large part of the money. Has the owner already walked off with more than 700 billion?

Is it worthwhile to invest in the stock market when at heart, you are investing into a corrupt system where someone is gaming you?

You have to answer this for yourselves. But if you feel it isn't, perhaps you should think about campaign finance reform.

Capitalism as a whole is undermined by our current political system, and you should think seriously if investing in stocks as your only mechanism of growing your capital.

It will be around 15 to 20 years when the "new legislation designed to stop the 2008 collapse" will have been forgotten and the end run of the laws will be taking place, and that may be when you are starting or in the middle of your retirement.

Will that next collapse throw you into the gutter?