The Speculator's Double Edge, Risk, Ruin, and Reward in Financial Markets

“ It is the Stock Exchange gambler rather than the investor, or the speculator who moves legitimately within his means, who may rejoice in the boom with its roaring business and rising prices, but who forms the real element of danger in a slump with its sudden depreciation, and who frequently turns the slump into a crisis, and eventually into a panic. ”

“ And the business man, who should know better, too often enters the share market as if he were sitting in an open poker party, among sharpers and pickpockets, and recklessly surrenders himself to every temptation of this devil-may-care atmosphere, while he “plays the game.”
It is this combination of the gambler, the sporting man, the fast broker, the frivolous and ignorant trader and the speculative public, all possessed with the mad passions of gain and fear, and all struggling more or less grimly in the maelstrom which boils about the Stock Exchange, that constitutes the Wall Street spirit. ”

“ The flutter of an eyelash, a hair-breadth of hesitation, a mumbled word and there may be born in the mind of the investor that instinctive distrust which is the beginning of panic. In a stock market as in a powder magazine there are always dread possibilities of explosion, and he who would survive must have incombustible nerves and an ice-packed brain; asbestos assurances and an unblushing swagger have averted many money conflagrations and set prices hill-climbing. ”

“ One of the most curious things in the history of Wall Street is the appearance of these vultures in a panic. They scent the final death-struggle with unerring accuracy. They never buy stocks except in those awful moments of ruin. They hold them grimly until the next tidal-wave of prosperity, sell out at the top, and wait patiently for the next killing. They are the only outsiders who ever make a dollar in Wall Street. ”

“ Those same joyous, winning stock-gamblers, with beaming faces, of the week before, were fear-clutched, losing stock-gamblers, with livid faces, on what they afterward called the day of the panic. It really was only a slump; rather sharper than usual. Too many lambs had been over-speculating. The wholesale dealers in securities—and insecurities—held very little of their own wares, having sold them to the lambs, and wanted them back now—cheaper. The customers’ eyes, as on happier days were intent on the quotation-board. ”

“ A man who accumulates large paper profits in speculation and fails to “cash in” until a large part, or all, of his gains have been dissipated in the process of deflation which inevitably follows every boom, is comparable to one who plants a field of grain and refuses to harvest it at maturity, hoping that the ripened kernels will get a little larger. Many a speculator has been brought to grief by an insatiate greed for that coveted topmost point, instead of being content to sell at a good profit and leave the possibility of a [76] small gain to the individual who buys his stock. ”

“ I might dwell upon the evil effects of speculation upon innocent parties whose property is juggled up or juggled down by the manipulations of the market, but I would appeal, not only to the innocent outsider, but to those who may be tempted by the profits promised to the inside ring. I would suggest, however, that those who by cornering the market suspend the law of supply and demand, add crime to vice and defraud those who are induced to invest in a “chance” which has no actual existence. ”

“ These are important and blessed functions in an imperfect world because they make it more perfect. The speculative activity equates prices and, therefore, sends the right signals to market operators as to how and where to most efficiently allocate their resources. But this is the passive speculator. The "active" speculator is really a market rigger. He corners the market by the dubious virtue of his reputation and size. He influences the market (even creates it) rather than merely exploit its imperfections. ”

“ Besides, a panic is only disastrous to single, isolated speculators, not to speculation in general. On the contrary panics are the great harvest of speculation, the opportunities for the slaughter of the entire saving and producing classes in a nation or in a continent, en masse. Then the few great capitals, the enormous fortunes, open their jaws and swallow not only the whole property of the investment-seeking public, but also that of the small robber capitalists, whom they usually good-naturedly allow to play around them, looking on like the lion at the mouse's gambols. ”

“ Of course there are some speculations that are fair and honest— speculations made with our own money, and which do not involve in their success the loss, by others, of what we gain. But generally modern speculation involves much risk to others, with chance of profit only to ourselves: even in its best conditions it is merely one of the forms of gambling or treasure hunting; it is either leaving the steady plough and the steady pilgrimage of life, to look for silver mines beside the way ”

“ The more dangerous malefactors are the men in high places who take a good property, overcapitalize it, appraise its value at many times what it is worth, use artful methods to beguile the thinking public into believing the stock is worth par or more, and foist it on investors at a figure which robs them of great sums of money. There are more than a million victims of this practice in the United States. ”

“ This is an extraordinary period for America's economy. Over the past few weeks, many Americans have felt anxiety about their finances and their future.
I understand their worry and their frustration. We've seen triple-digit swings in the stock market. Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money. ”

“ On the contrary, I know that if the people do what is necessary to shake off the "System's" strangling grip upon their savings, the "System" will suffer death, and everlasting profit and advantage will accrue to the nation. Though it be necessary for the people to withdraw from the banks and trust and insurance companies their billions of savings, and even though such withdrawal must cause a temporary business crash and the failure of many of the financial institutions of the country, the sacrifice would be many thousand times compensated for by the benefits that would follow in its train. ”

“ Any system which could at will open or shut the valves of American credit, stage an orgy of "inflation" or stage a debacle of "deflation," increase or decrease the money supply, make the tide of employment flow to prosperity's height or ebb to despair's depths, create a "bull" or a "bear" market at will—would justify the investment of hundreds of millions or even billions of capital! Its power would be practically boundless, its profits be fabulous and from its coign of vantage it could coin the sweat of scores of millions of toilers into its coffers of greed. ”

“ Every one of those schemes of frenzied finance about which we are reading in these days is a gigantic bloodsucker, with ten million minute tentacles which it stealthily fastens upon the people who do the world's work, and each one of the victims must give up a little of his life for the aggrandizement of our financial Titans. When such schemes flourish, by which men's gains are suddenly swollen to enormous proportions, somebody must be paying for it, and life is always the final payment. It all comes out of the life of the people who are producing the world's wealth. ”

“ Is it wise to delay all relief until the Gazette is full, and to keep credit suspended at the very moment when it is most urgently and clamantly required? And what kind of law, we ask, is that which in prosperous times—that is, whenever gold is abundant—confessedly puts no check whatever upon speculation, but which, at the least turn of the tide, is an absolute engine of destruction? Look at it in any view, and we maintain that a more miserable instance of legislation upon false and contracted principles was never yet invented by the brain of a political economist. ”

“ But it was a crisis that began in our financial system. Large banks engaged in reckless financial speculation without regard for the consequences – and without tough oversight. Financial firms invented and sold complicated financial products to escape scrutiny and conceal enormous risks. And there were some who engaged in the rampant exploitation of consumers to turn a quick profit no matter who was hurt in the process. ”

“ And it means reforming a weak and outdated regulatory system so that we can better withstand financial shocks and better protect consumers, investors, and businesses from the reckless greed and risk-taking that must never endanger our prosperity again. ”

“ To protect our economy and people from another market meltdown, our government needs to fundamentally reform the rules governing financial firms and markets to meet the challenges of the 21st century. We cannot allow the thirst for reckless schemes that produce quick profits and fat executive bonuses to override the security of our entire financial system and leave taxpayers on the hook for cleaning up the mess. And as the world’s largest economy, we must lead, not just by word, but by example, understanding that in the 21st century, financial crises know no borders. ”

“ As we continue to recover from an historic economic crisis, it is clear to everyone that one of its major causes was a breakdown in oversight that led to widespread abuses in the financial system. An epidemic of irresponsibility took hold from Wall Street to Washington to Main Street. And the consequences have been disastrous. Millions of Americans have seen their life savings erode; families have been devastated by job losses; businesses large and small have closed their doors. ”

“ Without it there would be a sort of chaos of confusion and abnormal prices, for it is the speculator who is often the most keen and discriminating in judging the true value of securities. The much maligned “bear” is the safety valve of the market. He often prevents the manipulation of the price of a stock to an unfairly high figure by exposing the weak points in the situation, which is a protection to a prospective buyer.
A great deal of shallow abuse is still being showered on the Stock Exchange from all parts of the country. This always follows a panic. ”

“ Without its medium it would be impossible to raise the capital for conducting our great railroad and industrial corporations; investors would be deprived of the means of finding profitable employment for their capital, and there would be no free market for the many millions of securities there dealt in. Abolish the Stock Exchange and the free play of market forces which best develop real values; then investors would be kept in the dark and their properties would be exposed to grosser manipulations than ever thought of by stock market operators. ”

“ The undue inflation or depression of prices will be counteracted by speculative operations such as we have referred to, and in that sense, speculation is directly of immense benefit, as it is one limb of a body of law which administers justice silently but surely to any one who has left one weak point in his armour when attempting by violent or fraudulent means to snatch a profit by unjustifiably raising or depressing prices. ”

“ The consensus of opinion among those who have studied the course of speculation on exchanges seems, however, to be that if manipulation of prices and monopoly can be kept out of the market, and if the laws of supply and demand are allowed to operate freely, the effect of speculation, particularly of dealing in futures, has a healthful balancing effect on the market. ”

“ Without it the wheels of commerce and finance, investments and technological innovation will immediately grind to a halt. But many operators are so risk averse that, in effect, they increase the inefficiency of the market in order to avoid it.
They act as though they are resolute, risk assuming operators. They make all the right moves, utter all the right sentences and emit the perfect noises. But when push comes to shove - they recoil, retreat, defeated before staging a fight. Thus, they waste the collective resources of all that the operators that they get involved with. ”

“ In the present study we do not need to consider risks, inasmuch as the greater part of them arise from dynamic causes; that is, from the changes and disturbances to which the business world is subject. An invention promises greatly to cheapen the production of some article and, for a time, to insure large returns for the men who first utilize it. A capitalist may be willing to take a risk for the sake of sharing this gain; but in time both the risk and the gain will vanish. The capacity of the new appliances will have to be tested, a market for their output found, etc. ”

“ When they succeed nothing is heard about the “wickedness” of Wall Street, and they flatter themselves as to their own superior shrewdness. But when these same individuals lose, then Wall Street is nothing but a “gambling hell and a cesspool of iniquity.” They fail to recognize that their losses are the result of their own cupidity, or inability to discriminate between sound and unsound investments. They usually lose because of their own bad judgment ”

“ Translating this into lay language, the private investor or his agents just cannot be interested in buying stock in enterprises which are suffering economic regulation by political agencies. And once an enterprise is denied access to the highly competitive markets for risk capital, it is indeed on the verge of bankruptcy or about to crash into the abyss of nationalization. ”

“ Exclusive ownership reflects real-life irreversibility. A first mover has the advantage of excess information and of irreversibly invested work, time, and effort. Economic enterprise is subject to information asymmetry: we know nothing about the future and everything about the past.
This asymmetry is known as "investment risk". Society compensates the entrepreneur with one type of asymmetry - exclusive ownership - for assuming another, the investment risk.
One way of looking at it is that all others are worse off by the amount of profits and rents accruing to owner- entrepreneurs. ”

“ Broadly the community has cooperated to meet the needs of honest distress, and to take such emergency measures as would sustain confidence in our financial system and would cushion the violence of liquidation in industry and commerce, thus giving time for orderly readjustment of costs, inventories, and credits without panic and widespread bankruptcy. ”