Bank Meltdown was High Stakes Gambling

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My late father-in-law was a casino owner and high-stakes gambler, and on a more modest scale I too have been a high roller.  I learned some valuable lessons firsthand at the blackjack tables in Vegas and Atlantic City.  Probably the most important lesson was how easy it is to delude oneself into thinking that it is superior skill, rather than luck, that produces a winning streak. If you are honest and wise you know with certainty that in the long run you cannot win.  However, the game is structured to distort perception. 

As you play there are numerous minor losses and occasional big wins. If you play within your means, and control what you put at risk, the game is exciting, and the VIP treatment and lavish environment for gambling makes it a fun experience – at least I enjoyed it. 

Then and now I see strong parallels between Wall Street and the casino. Speculation is betting, pure and simple. Disregard the pin-stripe suits and the jargon of the investment community. The fundamental proposition is this: You buy and sell based on your guess as to what the future holds. It's no different than betting on the turn of a card, except that in the Casino the odds are certain.  

All real business involves a mix of luck and the creation of value. Speculation eliminates the pesky need to create value and reduces success to a combination of luck and a belief that you have superior knowledge of the odds. (I note that even among professional investment managers, success in one time interval is not predictive of future success. Luck trumps skill.) 

” Money, [Keynes] argued, [referring to the Great Depression] was being switched from production to speculation. The rich were getting very much richer, while the incomes of the rest were stagnating. "Profit inflation," fueled by collateralized debt, went together with an "income deflation." Share prices were being driven up to dizzying heights even as farmers were finding it harder to service agricultural mortgages. Every financial crash is different in detail -- today's started in the banking system, not the stock market -- but the anatomy of all is surprisingly similar: A speculative frenzy, triggered by some technical innovation such as mortgage-backed securities, that collapses when reality -- in the form of more sober valuations -- kicks in.”

Read the whole article:
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/13/AR2008101302090.html

And this too:
http://www.opednews.com/articles/1/IT-S-THE-DERIVATIVES-STUP-by-Ellen-Brown-080918-354.html