Free Markets, Not So Free –Again

Every few weeks we get another example of how the deified Free Markets of the Western World are not so free at all.  Free markets suppose that information about the goods being bought and sold is full, and that all interested parties have access to it, so that a ‘fair’ agreement can be reached between seller and buyer as to its value.

Full knowledge about the goods being sold is the first thing a budding entrepreneur seeks to hide.  The most recent way to do this is through complexification:  make a financial derivative so complex that no one can understand it, then pitch it hard enough and the buyer goes on hope and greed, never mind the knowing.

Books Flash BoysMichael Lewis, in his newest book, Flash Boys, shows us another cohort of free-market fanatics who sell the line and don’t believe in it at all:  high-speed traders.  Throw enough money and technology to sneak a peak and jump the line in trades, making pennies per share for multi-million share trades and a very nice profit happens — at the expense of those who, not knowing, pay a little “value-stolen” tax.

Lewis appeared on 60 Minutes Sunday, March 30, 2014 in a piece called “Is the U.S. Stock market rigged?

High-frequency traders, big Wall Street firms and stock exchanges have spent billions to gain an advantage of a millisecond for themselves and their customers, just to get a peek at stock market prices and orders a flash before everyone else, along with the opportunity to act on it.

Michael Lewis: The insiders are able to move faster than you. They’re able to see your order and play it against other orders in ways that you don’t understand. They’re able to front run your order.

Steve Kroft: What do you mean front run?

Michael Lewis: Means they’re able to identify your desire to, to buy shares in Microsoft and buy ‘em in front of you and sell ‘em back to you at a higher price. It all happens in infinitesimally small periods of time. There’s speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But it”s enough for them to identify what you’re gonna do and do it before you do it at your expense.

Steve Kroft: So it drives the price up.

Michael Lewis: So it drives the price up, and in turn you pay a higher price.

Lewis also had a compressed version of the book in the Sunday New York Times Magazine, April 6, 2014  with much more of the technical details of how the skimming worked.

Katsuyama and his team did measure how much more cheaply they bought stock when they removed the ability of some other unknown trader to front-run them. For instance, they bought 10 million shares of Citigroup, then trading at roughly $4 per share, and saved $29,000 — or less than 0.1 percent of the total price. “That was the invisible tax,” Park says. It sounded small until you realized that the average daily volume in the U.S. stock market was $225 billion. The same tax rate applied to that sum came to nearly $160 million a day. “It was so insidious because you couldn’t see it,” Katsuyama says. “It happens on such a granular level that even if you tried to line it up and figure it out, you wouldn’t be able to do it. People are getting screwed because they can’t imagine a microsecond.”

Joe Nocera, at the Times, is impressed with the detective work of the small group who figured out what was happening and came up with a solution, of sorts, to keep the high-speed traders at the same speed as everyone else, though he thinks Lewis tells a story too perfectly at times.

William Alden at the Times’ “Deal Book” has a short precis of the book and alerts us to a live yelling match on CNBC between William O’Brien, the president of the BATS Global Markets exchange, who was clearly enraged and Lewis and Katsuyama.

O’Brien ought to be yelling as investigations of the practice have been begun in multiple places, one of which will certainly make changes to the legality of the peep-hole these traders have enjoyed for years.

It’s all pretty damned interesting.  Probably won’t get people to the barricades but it may be another straw in the growing bale of perception that wealth creation is more and more a rigged game, whose rules are written by the riggers and their hired politicians.


Janet Yellen: New View of Economic Health?

Don’t know if Heidi Moore at the Guardian, UK is blowing smoke, or if she’s even an economist but I thought her comments about US Federal Reserve Chair, Janet Yellen’s first presser were interesting. No others who have commented had such an interpretation.

“Wall Street is finally being forced to think for itself.

Today marked the first press conference for Janet Yellen, the first female chairman of the Federal Reserve.

… Yellen wiped away one lazy way of measuring the economy’s health. The Fed, under Bernanke, promised that when the unemployment rate hit 6.5%, the central bank would raise interest rates. This was called quantitative guidance, and it fed Wall Street’s fetish for largely made-up numbers. The 6.5% benchmark was a big hit with traders. It meant they didn’t have to think very hard: when unemployment hit 6.5%, Wall Street could start girding itself for a rise in interest rates.

Then Yellen shut down the betting parlor. In a statement, the Fed said it “will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. This is what is now called ‘qualitative guidance’”.

Translation: the Fed is looking at when the economy improves, and the economy comprises a giant number of measures and statistics. If Wall Street wants Cliffs Notes, it will have to look elsewhere.

… No longer will the Fed promise to raise interest rates at 6.5% unemployment. Instead, the Fed will raise interest rates when the economy is strong enough to justify it. Wall Street will just have to get over itself.

Yellen was clear that from now on, those market pundits are going to be forced to really think about where the economy is going, using a range of numbers, including how many people are dropping out of the workforce, how easy mortgages are to get, and whether regular people find it easy to borrow.

In her comments today, Yellen showed a sensitivity to the economy as real people experience it: mortgages that are hard to get, businesses that aren’t investing, “kids shacking up with their families”, people dropping out of the labor force because they can’t find jobs.

Read all Guardian: Moore

We won’t know for a while, of course, whether Yellen is actually setting out on a different road, or whether that road will lead to good results.  But since the human mind loves to speculate about everything from basketball tournament outcomes to where a missing airliner might be we might as well have a go at matters that actually affect us.


Race, Ryan and Lazy-Day Hammocks

Commenting on Paul Ryan’s “remarks in which he attributed persistent poverty to a “culture, in our inner cities in particular, of men not working and just generations of men not even thinking about working,” Paul Krugman points out that it wasn’t simply Ryan being inarticulate, as he later claimed, but that since the GOP can’t face the facts about poverty in America they respond to the only dog-whistle they understand: race — “the Rosetta Stone that makes sense of many otherwise incomprehensible aspects of U.S. politics.”

NY Times: Krugman

And for more on Congressman Ryan, who likes to hearken back to his famine-Irish forebears, have a look at Timothy Eagan’s justified take-down of the Ryan rhetoric about “culture of dependency”  and “a safety net that becomes a lazy-day hammock.”  It is the same stuff the British said about the famine-Irish, exactly.

The Irish historian John Kelly, who wrote a book on the great famine, was the first to pick up on these echoes of the past during the 2012 presidential campaign. “Ryan’s high-profile economic philosophy,” he wrote then, “is the very same one that hurt, not helped, his forebears during the famine — and hurt them badly.”

Said Ryan:

“We have this tailspin of culture, in our inner cities in particular, of men not working and just generations of men not even thinking about working or learning the value and the culture of work.” In other words, these people are bred poor and lazy.

Where have I heard that before? asks Eagan.

Ah, yes — 19th-century England. The Irish national character, Trevelyan confided to a fellow aristocrat, was “defective.” The hungry millions were “a selfish, perverse, and turbulent” people, said the man in charge of relieving their plight.

And the hammock?

“We entered a cabin. Stretched in one dark corner, scarcely visible from the smoke and rags that covered them, were three children huddled together, lying there because they were too weak to rise, pale and ghastly … perfectly emaciated, eyes sunk, voice gone, and evidently in the last stage of actual starvation.”

The Irish Famine, 1845-1849, (1900). Artist: Unknown

The Irish Famine, 1845-1849, (1900). Artist: Unknown


Trading Down

Joseph Stiglitz  has a very useful short summary, with a one paragraph history, of trade agreements and why the current secret negotiations for the so called TPP are so wrong-headed.

…trade deals today are markedly different from those made in the decades following World War II, when negotiations focused on lowering tariffs. As tariffs came down on all sides, trade expanded, and each country could develop the sectors in which it had strengths and as a result, standards of living would rise. Some jobs would be lost, but new jobs would be created.

Today, the purpose of trade agreements is different. Tariffs around the world are already low. The focus has shifted to “nontariff barriers,” and the most important of these — for the corporate interests pushing agreements — are regulations. Huge multinational corporations complain that inconsistent regulations make business costly. But most of the regulations, even if they are imperfect, are there for a reason: to protect workers, consumers, the economy and the environment.

What’s more, those regulations were often put in place by governments responding to the democratic demands of their citizens. Trade agreements’ new boosters euphemistically claim that they are simply after regulatory harmonization, a clean-sounding phrase that implies an innocent plan to promote efficiency. One could, of course, get regulatory harmonization by strengthening regulations to the highest standards everywhere. But when corporations call for harmonization, what they really mean is a race to the bottom.

NY Times: Stiglitz


The Rich Will Keep Getting Richer, Unless…

Books CapitalSeveral commentators take a look at, and are impressed, with the new English translation of Thomas Picketty’s French published book, Capital in the Twenty First Century [Capital au XXIe siècle, translated by Arthur Goldhammer.]

“The most prominent for many readers might be Eduardo Porter in the business section of Tuesday’s New York Times (3/12/14)

“In his bracing “Capital in the Twenty-First Century,” which hit bookstores on Monday, Professor Piketty provides a fresh and sweeping analysis of the world’s economic history that puts into question many of our core beliefs about the organization of market economies.

His most startling news is that the belief that inequality will eventually stabilize and subside on its own, a long-held tenet of free market capitalism, is wrong. Rather, the economic forces concentrating more and more wealth into the hands of the fortunate few are almost sure to prevail for a very long time.

…income from wealth usually grows faster than wages. As returns from capital are reinvested, inherited wealth will grow faster than the economy, concentrating more and more into the hands of few. This will go on until capital owners decide to consume most of their income and stop reinvesting as much.

A growing share of national income will go to the owners of capital. Of the remaining labor income, a growing share will also go to the top executives and highly compensated stars at the pinnacle of the earnings scale.”

For a longer, more substantive look at the book and the arguments here are four scholars, writing at the American Prospect, Long Form, where the book is called a ‘triumph,’ beginning with Jacob S. Hacker and Paul Pierson:

…another Frenchman with a panoramic vista—and far more precise evidence—wants us to think anew about the progress of equality and democracy. Though an heir to Tocqueville’s tradition of analytic history, Thomas Piketty has a message that could not be more different: Unless we act, inequality will grow much worse, eventually making a mockery of our democratic institutions. With wealth more and more concentrated, countries racing to cut taxes on capital, and inheritance coming to rival entrepreneurship as a source of riches, a new patrimonial elite may prove as inevitable as Tocqueville once believed democratic equality was.

…Piketty’s startling numbers show that the share of national income coming from capital—once comfortingly believed to be stable—is on the rise. Private wealth has reached new highs relative to national income and is approaching levels of concentration not seen since before 1929. Piketty’s powerful intellectual move is to place the subject of American income inequality in a broader historical and cross-national context. The forces most responsible for our egalitarian past, Piketty reminds us, were rapid growth—both of the population and of the economy overall.

And here, a snip from Heather Boushey’s article:

Among other conclusions, the data lead Piketty to describe the popular argument that we live in an era where our talents and capabilities matter most as “mindless optimism.” The data also lead him to reject the idea that wage inequality has grown as technological change increased the demand for higher-skilled, college-educated workers.

Piketty agrees that in the long run, investments in education are an important component of any plan to reduce labor-market inequalities and improve productivity.

Instead, Piketty’s evidence suggests it is the rise of what he calls the “supermanager” among the top 1 percent since 1980 that is driving the rise in earnings inequality.

Brad Delong, at UC Berkeley, adds his take:

If I had to summarize the lessons that I drew from Piketty’s book powerpoint presentation for his Helsinki Lecture, I would say that they are four.

+ he links us to Picketty’s own lecture/PowerPoint in Helsinki, November 2013.  There are some econometric equations included, but the gist is understandable — as it is from the reviews above.

His solution, if there is one?  Progressive tax schemes, estate taxes – rigorously enforced, which he thinks is unlikely.  I don’t think he mentions the R word.


Protectors of Wealth, not Work, Pressing Hard on Fear-Inflation Button

Another Krugman column on the long term against-the-data cries of fear-the- inflation! crowd

…inflation obsession has persisted, year after year, even as events have refuted its supposed justifications. And this tells us that something more than bad analysis is at work. At a fundamental level, it’s political.

This is fairly obvious if you look at who the inflation obsessives are. While a few conservatives believe that the Fed should be doing more, not less, they have little if any real influence. The overall picture is that most conservatives are inflation obsessives, and nearly all inflation obsessives are conservative.

Why is this the case? In part it reflects the belief that the government should never seek to mitigate economic pain, because the private sector always knows best. Back in the 1930s, Austrian economists like Friedrich Hayek and Joseph Schumpeter inveighed against any effort to fight the depression with easy money; to do so, warned Schumpeter, would be to leave “the work of depressions undone.” Modern conservatives are generally less open about the harshness of their view, but it’s pretty much the same.

The flip side of this antigovernment attitude is the conviction that any attempt to boost the economy, whether fiscal or monetary, must produce disastrous results — Zimbabwe, here we come! And this conviction is so strong that it persists no matter how wrong it has been, year after year.

Finally, all this ties in with a predilection for acting tough and inflicting punishment whatever the economic conditions. The British journalist William Keegan once described this as “sado-monetarism,” and it’s very much alive today.

Does any of this matter? It’s true that the Fed hasn’t surrendered to the sado-monetarists. Notably, it didn’t panic in 2011, when another blip in gasoline prices briefly raised the headline rate of inflation, and Republicans began inveighing against the “debasement” of the dollar.

NY Times: Krugman and see the comments too, by and large useful contributions…


New Fed Chair Had the Clearest Spectacles

The choice of Janet Yelled as the Federal Reserve Chair, accomplished over President Obama’s initial preference, is looking better every day.  A long, interesting article by Nathaniel Popper in the N Y Times biz pages is revealing.

As the world’s financial system stood on the verge of collapse in October 2008, Janet L. Yellen was not even a full voting member of the Federal Reserve’s policy-making committee, but she was not shy about admonishing her colleagues for not acting faster.

“We need to do much more and the sooner the better,” Ms. Yellen said at a two-day meeting in late October, after the Fed had helped bail out the banks. As president of the San Francisco regional Fed bank, Ms. Yellen attended all the meetings of the Federal Open Market Committee that year but had rotated out of the circle that actually voted on its actions.

After months in which some members of the Fed committee resisted taking steps to prop up the economy, Ms. Yellen lectured her colleagues: “Frankly, it is time for all hands on deck when it comes to our policy tools.”

Near the end of the article a suggestion of something even better for the future emerges.

As the new leader at the Fed, now the nation’s leading bank regulator, the skepticism Ms. Yellen displayed toward Wall Street that is revealed in the transcripts is likely to prove particularly important. Early in 2008, she pointed to a paper by the economist Raghuram Rajan, now the head of India’s central bank, about the danger of the structure of Wall Street bonuses.

“It seems to me that we have had an awful lot of booms and busts in which this type of incentive played a role,” she said.

Timothy F. Geithner, the president of the New York Fed at the time, pushed back against Ms. Yellen and the idea that overhauling bonuses was necessary. After the election of Barack Obama in November, Mr. Geithner rose to become secretary of the Treasury, and few changes were made to rules about bonuses.

Ms. Yellen might intend to approach the issue differently. Back in 2008 she said that proposals to alter bonuses “were not popular,” presumably referring to financial circles.

That didn’t scare her off.

“I think this is worth some thought,” she said.


Banks Rule – and Ruin

Matt Taibbi, in his last piece for Rolling Stone, wakes us to the next, higher, floor of corporate corruption:

…banks aren’t just buying stuff, they’re buying whole industrial processes. They’re buying oil that’s still in the ground, the tankers that move it across the sea, the refineries that turn it into fuel, and the pipelines that bring it to your home. Then, just for kicks, they’re also betting on the timing and efficiency of these same industrial processes in the financial markets – buying and selling oil stocks on the stock exchange, oil futures on the futures market, swaps on the swaps market, etc.

Allowing one company to control the supply of crucial physical commodities, and also trade in the financial products that might be related to those markets, is an open invitation to commit mass manipulation. It’s something akin to letting casino owners who take book on NFL games during the week also coach all the teams on Sundays.

The situation has opened a Pandora’s box of horrifying new corruption possibilities, but it’s been hard for the public to notice, since regulators have struggled to put even the slightest dent in Wall Street’s older, more familiar scams. In just the past few years we’ve seen an explosion of scandals – from the multitrillion-dollar Libor saga (major international banks gaming world interest rates), to the more recent foreign-currency-exchange fiasco (many of the same banks suspected of rigging prices in the $5.3-trillion-a-day currency markets), to lesser scandals involving manipulation of interest-rate swaps, and gold and silver prices.

But those are purely financial schemes. In these new, even scarier kinds of manipulations, banks that own whole chains of physical business interests have been caught rigging prices in those industries. For instance, in just the past two years, fines in excess of $400 million have been levied against both JPMorgan Chase and Barclays for allegedly manipulating the delivery of electricity in several states, including California.

Rolling Stone:

Taibbi will be missed.  Here’s a link to his archive.


Corporations and Stakeholders

Many people believe, improperly, the only obligation corporations have is to maximize shareholder returns. This is a belief encouraged by repetitive assertion and open eared credulity.

But there is “no law [that] requires corporations to maximize returns to share holders

In fact … No such law in any of the 50 states even raises the topic of maximizing shareholder returns. ”

The idea that corporations exist to reward their shareholders arose not in a body of law but from the work of ideologically driven economists. In 1970, Milton Friedman wrote that business properly had but one goal: to maximize profits. The same year, Friedman’s University of Chicago colleague Eugene Fama argued that a corporation’s share price was always the accurate reflection of the enterprise’s worth, an idea that trickled down into the belief that the proper goal of a corporation was to boost its share value — particularly after most CEO salaries and bonuses became linked to that value.

Read All at WaPo


Republicans: Soft Heads, Hard Hearts

Krugman – on the unconscionable Republican filibuster to block aid to the long-term unemployed.

If you follow debates over unemployment, it’s striking how hard it is to find anyone on the Republican side even hinting at sympathy for the long-term jobless. Being unemployed is always presented as a choice, as something that only happens to losers who don’t really want to work. Indeed, one often gets the sense that contempt for the unemployed comes first, that the supposed justifications for tough policies are after-the-fact rationalizations.

The result is that millions of Americans have in effect been written off — rejected by potential employers, abandoned by politicians whose fuzzy-mindedness is matched only by the hardness of their hearts.