Category: economy

High Frequency Trading and Deeper Questions about Capitalism

A recent PBS Newshour report by Paul Solman on Thursday 3/15/12 in his series “Making Sense of Financial News” gave pause concerning the role of high frequency traders (HFT) on Wall St. (and doubtless on other markets around the world). First, you might ask what are HFTs? These are traders who use computer-based algorithms to select, buy, and sell shares on the markets. The speed of these transactions and the “thinking” that is performed is driving the HFTs to locate in lower Manhattan as close as possible to the main Internet port in the city. The few microseconds saved by not being a half mile away on Wall St. turns out to have great significance to HFTs.

The existence of HFTs first came to public notice when the great “flash crash” took place. On May 6, 2010 at 2:42 pm the Dow Jones industrial average, already down by 300 points that day, suddently lost more than 600 poijts in 5 minutes. 20 minutes later the market had regained the 600 point loss. Investigations pointed to the role of HFTs in these events. Since then there has been a lot of discussion of the stability of financial markets and the potential role of HFTs.

 

The Solman report noted that HFTs represent 2% of all the firms trading on Wall St., but conduct over 75% of the transactions. So, when you here that volume of the Big Board today was 3.56 billion shares (3/26/12) 2.67 billion were traded by HFTS. Solman also noted that the average time a share is held is 22 seconds.

What seems strange is that the question of the function and utility of HFTs is never examined beyond economists trotting out the well worn explanation that they are providing liquidiity to the market. By liquidity they mean the presence of buyers and sellers in the marketplace when someone wants to make a transaction. But is this a serious claim in favor of HFTs? Does this incredible display of computing power really mean anything more than people gambling on a fractional move within a few seconds?

"Capitalism works for me! true/false" by Steve Lambert 2011

Now an aside. In a video presentation1 by Steve Lambert about his work, “Capitalism Works For Me! True/False” he notes that people seem perfectly at ease thinking about global warming and the need to undertake massive changes in the fundamental underpinnings of our world, but when it comes to our economy we engage in endless euphemisms and obfuscations. From his website he says:

“For 50 years it has been unacceptable, politically, in the United States to ask what is basically a straightforward question. We have a particular economic system, it’s called capitalism. We have every right as a society to ask of that system, is it working? Is it working for us? Do the benefits and the costs balance themselves out in a way that says, do we want to keep this system? Or that says, we want to change this system? Or that says, we ought to look at an alternative system. We’ve been afraid to ask that question. We’ve been afraid to have public debates—that’s the legacy of the cold war. We can’t afford anymore to not do that. We have to raise the question.”

To turn back to HFTs, why do we need this kind of transaction? How do they contribute to economic growth? These activities are by definition a zero sum game. They are like every other form of gambling a zero sum game. There are winners and losers, but no incremental gain for the economy. Other than enriching the HFTs at cost to others with smaller computers and fewer PhDs on staff what do we get for allowing these activities? Potentially catastrophic destabilization of financial markets? Where is the upside for society as a whole? Isn’t  a primary purpose of any economy to increase the size of the pie, not just to redistribute existing wealth?

 

  1. I saw this at the the de Cordova Sculpture Garden and Museum in Lincoln MA []

Charts from Mother Jones Illustrate That the Rich Have Won the Class War

I came on a set of graphics in Mother Jones, “It’s the Inequality, Stupid: Eleven charts that explain what’s wrong with America” that illustrate what you probably already know. But, a simple refresher course in some of the reasons why the rich are rich. The 99% already have this base covered.

Here are some of the charts I liked. Read the whole article at the Mother Jones website.

Income (constant dollars)

Note that if median family income had simply kept up with inflation over this period it would have grown to $92,000 instead of $50,000.

Change in income-since-1979-2010

 

 

 

 

 

 

 

 

 

 

 

 

Are Corporations Over Taxed?

Mother Jones does not make it clear that the Payroll Tax is also a tax on individuals. To add insult to injury the Payroll Tax is not levied beyond the first %106,800 of income.

Share of Federal Tax Revenue - Mother Jones

 

 

 

 

 

 

 

 

 

 

 

 

 

How Are The Richest of the Rich Doing?

Top Incomes asTax Payers - Mother Jones

Where, Oh, Where Did Our National Debt Come From?

The political rhetoric of the current moment, chiefly flowing from Republicans, but barely challenged by the Democrats, describes tales of profligate over-spending by the Federal government matched with burdensome taxation. While it is true that Federal spending is higher proportionately than post-WWII norms, social programs are not the source of this over spending. One only has to look back to George Bush’s two terms to see the true sources of the debt. 

Impact of Bush Policies, economy and wars on budget deficits

War, Wars, More Wars

First up are our profligate wars. A recent study at Brown University’s Watson Institute for International Studies finds that since 2001 we have spent between $2.3 and $2.7 trillion on our adventures in Iraq and Afghanistan.All of these dollars are deficit dollars. George Bush did not ask for increased taxes to fund his wars. Barack Obama has not asked for increased taxes to fund his continuation of the Bush wars and now his new war in Libya. The final bills for these wars will reach $3.7 to $4.4 trillion.1 We are fighting these wars on the backs of our grandchildren and, as is becoming obvious from the disgusting collusion between Obama and the Republicans, on the backs of the poor and the rapidly disappearing middle class. You might think that since these wars are in our national security interests (the rhetoric of all recent Presidents) they would feel it right to ask the American people to sacrifice more than just our mercenary military but also take money out of their pockets. It has been too easy to have the Chinese pay the bill.

Pills, Pills, Drug Companies and the Health Industry

President Bush, aided by the drug industry and health insurance industry, pushed through a new Part D Drug Benefit for Medicare. This was unfunded by new tax revenues. The estimate for 2009 to 2018 is an additional $727 billion

Tax Breaks Everywhere – The Gully Swamper of Them All

Part of the religion of the right is that cutting taxes will increase economic activity and in the end generate higher tax revenues. History has proven this theory to be nonsense. George Bush, aided by members of Congress, both Republican and Democrat, passed enormous tax decreases. These bills with their charming titles,  Economic Growth and Tax Relief Reconciliation Act of 2001 and Jobs and Growth Tax Relief Reconciliation Act of 2003, created an enormous windfall for the rich and have not produced any job growth. In fact George Bush’s presidency is marked with the lowest job growth record of any president back to Herbert Hoover2. As is demonstrated by the graphic from the Center for Budget and Policy Priorities the tax cuts of the Bush years are the largets single source of debt.

federal_outlays_and_revenues_as_percent_gdp

Under Tax – But Are We Over Spending?

With all of the Bush tax cuts (and the extensions by Obama and the Democrats) Federal tax revenues are now 14.9% of GDP. This is roughly  16% lower than the share typical during the post WWII era while Federal expenditures are 24% of GDP.  The chart from the National Priorities Project “Federal Outlays and Revenues, 1930-2015” shows the historical trends of revenues versus spending. Note that the projected increases in revenue for 2011 to 2014 are the result of the projected lapsing of the Bush tax cuts. As demonstrated by Obama and the Democrats at the end of 2010, it is hardly a forgone conclusion that this enormous giveaway will not be continued. 

The chart clearly shows that overall Federal spending is higher than the post WWII norm.  Despite the political rhetoric of the moment, it is hardly shockingly high. This is especially true if you take into account the war spending and outlays for economic recovery during what is now obviously the most serious economic slump since the Great Depression.

 


  1. I won’t go into the costs of these wars in lost lives and displaced persons not the enormous moral costs. The Watson Institute website has information on those aspects. []
  2. see Wikipedia article here http://en.wikipedia.org/wiki/Jobs_created_during_U.S._presidential_terms []

Naomi Wolf’s The End of America – the movie

The End of America – a film by Annie Sundberg and Ricki Stern

Here is a summary1 of the ten steps discussed and illustrated by Ms. Wolf in the movie.

10 STEPS THAT CLOSE AN OPEN SOCIETY

1. invoke an internal and external threat
People who are afraid are willing to do things that they wouldn’t otherwise do.

2. establish secret (unaccountable) prisons where torture takes place
In a secret system, the government does not have to provide any proof of wrongdoing by those it holds, so it can incarcerate anyone it wants.

3. develop a paramilitary force
A private military force — under the exclusive direction of the “commander in chief” with no accountability to Congress, the courts, or the public — blurs the line between a civilian police force and a militarized police state.

4. surveil ordinary citizens
People who believe they are being watched are less likely to voice opposition.  To scare a population into silence, the government need only monitor the activities of a few to make everyone fear that they are being surveilled.  Every closed society keeps a “list” of so-called opponents it tracks.

5. infiltrate citizen’s groups
Spies in activist groups put psychological pressure on genuine activists by undermining their trust in one another. They may also disrupt legal activities, undermining the effectiveness of group efforts.

6. detain and release ordinary citizens
Detention intimidates or psychologically damages those arrested and also lets everyone know that anyone could be labeled an “enemy combatant” and “disappeared.”

7. target key individuals
People are less likely to speak out when those who are highly visible, like journalists, scholars, artists, or celebrities, are intimidated or have the livelihoods threatened.  Targeting those who are especially visible makes it less likely that people will speak out and robs society of leaders and others who might inspire opposition.

8. restrict the press
The public is less likely to find out about government wrongdoing if the government can threaten to prosecute anyone who publishes or broadcasts reports that are critical of the government.

9. recast criticism as espionage and dissent as treason
People who protest can be charged with terrorism or treason when laws criminalize or limit free speech rather than protect it.

10. subvert the rule of law
The disappearance of checks and balances makes it easier to declare martial law, especially if the judiciary branch continues to exercise authority over individuals but has no authority over the Executive branch.

The movie presents these steps with lots of references to fascist and communist totalitarian history, particularly Nazi Germany and the Soviet Union. According to the movie we are rapidly moving away from a democratic open society to a closed fascist one. The historical context for these changes in America is strictly the post 9/11 era and Ms. Wolf seems blind to the extent to which our society ceased being very open and veered away from democracy long ago. The seeds of our present situation in which corporatist interests joined at the hip with the American Empire and its military/security apparatus substantially dominate politics and the mass media are to be found long before 9/11.

An interesting aspect of this list, and a significant blind spot for Ms. Wolf and the makers of this movie,  is the extent to which most of these “steps” have been present consistently in American life. John Adams and the Federalist’s Alien and Sedition Acts of 1798 speak directly to steps 8 and 9. Cold War America used Steps 1, 3, 4, 5, 6, 7, 8, 9, & 10 throughout this period. The post WWII security state has consistently treated the Constitution and Bill of Rights as rhetorical cannon fodder for propaganda to be ignored or more forthrightly nullified when found inconvenient.   For the most part, Ms. Wolf’s Ten Steps really stand out because they have been the subject of enormous intensification and institutionalization since 9/11. The American domestic security state is now united with the war making operations of the DOD to make the reach of American government truly comprehensive globally and domestically.

The government and the mass media, in a self-serving and cynical fashion, blew the 9/11 attacks into a gigantic existential threat. To this day 9/11 is treated as though it were a 21st century Pearl Harbor. In practical terms, 9/11 was a mere pin prick to an elephant. Though this attack wounded our self-perception of invulnerability and offended our sense that we are the saviors of the democratic world, it was just a terrorist attack, an incident to be dealt with proportionally, not by passing draconian Patriot Acts and building a gigantic addition onto the US security apparatus. Not to mention using this as a pretext to launching wars in two countries that have now lasted more than ten years and cost in the $ trillions.

On top of that, the government, in a completely bi-partisan display of unity, seized the opportunity to build whole new empires of security. We have the Department of Homeland Security with a $57 billion budget for fiscal 2012 and more than 200,000 employees (third largest department). 60,000 employees are in the TSA, that wonderful institution of airport silly business.

We now have to remove our shoes to get on an airplane, but do not have control of the hundreds of thousands of shipping containers that come to our ports each year. Better to demonstrate to the American populace the cost of our security by conducting invasive pat downs than to undertake real protection measures that might slow down commerce or even increase the expenses of corporations. I have been having a recurring bad dream of a small container ship floating into one of our harbors with a dirty bomb on it that we seem to have no effective means to prevent or detect.

Viewed from the perspective that Ms. Wolf’s Ten Steps are not new, but simply an intensification of fifty years of the American Empire, I think only the brutish forces of history will undo this mess.

 

  1. from the endofamericamovie.com website – 05/27/2011 []

Corporations as Persons – Freedom of Speech, now Right to Privacy – Bring on Three Strikes!

The case of the Federal Communications Commission v. AT&T1 now being heard before the US Supreme Court raises anew the craziness of the thinking that has position corporations to be “persons” in the first place.

Noun vs Adjective!

First we have several of the justices focusing argument around the difference between “persons” and “personal”.

But several justices said it was too much of a leap to go from saying that corporations might be “persons” for some purposes to saying that their “personal privacy” could be invaded. Chief Justice John G. Roberts Jr. said he could think of many instances “where the adjective was very different from the root noun.” “You have craft and crafty,” he said. “Totally different. Crafty doesn’t have much to do with craft. Squirrel, squirrelly. Right?” “Pastor and pastoral,” he went on. “Same root, totally different.”

Can they be serious that the issue here is the difference between a noun and an adjective and the not novel observation that a common root does not universally generate a common smenatic value?

Common Usage

As reported, during the oral arguments, “Can you give me any examples in common usage where people would refer to the personal privacy of a corporation?” Justice Scalia asked Mr. Klineberg. “Do you have any examples from The New York Times, from, you know, Boswell, from anywhere, that anybody refers to the interests of a corporation as the ‘personal privacy’ of General Motors?”

Following Scalia’s line of argument, we might ask ourselves to find examples from common usage, excepting those generated by the Court’s long standing finding that corporations are “persons for some purposes”, where people refer to corporations or any business entities as persons. Even corporations only use the impersonal pronouns “it” and “they” in referring to themselves. Certainly corporations acting in groups use the pronoun “we” in the collective sense. But, can anyone find examples where people in common usage use “I” “you”, “he” or “she” in referring to corporations. Corporations certainly never use these pronouns in speaking of the corporation. Ask the common person anywhere whether they think that a corporation is a person in any sense that relates to the classic uses in American history. Does the the Declaration of Independence’s line, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” Does anyone think that corporations have unalienable rights to Life, Liberty, and the pursuit of Happiness?

Last year’s Supreme Court decision granting corporations the right to free speech, and by extension the right to spend whatever amounts of money they want to express their opinions, is a now well known extension of the corporation as a person. With the thinking revealed in these oral arguments, who knows where this court could find on the issue of the right of corporations to personal privacy.

Three strikes and you are dissolved!

Perhaps we should envision some further extensions of this thinking. If corporations are persons, then why don’t we apply the same penalties to their misbehavior that we do to real persons? Repeat offenders are regularly sentenced to long terms in jail or even life in prison. Shouldn’t we apply this thinking to corporations and hold them to the same accountability? Three strikes and you are dissolved!

  1. See the NYTimes,  “Court Weighs Whether Corporations Have Personal Privacy Rights” By ADAM LIPTAK Published: January 19, 201 []

Religious Doubt Spreads – Free Flows of Capital Seen as Dangerous to Some

Money floating aroundThere is more evidence that the current run of religious mania about “free markets” is finally giving way to a more fact-based approach to this important human invention, many countries are now applying capital controls on the flow of monies into  their economies. The world flood of money seeking higher rent districts is terrorizing smaller economies like a tsunami. Fears of speculative bubbles burgeoning and then bursting with disastrous consequences for local economies are driving many to control inflows. Recently the NY Times posted an article about this phenomenon, “Countries See Hazards in Free Flow of Capital1.

“The world has learned about the perils of free market finance — global financial liberalization just does not work as advertised,” said Dani Rodrik, a political economy professor at the John F. Kennedy School of Government at Harvard. “Just as John Maynard Keynes said in 1945 — capital controls are now orthodox.”

Despite the obvious lessons of the last 4 years, “free market” advocates, just like religious zealots throughout history, remain undeterred by the facts on the ground. Financial firms ride along with this zealotry because its suits their business strategies to a T. Nevertheless, some governments, in the face of what must be enormous pressures from the world financial industry that profits coming and going in these financial boondoggles, are facing up to the facts and doing their best to take actions to control the impacts of markets on their local economies. Unfortunately for us in the US, we have no such governments. Ours are owned more than ever completely by big money, overwhelmingly by big corporate money and the super plutocracy of the super rich. They have always known that “free markets” is a wonderful religious cover their control over the real wheels of commerce and politics.

  1. By LANDON THOMAS Jr. Published: November 10, 2010 http://www.nytimes.com/2010/11/11/business/global/11capital.html?_r=1&emc=eta1# []

The Mortgage Debacle – Redux

The current tsunami of revelations of misbehavior, if not outright criminality, by the banking industry in their pursuit of mortgages gone bad, is further evidence of how fundamentally corrupt and cynical this industry continues to be. On the front end of this global economic disaster the financial system engaged in misleading sales tactics using financial products that were baroque in their complexities. Aided by governments seduced by the siren songs of free market religion and  floods of money to grease the ways, the industry expanded spreading its load of debt everywhere. Finally the whole Ponzi scheme collapsed under the weight of its own lust.

Now, in a further display that the people running these institutions have learned nothing, nor been disciplined by either market forces or governments, we are suffering through another round of their arrogance.

Time to call again for these institutions to be broken up. They are not serving the basic purpose of a banking system to supply credit. And, even after being bailed out at enormous expense, directly and indirectly to the general populace, they are again displaying utter disdain for the very laws and procedures that make it possible for the system of capitalism to function at all. Time to put some of these bank managers in jail for organizing and directing this massive fraud against the legal system and homeowners. Time to break them up to form a banking system that will both serve the needs of the economy for credit while not allowing any of them to be so large as to threaten the system as a whole.

But, who will do this? Obama’s administration seems strangely silent. But, given the continuing prevalence of Wall St. executives and their supporters in the Federal Reserve and academics in the administration this is not surprising. Similarly, the Congress, both houses, are still amazingly in thrall of the gods of the “free market” religion and money.

Do We Need Wall St. and all the other gamblers in the financial services world?

What Is the Function of Wall St.?

The global financial meltdown of 2008 – 2009 with its ongoing sequelae seems not to have definitively demonstrated the dangers of our continuing belief in the religion of “free markets” nor shaken, especially it seems in the Obama administration, our thrall with Wall St. and all things financial. We are seeing the combined effects of Wall St.’s funding of the Democrats and Republicans, the primacy of Wall St-ers in positions in government,1 and the tendency of the rest of us to want to beat the table and make wonderfully large profits (winnings). A deeper question here is what is the function and usefulness of gambling in the financial markets for our overall economy and society?

  1. Obama did not invent this situation; Wall St-ers have held most of the important economic positions in the government for generations of presidencies. []

The Two Faces of Mortgage Debt – “Return to Creditor”

Return to Creditor

Stuyvesant/Cooper Houses NYC 2006There is an interesting headline in today’s (1/25/10) New York Times, “Huge Housing Complex in N.Y. Returned to Creditors”.1 This article reports that Tishman Speyer Properties and BlackRock Realty defaulted (welched?) on their debt obligations of $3 billion for their 2006 purchase of the Stuyvesant Town/Peter Cooper Village in Manhattan for $5.4 billion. This is another example of how we think that is it merely a business decision for a corporation to shed unsupportable debt while homeowners faced with the same situation face it as a moral and social disaster. The phrase “returned to creditors” elegantly captures corporate America’s relationship to debt. Its just business.

Default on your home mortgage? What will the friend’s think? The neighbors? Seems to me that what is appropriate for business must be appropriate for individuals. After all, we have been barraged in recent years with call for every person to act as an entrepreneur, a business of one. Any business person looking at continuing to fund a business whose value has shrunk by 30% to 50% while operating costs (mortgage payments) remain fixed would immediately decide to walk away (default) from the debt.

Return Your Sunk House to the Creditors

Time for all those mortgage holders out there to return their underwater houses to their creditors and move on with their lives. This is what these two big real estate firms are doing.

More Readings

For more on the arguments about mortgage defaults see this article in the Sunday New York Times, “Underwater, but wil they leave the pool“, by Richard H. Thaler and the 1/7/10 article, also in the NYTs, “Walk Away From Your Mortgage!” by Roger Lowenstein.

  1. photo by Nicole Bengiveno/The New York Times – The Peter Cooper Village and Stuyvesant Town complex in 2006- borrowed without permission []

How Did We Come To Consider Corporations to Be Natural Persons? – What To Do Next?

This week’s decision by the US Supreme Court to allow corporations, including unions, to hold full rights to free speech and political action under the First Amendment to the Constitution once again reminds me of the strange practical and ethical relationship we have with corporations. In the 1886 ruling, Santa Clara County v. Southern Pacific Railroad Company1, the court reporter wrote in a summary: “The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does.”  I have not read very much at all about the history of how corporations came to be persons and I will not enter into the disputes about how this came to be. It is clearly a well established fact in our laws that corporations are people.

With this new policy handed down by the Supreme Court,  corporations can now spend unlimited amounts of money carrying out political activities. The are many troubling aspects of this situation.  Besides the obvious fact that an artificial socio-economic artifact like a corporation can not possibly be a natural person, there are numerous features of corporations that make them particularly dangerous to us human beings. Corporations never die, excepting the rare death by dissolution. Corporations act globally with many agents in place to carry out policies that favor the corporation wherever and whenever required. Through the wonders of contracts and financialization of assets corporations can appear and disappear from any locality at will. One can observe an example of this phenomenon several years ago when corporations like Tyco International moved its headquarters to an off-shore island to avoid US corporate taxes. This, despite the fact that Tyco had dozens of manufacturing facilities and other operations employing thousands here in the US.