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

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.

Free Markets – free? markets? – lessons not learned

“Free market” has always struck me as a rather strange phrase. Never more so than in this period of financial market disasters. The phrase ‘free market’ continues to be used reflexively. Just as commentators go right on speaking of Wall St. as a source of capital and innovation, few want to ask out loud why we need most of  Wall St.’s “services”; few people are openly using the most obvious words to describe these services as gambling; and, we go right on using this phrase, “free market” to describe an economy that is not free and in many sectors not a market. A recent exception to this are the comments of Ben Friedman, a professor of economics at Harvard, who said, speaking on the PBS Newshour1  of the continuing high percentage of our “best and brightest” going to employment on Wall St., “…it’s all the more troubling when I think that, after they leave us, so many of them go into activities that are not economically productive for the country, for society, even, just narrowly, for the economy.” Continue reading

  1. http://www.pbs.org/newshour/bb/business/jan-june10/makingsense_06-04.html []

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? Continue reading

  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. []

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. Continue reading

Controlling Gambling by Wall St. and the Big Banks – Bad for Business?

Anti-Wall St Does Not Mean Anti-Business

President Obama’s proposals to break up the “too large to fail” mega banks and otherwise reapply the Glass Steagall Act to the financial sector has predictably brought loud complaints that this is populist and anti-business. Even the rhetoric of the reporters and expert talking heads reflects a general bias that anything that we might do to prevent a re-occurrence of last year’s global financial meltdown is anti-business.

How Is It Anti-Business To…. or

Is the New Rule of Banking, “Privatize profits, but socialize losses (risk)”?

As a business person and a citizen I have to point out that having a sector of our economy that caused so much damage to the rest of the economy and citizens continue to conduct themselves in a fashion that is likely to cause a repeat breakdown is not a good state of affairs. How is it anti-business to want to control the gambling addictions of the financial services sector? How is it anti-business to prevent banks and other financial firms to become so large that they can place another call on the the nation’s treasury to bail them out because they indulge another round of gambling with other people’s money through dangerous leveraging? How is it anti-business to want the banking system to perform their primary function that is necessary to make the economy run, that is to take in deposits and make loans? Or, to capture this in a current diddy, we have an economy where for the financial services sector they follow this unique rule of crony capitalism, “Privatize profits, but socialize losses (risk)”.

How Is Gambling With Other People’s Money Good For Us? Continue reading