A storm is brewing around Facebook and its cavalier treatment of users' privacy. Over the weekend the Washington Post published an op-ed piece by Facebook's CEO designed to defuse some of the criticism. Commenting on that piece was a Monday Wall Street Journal article by Jessica Vascellaro that re-lit the subject, making it look like the Facebook pledge was fairly weak. But WSJ wasn't alone, the criticisms have become a flood:
Facebook CEO pledges another privacy rework (CBC)
Tension Building At Facebook As Staffers Challenge Zuckerberg's Approach To Privacy (BusinessInsider)*
Facebook Grapples With Privacy Issues (Wall Street Journal) (Jessica Vascellaro)
Dumb f***s (Forbes) (Meghan Casserly)
Facebook CEO Accused of Securities Fraud (slashdot)
Facebook CEO’s latest woe: accusations of securities fraud (VentureBeat)
Facebook Issues Statement On Latest Zuckerberg IM And Company Attitude Toward Privacy (BusinessInsider)
The shape of Facebook's grand strategy seems to be to take advantage of naivete wherever possible, then expose user data and expect that users will then forgive this slight by agreeing that it was all for their benefit anyway, as though Facebook knows better what is good for users than the users themselves do. From the WSJ article: "he [Facebook's CEO] has made no secret that he believes users should and will want to make more information about themselves public over time. "
Developers Can Exploit Facebook User Data
Facebook earlier deployed a series of programming tools that developers can use to add content to their websites. A lot of that content comes from the private data of individual users. One such site is YourOpenBook.org.
As of the time of this blog post, these were recent Searches:
my vulva
"I'm over it"
"jose gomez"
nigger
gay
win borden
interracial
acne
shaved my head
my new pictures
skinny dipping
lost virginity
my new number
"lost my virginity"
getting a divorce
naughty pics
had a threesome
slutty pictures
im a lesbian
radical muslim
Pick anything, and you get real pictures of real people, complete strangers, telling you exactly about their vulva or divorce or how they had a threesome or are radical muslim.
Go ahead, try it.
Coming Next
There is so much more to write on this topic, and how it intersects with economics and politics and the future of commerce. Future posts will explore each of these in turn.
* I first encountered a Forbes story, but that story is little more than a wrap of a BusinessInsider story which is in turn a wrap of a Wall Street Journal story. So for this news story, in effect, Forbes is suckling from the WSJ information stream. We chose the BusinessInsider headline because it was more colorful.
Tuesday, May 25, 2010
Monday, May 24, 2010
Bank Lending: Policy Makers Squeezed Tight?
The prescription to cure an economy that choked on too much credit is simple: Less credit. Unfortunately for officials, this is a very unpopular medicine, since it reduces economic activity by reducing leverage among lenders, reducing lending, and propping up medium-term interest rates that affect purchases of durable goods. If you want a bank to increase its capital relative to assets, then assets must shrink, since capital will only be generated over time through earnings. Fewer assets, less lending, fewer lenders who are open to lending.
If you are a public official, the last thing you want to be associated with is reduced lending. Hence our current official set of matched lies: "It is the banks who are refusing to lend" versus "You'd better increase your capital ratio." Calling it hypocrisy would be exact, but then some readers find that to be a loaded term, implying more criticism than is intended.
The key point is understanding how all of the players are influenced. While the economy is in bad shape, banks will be hit with blame from officials for not lending while being given incentives to do exactly the opposite. There is a gap between the genuine true and the printed and perceived words in the press. Bank lending will not increase until the real conditions, not words, are there to support it.
~ ~ ~
On the other side of the coin are consumers. If they don't want to borrow, they won't. Right now the prudent action for consumers is to pay down debt and build up savings. Eventually, government encouragement to spend and fail to save will arrive, but don't expect an increase in consumer lending until the mood of frugality has passed.
If you are a public official, the last thing you want to be associated with is reduced lending. Hence our current official set of matched lies: "It is the banks who are refusing to lend" versus "You'd better increase your capital ratio." Calling it hypocrisy would be exact, but then some readers find that to be a loaded term, implying more criticism than is intended.
The key point is understanding how all of the players are influenced. While the economy is in bad shape, banks will be hit with blame from officials for not lending while being given incentives to do exactly the opposite. There is a gap between the genuine true and the printed and perceived words in the press. Bank lending will not increase until the real conditions, not words, are there to support it.
~ ~ ~
On the other side of the coin are consumers. If they don't want to borrow, they won't. Right now the prudent action for consumers is to pay down debt and build up savings. Eventually, government encouragement to spend and fail to save will arrive, but don't expect an increase in consumer lending until the mood of frugality has passed.
Sunday, May 23, 2010
U.S. Should Require Minimum Investable Content in All Imported Goods
This post's headline is not going to attract many readers. Tough. Let it exclude candy-addicts.
I will try to warn you most times when I make a post that is normative. That is, if the post is pushing a policy, rather than an observation or opinion about what we think might be true, regardless whether anyone wants it to be true or not, then I'll tell you. So here's the warning: This post is pushing a policy.
The U.S. and China have a trade imbalance. China sets exchange rate policies in its self-interest that keep their export prices low, which generate surpluses and tend to have the effect of undermining industries in the trading partner's economy. The U.S. has free-trade principles that tend to reduce our retaliatory actions against nations that set exchange rates in order to capture market share.
For the moment, let's set political and labor considerations aside. Arguing about whether protecting domestic industries is good or bad is a separate debate. There is an alternative.
Presumably, in any trading relationship, both partners benefit when the lower cost producer of goods is permitted to export its goods. If both partners have specialties, then all benefit from the diminished input costs to the two societies taken as a whole.
The problem occurs if one of the countries wants to be the specialist in all goods. From a practical perspective, the only way to pull this off is for one country to set a society-wide policy that allows it charge less for all of its goods. At the national level, the most accessible lever is setting exchange rates, as China does. By holding the exchange rate so your currency is cheap, your trading partner's goods are expensive while your own are cheap, as measured in each others' currency. The disadvantage of this policy is that your profits are lower. If the goods you export have sustainable value, then on an absolute basis you tend to wind with less of the pie. If the goods you export have a rapidly declining value, then in the short term you lose but in the long term you can win.
So here comes the normative (and invented) part: U.S. policy for trade should require a minimum investable content for all imported goods. Investable content is defined as a residual value the product has at the end of its depreciated life. Every good has some nominal value that tends to evaporate as the product is used. Cheap goods that break easily have no investable value, because they tend to be discarded quickly. High quality durable goods that prove to be defendable have high investable content, because they return substantial value even after their nominal life has been served. Anyone who has ever bought a refrigerator, car, television, expensive electronics, or computer knows the difference between getting more than your money's worth from the best, and getting junk that has to be removed and discarded after a short life.
Some simple examples:
Back when it was produced, most Chevrolet Chevettes had negative investable content, because during their short troubled lives they broke down, had high repair and inconvenience costs, and after five years were close to worthless. In contrast, Honda Civics had high positive investable content, because they gave well above-average gas mileage, were reliable, had low maintenance costs, and after five years had high resale value because they had many, many more years of life in them.
Buying foreign goods cheaply is a net positive for the U.S. if the goods retain value. A trading partner that holds exchange rates fixed and which are advantageous to itself should be required to send only the best goods with substantial residual value, not junk. Then, in the future should exchange rates change and the foreign country try to complete its conquest of all goods markets, then the U.S. can simply wait out the attempt, by relying on its existing stock of durable high quality acquired goods, while rebuilding its domestic industries that produce those goods for both domestic consumption and export to the trading partner.
There is nothing unfair or retaliatory about requiring quality. I do not believe that requiring quality would violate any WTO rules. I don't believe that our trading partners would wish to be perceived as defending their right to send shoddy merchandise. Most importantly, requiring quality from imported goods raises the standards for all, sets good examples, and prevents trading partners from cheating on free-trade agreements in the long term.
Since this is a normative post, I'll add that most Americans probably already have too many things, so buying fewer things of higher quality and price is often superior to having more things of lower quality and price. The cheaper stuff requires more diagnosis work when it breaks, results in spending more time buying replacements, takes up more landfill space when it is discarded, and takes up more room in your house. Wouldn't you rather pay for less real estate to store fewer objects? Having fewer things will pay dividends every single day.
~ ~ ~
In the absence of official action, it is simple to make a difference and enforce the policy described above. You could, for example, send a short message to some of your favorite stores or vendors:
"Dear [retailer or vendor],
I understand that in the current global economy that opportunities for sourcing your products from countries like China gives you the option of maintaining good margins and passing on low prices to your customers. I want you to know, however, that in our [company, family, group] we feel that it is time China met all of its obligations, not just those based on price. In the future, we will be looking to make sure that products we buy from you have outstanding quality, regardless of price or China content. There will no longer be an implied lower quality standard for cheaper merchandise. We expect you to import only top quality China merchandise that has a very long-term sustainable value, even if it is inexpensive. We don't need things that t go straight to the landfill. Do the right thing. Insist on the best, and reject crappy cheap junk. Send that message, and we will support you.
Sincerely,
A continuing customer."
I will try to warn you most times when I make a post that is normative. That is, if the post is pushing a policy, rather than an observation or opinion about what we think might be true, regardless whether anyone wants it to be true or not, then I'll tell you. So here's the warning: This post is pushing a policy.
The U.S. and China have a trade imbalance. China sets exchange rate policies in its self-interest that keep their export prices low, which generate surpluses and tend to have the effect of undermining industries in the trading partner's economy. The U.S. has free-trade principles that tend to reduce our retaliatory actions against nations that set exchange rates in order to capture market share.
For the moment, let's set political and labor considerations aside. Arguing about whether protecting domestic industries is good or bad is a separate debate. There is an alternative.
Presumably, in any trading relationship, both partners benefit when the lower cost producer of goods is permitted to export its goods. If both partners have specialties, then all benefit from the diminished input costs to the two societies taken as a whole.
The problem occurs if one of the countries wants to be the specialist in all goods. From a practical perspective, the only way to pull this off is for one country to set a society-wide policy that allows it charge less for all of its goods. At the national level, the most accessible lever is setting exchange rates, as China does. By holding the exchange rate so your currency is cheap, your trading partner's goods are expensive while your own are cheap, as measured in each others' currency. The disadvantage of this policy is that your profits are lower. If the goods you export have sustainable value, then on an absolute basis you tend to wind with less of the pie. If the goods you export have a rapidly declining value, then in the short term you lose but in the long term you can win.
So here comes the normative (and invented) part: U.S. policy for trade should require a minimum investable content for all imported goods. Investable content is defined as a residual value the product has at the end of its depreciated life. Every good has some nominal value that tends to evaporate as the product is used. Cheap goods that break easily have no investable value, because they tend to be discarded quickly. High quality durable goods that prove to be defendable have high investable content, because they return substantial value even after their nominal life has been served. Anyone who has ever bought a refrigerator, car, television, expensive electronics, or computer knows the difference between getting more than your money's worth from the best, and getting junk that has to be removed and discarded after a short life.
Some simple examples:
Back when it was produced, most Chevrolet Chevettes had negative investable content, because during their short troubled lives they broke down, had high repair and inconvenience costs, and after five years were close to worthless. In contrast, Honda Civics had high positive investable content, because they gave well above-average gas mileage, were reliable, had low maintenance costs, and after five years had high resale value because they had many, many more years of life in them.
Buying foreign goods cheaply is a net positive for the U.S. if the goods retain value. A trading partner that holds exchange rates fixed and which are advantageous to itself should be required to send only the best goods with substantial residual value, not junk. Then, in the future should exchange rates change and the foreign country try to complete its conquest of all goods markets, then the U.S. can simply wait out the attempt, by relying on its existing stock of durable high quality acquired goods, while rebuilding its domestic industries that produce those goods for both domestic consumption and export to the trading partner.
There is nothing unfair or retaliatory about requiring quality. I do not believe that requiring quality would violate any WTO rules. I don't believe that our trading partners would wish to be perceived as defending their right to send shoddy merchandise. Most importantly, requiring quality from imported goods raises the standards for all, sets good examples, and prevents trading partners from cheating on free-trade agreements in the long term.
Since this is a normative post, I'll add that most Americans probably already have too many things, so buying fewer things of higher quality and price is often superior to having more things of lower quality and price. The cheaper stuff requires more diagnosis work when it breaks, results in spending more time buying replacements, takes up more landfill space when it is discarded, and takes up more room in your house. Wouldn't you rather pay for less real estate to store fewer objects? Having fewer things will pay dividends every single day.
~ ~ ~
In the absence of official action, it is simple to make a difference and enforce the policy described above. You could, for example, send a short message to some of your favorite stores or vendors:
"Dear [retailer or vendor],
I understand that in the current global economy that opportunities for sourcing your products from countries like China gives you the option of maintaining good margins and passing on low prices to your customers. I want you to know, however, that in our [company, family, group] we feel that it is time China met all of its obligations, not just those based on price. In the future, we will be looking to make sure that products we buy from you have outstanding quality, regardless of price or China content. There will no longer be an implied lower quality standard for cheaper merchandise. We expect you to import only top quality China merchandise that has a very long-term sustainable value, even if it is inexpensive. We don't need things that t go straight to the landfill. Do the right thing. Insist on the best, and reject crappy cheap junk. Send that message, and we will support you.
Sincerely,
A continuing customer."
Friday, May 21, 2010
Jabber, part 3
He took his vorpal sword in hand:
Long time the manxome foe he sought--
So rested he by the Tumtum tree,
And stood awhile in thought.
The investor compiled his facts and figures
He'd long sought to destroy evil's smooth lies
He pause to observe the true actions around him
uncovering deceptions with trained and open eyes
Long time the manxome foe he sought--
So rested he by the Tumtum tree,
And stood awhile in thought.
The investor compiled his facts and figures
He'd long sought to destroy evil's smooth lies
He pause to observe the true actions around him
uncovering deceptions with trained and open eyes
Bank Bailout Cost Decreases Again
I reported on the rapidly diminishing estimates of TARP costs last month. Today, AP reported ("Lower bailout estimate assumes higher stock prices") that the total cost to taxpayers has decreased again, to $105.4 billion, according to the The Treasury Department. The White House and Treasury maintain different estimates.
Other estimates:
Congressional Budget Office, March 2010, $109 billion
Other estimates:
Congressional Budget Office, March 2010, $109 billion
Wednesday, May 19, 2010
Evidence of Soros' Reflexivity Theory
Germany has banned naked short-selling of securities in a move that was swiftly declared, catching other Euro partners off guard. The words Merkel used to defend this action are evidence for George Soros' reflexivity principle, in which markets feed on themselves to go too far. You can see this in the Reuters story "Germany declares solo war on speculators".
In the fourth paragraph:
"Merkel told Germany's parliament EU leaders had to ensure markets could not "extort" the state any more and the bloc would introduce its own financial transaction tax or levy if the Group of 20 nations failed to reach a deal in June."
While the description of the markets could be wrong, and explained as a leader's perspective on the markets, the underlying concept is a strong statement of the belief by German officials, from direct observation of the markets, that the marketplace will go too far on its own, with real and malevolent effects on the economy at large.
Although the tendency at the political level is to blame "someone else out there," as though speculators always seek to tear down countries for profit in preference to any other vice, it is clear that the danger perceived is real. That the danger is caused by collective economic behavior is a fine point. If legal action can defuse the potential for economic damage, then the state is correct to act by inserting obstacles in the path of the meltdown dynamics.
It remains to be seen whether the selected mechanisms will create the desired effect. The immediate reaction in Europe was to increase selling to reduce risk exposure, just in case the German government had inside information that the market participants weren't privy to. Still, the point remains: The short-selling ban is motivated by a desire to cut reflexivity short.
In the fourth paragraph:
"Merkel told Germany's parliament EU leaders had to ensure markets could not "extort" the state any more and the bloc would introduce its own financial transaction tax or levy if the Group of 20 nations failed to reach a deal in June."
While the description of the markets could be wrong, and explained as a leader's perspective on the markets, the underlying concept is a strong statement of the belief by German officials, from direct observation of the markets, that the marketplace will go too far on its own, with real and malevolent effects on the economy at large.
Although the tendency at the political level is to blame "someone else out there," as though speculators always seek to tear down countries for profit in preference to any other vice, it is clear that the danger perceived is real. That the danger is caused by collective economic behavior is a fine point. If legal action can defuse the potential for economic damage, then the state is correct to act by inserting obstacles in the path of the meltdown dynamics.
It remains to be seen whether the selected mechanisms will create the desired effect. The immediate reaction in Europe was to increase selling to reduce risk exposure, just in case the German government had inside information that the market participants weren't privy to. Still, the point remains: The short-selling ban is motivated by a desire to cut reflexivity short.
Tuesday, May 18, 2010
Goldman Sachs as Bucket Shop
I wrote last year about brokers and bucket shops. In that article, the subject was detecting brokers that operated Ponzi schemes. But there is another way that your broker can act just like a bucket shop.
A bucket shop of the old days just sold you a piece of paper that gave you a short term profit or loss on stock price changes. Since there was no one on the other side of the trade, in effect the bucket shop always traded against the customer. For each customer long position on a stock the bucket shop effectively took a short position exactly opposed to the customer's position. Hence, bucket shops are customer adversaries, a phenomenon that should always make customers queasy about doing business with them. And, in fact, bucketing trades, in which the customer's order is not cleared on a general exchange with a counter-party that is not the broker, is presently illegal in most states.
Even in 1905, bucket shops were not reputable. A pleasingly quaint account of the business as it was conducted in then is described in an old New York Times article (PDF).
Any time a broker is acting more or less like it is taking positions opposite its customers, then, it is acting in effect as a bucket shop. A key part of Goldman Sach's offense, at least in the figurative sense, is that it shorted any market in which it also underwrote securities. Customers expect brokers to act in the customer's interest. That is why they are trusted. If the broker uses any element of the customer's business or information generated by that business to trade against the customer then it is in violation of that trust.
This is the gray area between bucket shop and concerned customer agent. I suspect that most Wall Street brokers have been operating in the gray area for so long that they have forgotten where customers draw that line. I know a number of individual traders who never take it for granted that their brokers, whether full service or discount, Merrill Lynch, Raymond James, TD Ameritrade, Charles Schwab, or even E*Trade, are honestly processing their orders without somehow making illicit use of the information represented by the customer's current account holdings or orders. They take it for granted that brokers are shaving something off of every trade, whether information, front-running, or collecting "contrary indicator" data in which customer trades are data-mined for correlations to future price movements.
But expecting a certain level of despicable broker behavior is not the same as condoning it, or even thinking that it should be legal. Customers only tolerate this "at the edge" behavior because they know of no way to prevent their brokers from engaging in it. That Goldman Sachs has purportedly been caught at engaging in it will not save them from a significant and public punishment. After all, Goldman has long touted its superior moral values. That makes Goldman's behavior both marginal and at odds with how it represents itself.
Actually, not all customers tolerate bucketeering or, to coin a phrase, "data trimming" by the broker from their accounts and orders. There are techniques for double-crossing a broker that is front-running your trades. I will describe some of more than 20 ways to trip them up in future posts.
References:
Goldman CEO, under siege, concedes changes coming (Reuters)
Aussie fund director's Goldman claim gets traction (Reuters)
A bucket shop of the old days just sold you a piece of paper that gave you a short term profit or loss on stock price changes. Since there was no one on the other side of the trade, in effect the bucket shop always traded against the customer. For each customer long position on a stock the bucket shop effectively took a short position exactly opposed to the customer's position. Hence, bucket shops are customer adversaries, a phenomenon that should always make customers queasy about doing business with them. And, in fact, bucketing trades, in which the customer's order is not cleared on a general exchange with a counter-party that is not the broker, is presently illegal in most states.
Even in 1905, bucket shops were not reputable. A pleasingly quaint account of the business as it was conducted in then is described in an old New York Times article (PDF).
Any time a broker is acting more or less like it is taking positions opposite its customers, then, it is acting in effect as a bucket shop. A key part of Goldman Sach's offense, at least in the figurative sense, is that it shorted any market in which it also underwrote securities. Customers expect brokers to act in the customer's interest. That is why they are trusted. If the broker uses any element of the customer's business or information generated by that business to trade against the customer then it is in violation of that trust.
This is the gray area between bucket shop and concerned customer agent. I suspect that most Wall Street brokers have been operating in the gray area for so long that they have forgotten where customers draw that line. I know a number of individual traders who never take it for granted that their brokers, whether full service or discount, Merrill Lynch, Raymond James, TD Ameritrade, Charles Schwab, or even E*Trade, are honestly processing their orders without somehow making illicit use of the information represented by the customer's current account holdings or orders. They take it for granted that brokers are shaving something off of every trade, whether information, front-running, or collecting "contrary indicator" data in which customer trades are data-mined for correlations to future price movements.
But expecting a certain level of despicable broker behavior is not the same as condoning it, or even thinking that it should be legal. Customers only tolerate this "at the edge" behavior because they know of no way to prevent their brokers from engaging in it. That Goldman Sachs has purportedly been caught at engaging in it will not save them from a significant and public punishment. After all, Goldman has long touted its superior moral values. That makes Goldman's behavior both marginal and at odds with how it represents itself.
Actually, not all customers tolerate bucketeering or, to coin a phrase, "data trimming" by the broker from their accounts and orders. There are techniques for double-crossing a broker that is front-running your trades. I will describe some of more than 20 ways to trip them up in future posts.
References:
Goldman CEO, under siege, concedes changes coming (Reuters)
Aussie fund director's Goldman claim gets traction (Reuters)
Monday, May 17, 2010
Jabber, part 2
"Beware the Jabberwock, my son!
The jaws that bite, the claws that catch!
Beware the Jubjub bird, and shun
The frumious Bandersnatch!"
Beware of Ponzi schemes my fellows!
the fantastic returns, too good tres fats!
Beware of cold-calling microstock brokers, shun
the Wall Street/Washington mutual backpats!
The jaws that bite, the claws that catch!
Beware the Jubjub bird, and shun
The frumious Bandersnatch!"
Beware of Ponzi schemes my fellows!
the fantastic returns, too good tres fats!
Beware of cold-calling microstock brokers, shun
the Wall Street/Washington mutual backpats!
Sunday, May 16, 2010
Jabber Translation, part 1, non-rhyming
`Twas brillig, and the slithy toves
Did gyre and gimble in the wabe:
All mimsy were the borogoves,
And the mome raths outgrabe.
The market was fluctuating, and all the participants, especially slimy sellers-of-ideas
were twisting and talking and attempting to out-do, out-talk, outwit their competitors and customers
And greedy but prudent were the mutual funds and asset managers and hedge funds
seeking outperformance, at least in their office and/or fees that were charged.
Did gyre and gimble in the wabe:
All mimsy were the borogoves,
And the mome raths outgrabe.
The market was fluctuating, and all the participants, especially slimy sellers-of-ideas
were twisting and talking and attempting to out-do, out-talk, outwit their competitors and customers
And greedy but prudent were the mutual funds and asset managers and hedge funds
seeking outperformance, at least in their office and/or fees that were charged.
Public's Appetite for New Subprime Credit Grows
In addition to official Government interest in seeing increased lending, some companies too want to increase the number of new sub-prime loans.
GM wants more subprime buyers; will lender agree? (AP)
Wait a second! Didn't we just finish a major part of a severe economic downdraft inspired by subprime credit? Aren't we still burdened with trillions of dollars of public debt directly related to the excesses of asset-based lenders who overextended themselves in taking on too much leverage in order to serve all debt markets, especially and including subprime? Isn't one of the lessons that should have been learned is that taking on too much debt, whether individual, corporation, or nation, a bad idea? Aren't people at this moment basking in their new-found frugalness, thanking God for the lessons they have learned, and feeling the benefits of increased rationality in their financial lives?
Aside from the normative statements we could make here, there are telltales to note. GM appears to have benefited as much as it can from the past year's recovery in the economy. Strumpf writes: ""There's a real sense of urgency on GM's part to maximize its sales" as it gets closer to the stock offering, said Kirk Ludtke, senior vice president of CRT Capital Group in Stamford, Conn."
Some possible conclusions to draw:
GM wants more subprime buyers; will lender agree? (AP)
Wait a second! Didn't we just finish a major part of a severe economic downdraft inspired by subprime credit? Aren't we still burdened with trillions of dollars of public debt directly related to the excesses of asset-based lenders who overextended themselves in taking on too much leverage in order to serve all debt markets, especially and including subprime? Isn't one of the lessons that should have been learned is that taking on too much debt, whether individual, corporation, or nation, a bad idea? Aren't people at this moment basking in their new-found frugalness, thanking God for the lessons they have learned, and feeling the benefits of increased rationality in their financial lives?
Aside from the normative statements we could make here, there are telltales to note. GM appears to have benefited as much as it can from the past year's recovery in the economy. Strumpf writes: ""There's a real sense of urgency on GM's part to maximize its sales" as it gets closer to the stock offering, said Kirk Ludtke, senior vice president of CRT Capital Group in Stamford, Conn."
Some possible conclusions to draw:
- negotiate hard on price if buying a GM vehicle; they really need the sale
- avoid buying shares of the IPO, if it occurs
- look for bank earnings to level off, as competition increases among lenders to make subprime loans
- in your macroeconomic models (you have one, right?), increase the probability of a new credit crisis occurring in 2010, 2011, or 2012
Commentators Exceed LATimes Columnist
Put this in the "measurements of quality" category. David Lazarus is a syndicated LA Times financial columnist. A recent 4/25/10 column on bank reform legislation made reference to "puppies and kittens." I went looking for other telltales, and found Bank of America yanks Countrywide Financial customers' credit lines.
What's interesting is that reader comments show more sobriety than the columnist's original prose. For example, KathyA says:
"Mr. Lazarus, you seem to want it both ways. In the past, you have (rightly) raked banks over the coals, especially Countrywide (now Bank of America), for risky financial decisions in mortgage lending. You can't expect to be taken seriously when you now criticize these same institutions for making fiscally conservative financial decisions."
Lazarus' complaint is that Bank of America has declined to renew home equity lines at the five-year mark, as the contracts issued by Countrywide permitted. His reaction, over the bank's failure to provide an explanation, seems puzzling. At least, until you draw an analogy of the bank as bartender and home owner as alcoholic. The alcoholic doesn't like being cut off, even if, or perhaps especially if, the reason for severing the drug supply is rational.
In summary, the problem, the way Lazarus has described it, is that Countrywide was a good co-dependent, and Bank of America is not behaving right as a co-dependent properly should.
Snicker snack!
What's interesting is that reader comments show more sobriety than the columnist's original prose. For example, KathyA says:
"Mr. Lazarus, you seem to want it both ways. In the past, you have (rightly) raked banks over the coals, especially Countrywide (now Bank of America), for risky financial decisions in mortgage lending. You can't expect to be taken seriously when you now criticize these same institutions for making fiscally conservative financial decisions."
Lazarus' complaint is that Bank of America has declined to renew home equity lines at the five-year mark, as the contracts issued by Countrywide permitted. His reaction, over the bank's failure to provide an explanation, seems puzzling. At least, until you draw an analogy of the bank as bartender and home owner as alcoholic. The alcoholic doesn't like being cut off, even if, or perhaps especially if, the reason for severing the drug supply is rational.
In summary, the problem, the way Lazarus has described it, is that Countrywide was a good co-dependent, and Bank of America is not behaving right as a co-dependent properly should.
Snicker snack!
Thursday, May 13, 2010
Wednesday, May 12, 2010
Punishing Scientific Liars
The problem with publishing articles about the outrages perpetrated by evildoers is that you wind up promoting the evildoers. In the process of promoting justice, you might accidentally promote evil instead. After all, as the expression goes in the entertainment business: "Print whatever you want. Just spell my name right!"
So in the spirit of correcting injustice, I will instead present ten awesome people who deserve your attention and praise:
Warren Buffett - Great financial, investment, business advice, attitude, and outlook
Thomas Sowell - First class thinker, a man who plows through controversial topics as though he were wielding a vorpal blade [hey, it's been way too long since I worked in a Carroll reference to this blog's title...]
Meryl Streep - A master at her craft. Much better and longer-lasting than your average popular face in Hollywood.
Matt Groenig - Author of the "Life in Hell" strip and then The Simpsons, a classic television show that has withstood now for decades.
Tori Amos - She makes music that doesn't wear out, and she's prolific, different, and--dare I say it this way?--spicy.
Frank Tipler - Physicist who dares to blur the line separating God and Science through the use of cutting edge physics. This isn't pop physics or pop religiosity. Prepare to resume your graduate level math to follow his papers and read the appendices of his books.
Richard Dawkins - Author of perhaps the best scientific book of the last 30 years, The Selfish Gene.
Bruce Schneier - Security expert. In the digital era, knowing about computer security is not just a good idea, it is a survival skill, and Bruce has a great blog that maps out most of the pertinent topics.
Dan Seligman - Former Fortune columnist, and then a Forbes columnist, who was always pointing surprising statistical facts in his articles. Over and over he showed that conventional wisdom is sometimes pathetically stupid.
Kurt Godel - Famous for his incompleteness theorems, which he proved in 1931.
So who is the evildoer who originally sponsored this column? Oh well, I forgot who they were. And forgotten they shall stay...
So in the spirit of correcting injustice, I will instead present ten awesome people who deserve your attention and praise:
Warren Buffett - Great financial, investment, business advice, attitude, and outlook
Thomas Sowell - First class thinker, a man who plows through controversial topics as though he were wielding a vorpal blade [hey, it's been way too long since I worked in a Carroll reference to this blog's title...]
Meryl Streep - A master at her craft. Much better and longer-lasting than your average popular face in Hollywood.
Matt Groenig - Author of the "Life in Hell" strip and then The Simpsons, a classic television show that has withstood now for decades.
Tori Amos - She makes music that doesn't wear out, and she's prolific, different, and--dare I say it this way?--spicy.
Frank Tipler - Physicist who dares to blur the line separating God and Science through the use of cutting edge physics. This isn't pop physics or pop religiosity. Prepare to resume your graduate level math to follow his papers and read the appendices of his books.
Richard Dawkins - Author of perhaps the best scientific book of the last 30 years, The Selfish Gene.
Bruce Schneier - Security expert. In the digital era, knowing about computer security is not just a good idea, it is a survival skill, and Bruce has a great blog that maps out most of the pertinent topics.
Dan Seligman - Former Fortune columnist, and then a Forbes columnist, who was always pointing surprising statistical facts in his articles. Over and over he showed that conventional wisdom is sometimes pathetically stupid.
Kurt Godel - Famous for his incompleteness theorems, which he proved in 1931.
So who is the evildoer who originally sponsored this column? Oh well, I forgot who they were. And forgotten they shall stay...
Government Bailout Funds: 'Cause That's Where the Money Is!
I have to wonder, do people really think through their ideas, or are they just in love with the desired outcome? The most dangerous proposals are those where the real outcome is indeterminate but both sides imagine they will get what they want.
The thought that banks should be paying extra fees into a bailout fund so that Government can rescue them in the future is either wishful thinking or an extremely pernicious stab. Current legislation envisions a $50 billion fund created with taxes on financial institutions.
Where is the wishful thinking? The first wish is that $50 billion will be enough to ward off a future credit meltdown. The second, sneakier, wish is that the Government will have $50 billion it didn't have before.
Here is what will really happen: Willie Horton.
What? It is easy: A $50 billion pot of money will soon attract honey-seekers. The money will be there, tantalizing various special interests, seemingly doing nothing. Hence, it will not be in reserve for long. It will be transferred, borrowed, or stolen, for or by special interests via legislation, and will never be available for a bailout. Congressional action will loan it for other purposes. When a bailout really is required, the Government would then have to scrape up $50 billion from other accounts in order to effect the bailout, which will be that much harder to do.
Even worse, banks and financial institutions and their customers will believe that their actions are backed by a $50 billion bailout fund. Moral hazard will be increased, and many will act as though their actions are insured. Because, by gosh, they are insured. No illusions there, seriously! If that's what they've been told, in full faith, why shouldn't they believe it? You certainly can't blame them if they've paid insurance premiums under the impression that they are buying insurance.
The best argument for creating any sort of $50 billion is that it is a "rainy day fund." You save the money, just like an insurance company, against future hardship. The problem is that public finance has proven, over and over, that it an extremely poor steward of capital, and tends to overspend its budget, significantly and repeatedly.
Hence, the correct action to take is passing legislation that encourages the formation of private pools of capital that could intervene in the case of crisis. By encouraging private capital formation, the U.S. gets the benefit of rational self-interest, rewards the best stewards of capital in proportion to their skill, avoids the problems of attempting to retain and maintain public capital, obtains broad and powerful diversification across hundreds of thousands of small pools of capital, and generates a more powerful capital base from which to fund future technological investment.
What shape would such incentives have? The Government could buy special insurance, that would operate in two parts. First, it would pay a direct annual premium against failure of major financial institutions. Each capital pool owner would collect this premium from the Government in proportion to the amount of capital that they would guarantee as being available during a crisis. In the event of crisis, the claim is not for cash, it is for credit. That is, the insurance provider guarantees that they will make a loan available at a particular, contractually agree interest rate. For this loan, the Government also pays the interest. If the insurer is unable to make the loan, they would pay a penalty of multiples of the prior collected premium.
Direct cost to taxpayers of this system would be much lower. Annual premiums would be set by the market, of course, but since the insurer is only guaranteeing liquidity, they can invest their pool of capital elsewhere and still earn a return. The premium would be only a bonus. You can imagine that some of this capital would be in cash, money market funds, in deposits, and in stocks and bonds.
Obviously, the Government is not generating new capital when it makes a claim. Money moves as the insurers may be forced to liquidate stocks and bonds to post some of the claim. More importantly, though, a Government claim more likely forces highly liquid cash investments out of the hands of the insurer to the Government at exactly the time that a TARP-like rescue is required. It is during such crises that many private participants sit on cash hoards as a protection against uncertainty, so although the insurer may have less of a cushion than before, it is unlikely that such a capital claim will force down asset values. This system acts as a circuit breaker, forcing money back into circulation during a crisis when it is needed most.
The premiums paid by the Government could still come from premiums in turn paid by banks and major lending institutions. But such premiums would likely be much less, and the overall flow of funds would be less traumatic for all involved. Even better, the Government could still retain a fund of excess premiums it had collected, which presumably would vary but likely be much less than $50 billion. And there would be no public moral hazard to tap this Government slush fund.
[This post started May 12 and completed May 16.]
The thought that banks should be paying extra fees into a bailout fund so that Government can rescue them in the future is either wishful thinking or an extremely pernicious stab. Current legislation envisions a $50 billion fund created with taxes on financial institutions.
Where is the wishful thinking? The first wish is that $50 billion will be enough to ward off a future credit meltdown. The second, sneakier, wish is that the Government will have $50 billion it didn't have before.
Here is what will really happen: Willie Horton.
What? It is easy: A $50 billion pot of money will soon attract honey-seekers. The money will be there, tantalizing various special interests, seemingly doing nothing. Hence, it will not be in reserve for long. It will be transferred, borrowed, or stolen, for or by special interests via legislation, and will never be available for a bailout. Congressional action will loan it for other purposes. When a bailout really is required, the Government would then have to scrape up $50 billion from other accounts in order to effect the bailout, which will be that much harder to do.
Even worse, banks and financial institutions and their customers will believe that their actions are backed by a $50 billion bailout fund. Moral hazard will be increased, and many will act as though their actions are insured. Because, by gosh, they are insured. No illusions there, seriously! If that's what they've been told, in full faith, why shouldn't they believe it? You certainly can't blame them if they've paid insurance premiums under the impression that they are buying insurance.
The best argument for creating any sort of $50 billion is that it is a "rainy day fund." You save the money, just like an insurance company, against future hardship. The problem is that public finance has proven, over and over, that it an extremely poor steward of capital, and tends to overspend its budget, significantly and repeatedly.
Hence, the correct action to take is passing legislation that encourages the formation of private pools of capital that could intervene in the case of crisis. By encouraging private capital formation, the U.S. gets the benefit of rational self-interest, rewards the best stewards of capital in proportion to their skill, avoids the problems of attempting to retain and maintain public capital, obtains broad and powerful diversification across hundreds of thousands of small pools of capital, and generates a more powerful capital base from which to fund future technological investment.
What shape would such incentives have? The Government could buy special insurance, that would operate in two parts. First, it would pay a direct annual premium against failure of major financial institutions. Each capital pool owner would collect this premium from the Government in proportion to the amount of capital that they would guarantee as being available during a crisis. In the event of crisis, the claim is not for cash, it is for credit. That is, the insurance provider guarantees that they will make a loan available at a particular, contractually agree interest rate. For this loan, the Government also pays the interest. If the insurer is unable to make the loan, they would pay a penalty of multiples of the prior collected premium.
Direct cost to taxpayers of this system would be much lower. Annual premiums would be set by the market, of course, but since the insurer is only guaranteeing liquidity, they can invest their pool of capital elsewhere and still earn a return. The premium would be only a bonus. You can imagine that some of this capital would be in cash, money market funds, in deposits, and in stocks and bonds.
Obviously, the Government is not generating new capital when it makes a claim. Money moves as the insurers may be forced to liquidate stocks and bonds to post some of the claim. More importantly, though, a Government claim more likely forces highly liquid cash investments out of the hands of the insurer to the Government at exactly the time that a TARP-like rescue is required. It is during such crises that many private participants sit on cash hoards as a protection against uncertainty, so although the insurer may have less of a cushion than before, it is unlikely that such a capital claim will force down asset values. This system acts as a circuit breaker, forcing money back into circulation during a crisis when it is needed most.
The premiums paid by the Government could still come from premiums in turn paid by banks and major lending institutions. But such premiums would likely be much less, and the overall flow of funds would be less traumatic for all involved. Even better, the Government could still retain a fund of excess premiums it had collected, which presumably would vary but likely be much less than $50 billion. And there would be no public moral hazard to tap this Government slush fund.
[This post started May 12 and completed May 16.]
Cause of Meltdown: Massive Leverage
It is fairly clear that massive leverage was the primary cause of the financial collapse of July 2007 to January 2009. Companies like Merrill Lynch, Lehman Brothers, Bear Stearns, and various home mortgage lenders levered up their balance sheets in order to take advantage of historically low volatility in interest rates. By gearing their operations at 25 to 40 to 1, and adding other mechanisms on top of that leverage, they were able to make grand bets using the classic late night TV show trick called OPM, "other people's money."
It really shouldn't be a mystery to anyone, especially federal regulators and legislators, that this is what caused the crisis. Nearly all financial crises have too much debt and borrowing as the causative factors. All of the stomping around and looking for scapegoats just serves to deflect the public's attention away from the fact that regulators failed to apply sound financial management in their regulatory roles.
Which brings us to an especially important subject: Bailouts and moral hazard.
Bank insurance, government backstops, and similar special funds may actually make the next financial crisis worse, not better. The problem is that if the market perceives that Government has a special way to remove risk from a segment of the financial market, then participants will fail to exercise diligence in examining their counterparties and checking on their risk exposure. A consumer who believes that their money is insured by FDIC will not check on management's probity. A bond buyer lending money to Freddie Mac will accept a smaller coupon on the expectation that the Federal Government is backing the loan. If you encourage, or force, lenders and financial consumers to consider soundness of their counterparty, then everyone is going to be a lot more careful.
It reminds me of a saying that I believe is attributed to Robert Heinlein: "An ARMED society is a POLITE society."
The more consumers are discouraged from exercising their judgment about selecting sound institutions, the more the marginal institutions will use the cover of government bailout agencies like the FDIC to skate close to the edge. Blowups like Washington Mutual, Wachovia, Freddie Mac, and Fannie Mae wouldn't have been nearly as bad had they been required to trade on their full market risk.
In short, Government backstops that are funded with cash are a bad idea. Government financial regulation needs to focus more on information flow, especially sniffing out easily understood financial soundness measures of the lending and deposit-taking institutions. Shoveling financial data and telltales to the market will correct future problems before they happen, and with much more soundness than any cash-based bailout fund.
It really shouldn't be a mystery to anyone, especially federal regulators and legislators, that this is what caused the crisis. Nearly all financial crises have too much debt and borrowing as the causative factors. All of the stomping around and looking for scapegoats just serves to deflect the public's attention away from the fact that regulators failed to apply sound financial management in their regulatory roles.
Which brings us to an especially important subject: Bailouts and moral hazard.
Bank insurance, government backstops, and similar special funds may actually make the next financial crisis worse, not better. The problem is that if the market perceives that Government has a special way to remove risk from a segment of the financial market, then participants will fail to exercise diligence in examining their counterparties and checking on their risk exposure. A consumer who believes that their money is insured by FDIC will not check on management's probity. A bond buyer lending money to Freddie Mac will accept a smaller coupon on the expectation that the Federal Government is backing the loan. If you encourage, or force, lenders and financial consumers to consider soundness of their counterparty, then everyone is going to be a lot more careful.
It reminds me of a saying that I believe is attributed to Robert Heinlein: "An ARMED society is a POLITE society."
The more consumers are discouraged from exercising their judgment about selecting sound institutions, the more the marginal institutions will use the cover of government bailout agencies like the FDIC to skate close to the edge. Blowups like Washington Mutual, Wachovia, Freddie Mac, and Fannie Mae wouldn't have been nearly as bad had they been required to trade on their full market risk.
In short, Government backstops that are funded with cash are a bad idea. Government financial regulation needs to focus more on information flow, especially sniffing out easily understood financial soundness measures of the lending and deposit-taking institutions. Shoveling financial data and telltales to the market will correct future problems before they happen, and with much more soundness than any cash-based bailout fund.
Regulators Feverishly Looking for Causes of Market Volatility
Mystified by recent market ups and downs, including the "flash crash" as rhyme-loving media organizations have dubbed it, regulators are pawing desperately through trade data, hoping to find a culprit to pin blame on. See: Regulators Dissect Trades, Searching for Cause of Plunge
The continuing bull market in blame-finding, fingerpointing, and scapegoating may surge in the near future with charges against Morgan Stanley, say AP and WSJ stories (and a Reuters report on the WSJ story) on the matter published today.
So far, repeal of the Glass-Steagall Act, the Community Reinvestment Act (CRA), low Federal Reserve interest rates, greed on the part of subprime homebuyers, Congressmen who trade on inside information, NY Fed directors who bought Goldman Sachs stock while still acting in their official capacity, and other angels and angelic acts have been omitted from the search for culprits.
The continuing bull market in blame-finding, fingerpointing, and scapegoating may surge in the near future with charges against Morgan Stanley, say AP and WSJ stories (and a Reuters report on the WSJ story) on the matter published today.
So far, repeal of the Glass-Steagall Act, the Community Reinvestment Act (CRA), low Federal Reserve interest rates, greed on the part of subprime homebuyers, Congressmen who trade on inside information, NY Fed directors who bought Goldman Sachs stock while still acting in their official capacity, and other angels and angelic acts have been omitted from the search for culprits.
Prospects for Real Estate Recovery in Los Angeles
Perhaps there was a good reason for the housing boom, says the New York Times.
[whoops, this link is now dead:
http://finance.yahoo.com/news/Was-There-Good-Reason-for-a-nytimes-3118998957.html?x=0
new link, fixed 12 Oct 2011:]
[whoops, this link is now dead:
http://finance.yahoo.com/news/Was-There-Good-Reason-for-a-nytimes-3118998957.html?x=0
new link, fixed 12 Oct 2011:]
Homeowners and speculators in Los Angeles are hoping for a recovery. What are the prospects?
In my estimation, not very good for the near term. The last time Los Angeles real estate peaked in 1988 it took over 8 years to get back to even. The peak this time was much more pronounced, which will make the recovery that much longer and more painful. Look for a return to "normalcy" in Los Angeles real estate sometime in 2014 or 2015.
In my estimation, not very good for the near term. The last time Los Angeles real estate peaked in 1988 it took over 8 years to get back to even. The peak this time was much more pronounced, which will make the recovery that much longer and more painful. Look for a return to "normalcy" in Los Angeles real estate sometime in 2014 or 2015.
The Most Dangerous Time of a Bull Market
Is when it is not clearly a bull market anymore. Just two weeks ago the Wall Street Journal published an article touting the news that technical analysts thought the market had room to run. Instead, it has faltered fairly firmly. Stock action was a little too happy through March and April. Clearly, the market was near a temporary top, which has now occurred.
Where to go from here? Normally, reputation being dear, I would refrain officially and formally from making any sort of pronouncements about where the market will head next. And if I knew now, then I'd be wrong. Unfortunately, the certainty that existed just a few short weeks ago is no longer. The prospects for up, down, or sideways movements are all equally likely, at least to the non-measuring, qualitative human mind that is usually applied to such predictions.
All that said, I would conclude that the market is about to be completely random.
Which means, in translation, that we're likely due for a rise, but not for very long.
Where to go from here? Normally, reputation being dear, I would refrain officially and formally from making any sort of pronouncements about where the market will head next. And if I knew now, then I'd be wrong. Unfortunately, the certainty that existed just a few short weeks ago is no longer. The prospects for up, down, or sideways movements are all equally likely, at least to the non-measuring, qualitative human mind that is usually applied to such predictions.
All that said, I would conclude that the market is about to be completely random.
Which means, in translation, that we're likely due for a rise, but not for very long.
Tuesday, May 11, 2010
Economic Cycles as a Form of Spiritual "Payback"
Governments strive to keep their economies as healthy as possible, usually paying special attention to maintaining the fullest level of employment possible. But full employment has its own costs:
- Government stimulus programs result in higher taxes, putting a drag on economic activity
- lack of austerity reduces the incentive to maintain high standards for return on invested capital
- decreased appetite risk necessary for new ventures, since maintaining the status quo is adequate; result is that fewer new ventures are created
Deep recessions can creates a groundswell of sharp, tough decision-making among consumers that raises the bar for marketplace products, which has the effect of requiring lower prices and higher quality among businesses competing for a share of scarcer dollars. On the consumption side, having fewer dollars to spend tends to automatically enforce a higher consumption productivity, in which the same utility is generated from fewer expended dollars.
The hazard is pernicious: If the recovery from recession is too easy, consumers forget their tough, high return-on-investment habits and begin to make sloppier decisions. The right way to recover from recession is to have the recovery driven by the higher productivity of consumption and investment decisions among consumers and businesses, respectively. That is, as frugality is practiced more and more it becomes a habit and more ingrained. This frugality causes a national natural productivity boost, which then shows up in an expanding marketplace as consumers then find new surpluses at their disposal.
The converse also occurs: In boom times consumers feel that money flows to them easily. They get careless, and don't police their expenditures as much, or fail to shun higher-priced, less efficient services and products. Marginally inefficient activity fails to be curtailed during the boom, but then this leads to small decreases in the capital stock as resources are squandered and wasted and consumers fail to reward the good businesses and punish the bad businesses.
In the global scheme of things, a recession is a school lesson. It occurs because the nation forgot that it was supposed to be on good behavior. Once in the recession, the nation learns the good way, the right way, and these practices then lead to the recovery.
So the business cycle is payback: It is carrot and stick, rewarding you (economic expansion) for good habits (frugality) and punishing you (economic contraction) for bad habits (overspending or buying badly). It is a natural cycle, supplying invaluable feedback.
Stimulus interferes with this learning process. Supply enough stimulus, and the nation will forget how to invest in itself appropriately, and the lessons of frugality will be lost.
- Government stimulus programs result in higher taxes, putting a drag on economic activity
- lack of austerity reduces the incentive to maintain high standards for return on invested capital
- decreased appetite risk necessary for new ventures, since maintaining the status quo is adequate; result is that fewer new ventures are created
Deep recessions can creates a groundswell of sharp, tough decision-making among consumers that raises the bar for marketplace products, which has the effect of requiring lower prices and higher quality among businesses competing for a share of scarcer dollars. On the consumption side, having fewer dollars to spend tends to automatically enforce a higher consumption productivity, in which the same utility is generated from fewer expended dollars.
The hazard is pernicious: If the recovery from recession is too easy, consumers forget their tough, high return-on-investment habits and begin to make sloppier decisions. The right way to recover from recession is to have the recovery driven by the higher productivity of consumption and investment decisions among consumers and businesses, respectively. That is, as frugality is practiced more and more it becomes a habit and more ingrained. This frugality causes a national natural productivity boost, which then shows up in an expanding marketplace as consumers then find new surpluses at their disposal.
The converse also occurs: In boom times consumers feel that money flows to them easily. They get careless, and don't police their expenditures as much, or fail to shun higher-priced, less efficient services and products. Marginally inefficient activity fails to be curtailed during the boom, but then this leads to small decreases in the capital stock as resources are squandered and wasted and consumers fail to reward the good businesses and punish the bad businesses.
In the global scheme of things, a recession is a school lesson. It occurs because the nation forgot that it was supposed to be on good behavior. Once in the recession, the nation learns the good way, the right way, and these practices then lead to the recovery.
So the business cycle is payback: It is carrot and stick, rewarding you (economic expansion) for good habits (frugality) and punishing you (economic contraction) for bad habits (overspending or buying badly). It is a natural cycle, supplying invaluable feedback.
Stimulus interferes with this learning process. Supply enough stimulus, and the nation will forget how to invest in itself appropriately, and the lessons of frugality will be lost.
Congress Permitted to Trade on Inside Information
Based on what Tech Ticker and the Wall Street Journal report, members of Congress are permitted to trade on material, non-public information pertaining to publicly traded companies:
http://finance.yahoo.com/tech-ticker/congress-refuses-to-outlaw-insider-trading-for-lawmakers-478701.html?tickers=^dji,^gspc,^ixic,brk-a,brk-b,gs,xlf
We could make an argument that current SEC regulations don't distinguish between legislators and non-legislators, so theoretically the insider trading that has occurred is technically already a violation of U.S. securities laws.
http://finance.yahoo.com/tech-ticker/congress-refuses-to-outlaw-insider-trading-for-lawmakers-478701.html?tickers=^dji,^gspc,^ixic,brk-a,brk-b,gs,xlf
We could make an argument that current SEC regulations don't distinguish between legislators and non-legislators, so theoretically the insider trading that has occurred is technically already a violation of U.S. securities laws.
Fed's "Fat Finger" Fantasy Fallacious
The cause of the last week's sudden plunge in stock markets remains an obsession of the Administration and securities regulators. The rush to blame something, or someone, has led to theories of manipulation, terrorist action, and a "fat finger" error in which a trader coded in an error to sell "billions" of shares instead of "millions." So far, the frenzied searches have turned up nothing.
In my estimation, they will not find a cause, because the cause is far too simple for them to believe. If you look at a chart of market action from last week, there was a clear rapid decrease in prices for several hours prior to the "sharp plunge" that caught everyone by surprise. Could it simply be that market action, exacerbated by programmed trading, simply resulted in the vast majority of participants deciding all at one time that stocks should be sold before they almost certainly would be cheaper in the near future? If all traders suddenly agree, you would see exactly such dramatic price moves. There is no inconsistency.
It seems very foolish that the SEC and Administration would find it "unacceptable" that the stock markets behave in such a fashion. One gets the feeling that they are highly offended that the market would show such volatility, as though a "normal" market should always be kind and smooth. I have a bulletin for you: Efficient market theory says that markets behave randomly. And random behavior includes sudden drops, and rises. Even if you don't believe in the efficient market theory, it seems clear that when everyone suddenly agrees that a good is too cheap or too expensive that the price of that good is going to suddenly show a very discontinuous pricing.
Probabilities:
90% chance that nothing "unusual" caused the sudden drop.
35% chance that this conclusion is buried by the investigators for several weeks.
85% chance that the sudden drop was caused by market participants deciding that political events in Europe, Greece, and Washington D.C. would cause a future decrease in U.S. GDP growth.
In my estimation, they will not find a cause, because the cause is far too simple for them to believe. If you look at a chart of market action from last week, there was a clear rapid decrease in prices for several hours prior to the "sharp plunge" that caught everyone by surprise. Could it simply be that market action, exacerbated by programmed trading, simply resulted in the vast majority of participants deciding all at one time that stocks should be sold before they almost certainly would be cheaper in the near future? If all traders suddenly agree, you would see exactly such dramatic price moves. There is no inconsistency.
It seems very foolish that the SEC and Administration would find it "unacceptable" that the stock markets behave in such a fashion. One gets the feeling that they are highly offended that the market would show such volatility, as though a "normal" market should always be kind and smooth. I have a bulletin for you: Efficient market theory says that markets behave randomly. And random behavior includes sudden drops, and rises. Even if you don't believe in the efficient market theory, it seems clear that when everyone suddenly agrees that a good is too cheap or too expensive that the price of that good is going to suddenly show a very discontinuous pricing.
Probabilities:
90% chance that nothing "unusual" caused the sudden drop.
35% chance that this conclusion is buried by the investigators for several weeks.
85% chance that the sudden drop was caused by market participants deciding that political events in Europe, Greece, and Washington D.C. would cause a future decrease in U.S. GDP growth.
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