Superfast Financial Sleaze

A New York Times article published in the last few days details how deep-pocketed stock traders, a la Goldman Sachs and many hedge funds are using supercomputers to game the market system. They have tricks like buying and selling a stock within milliseconds or executing a buy order and then canceling it within a few milliseconds. If you can buy and sell the same stock several times in one minute and make even a minute profit on every share on every sale, then the moolah starts adding up very quickly.


Thus a part of Goldman Sachs’ recent record quarterly profit was derived from such super-fast trading. It is estimated that high-frequency traders earned $21 billion in profits last year. Moreover, a handful of them are now responsible for half of all trading on the NYSE.


Without going into the details of supercomputer based automatic trading, which would melt my brain if I actually learned enough to explain them and confuse you to tears if you tried to understand such, here is the essence: they are skimming income from everybody else in the business and diverting it to themselves, the superwealthy.


At any rate, that’s what the great minds of finance are using their wisdom for. Forget actually creating something of value, this is about making money, pure and simple. Moreover this is about a kind of speculation which milks the society for the benefit of the favored few without a shred of corresponding benefit for anyone else. I understand that the people who are reaping the windfalls - and their mouthpieces and defenders in the business community - can spout their reasons and rationales for the underlying value of their machinations but we know what that’s worth.


I brought this story up as a perfect example of the importance of taxing stock transactions. Obviously the scam would be instantly shut down if even a miniscule tax were levied; the stock market could then begin to return to what’s supposedly its main purpose; investment. There is absolutely no reason to encourage that type of speculative activity; it serves no good purpose whatever. Moreover, there is no investor who is in it for the long run who would be hurt by paying a one percent tax on their stock purchases. And that one percent would bring in a very large and urgently needed amount of money. If you have the money to invest in stocks you obviously have the money to support government.


Representative Peter DeFazio of Oregon, arguably one of the most liberal members of congress, has proposed a .02 % tax on some stock transactions. As a testament to how warped the system has become his proposal has brought a howl of protests from affected parties, who, after all, since they own the government, will easily quash his proposed tax.


This is similar to Obama wanting to add an income tax surcharge to the top one percent of income earners – those above $280,000 per year – to pay for his health care plan. The protests were so vociferous, that number has now been changed to $1 million, leaving a large revenue shortfall.


And lets not forget that capital gains are taxed at a very low rate compared to income that comes from actually working for a living. Warren Buffet, one of the world’s richest people, has famously remarked that he pays income taxes at a lower rate than his domestic staff.


Contrast Americans’ current desire to have government without paying for it, and the concurrent difficulty of having the wealthy contribute their fair share, to the 1960’s. Back then, top wage earners paid a 91% income tax rate; corporations paid one third of all income taxes as opposed to about 7% today; and even I, in 1960, earning a pay rate very close to the bottom of the scale, paid $400 income tax on a $4000 income. I thought it was quite unfair at the time, considering the hardship of living on that meager income, but at least everyone was coughing up and paying their share.


Not so anymore, only future generations need worry about paying for today’s government. And, absent drastic changes to America’s political culture, certainly not the well healed, ever.

Roller Coaster Year

From the heights of exuberant irrationality, to omens of the Great Depression, 2008 was a deal-breaking year. As long as the masses kowtowed to the gods of unfettered capitalism they were assured the majority would benefit. Ok, what the ruling class really meant was the majority representing the upper half of society. But still, many prospered: housing values spiked (against all reason, it should be added) providing the ownership class an easy ATM of lots of ready (unearned) cash; the stock market just kept going up keeping those 401k’s rising handsomely; hedge fund managers paid only 15% income tax on their spectacular megamillion dollar earnings – compared to the 35% rate paid by Average Joe Middle-Class - but that was the price of innovation, the ‘good greed’ that kept the money spigot going and exhibited the greatness of capitalism, American style.

But then a well worn quip comes to mind: If something can’t go on forever, it won’t. Think about the nature of a bubble: the bigger it gets, the thinner its walls and likeliness of bursting; when it does reach its limit it has a quick and exciting end and then disappears with hardly a trace.

It was a year of mind-boggling extremes. Crude oil is now barely more than 25% of its July high of $148. In mitigation, there were two special factors that contributed to that very high price. One was the drop in the value of the dollar of about 25% compared to the world’s other major currencies which would lop about $35 off that high price. Speculation was said to have caused another 30%. Minus those two factors the price would have been about $75 per barrel. Still, the speculation part only happened because demand was pushing up against supply.

In any case it was the world’s second oil price shock with a warning of future hard times implicitly included. The first, in 1973, came with a doubling of the price, long lines at the pump and stations running out in front of your very eyes – I was once the last to get filled up. It can’t be emphasized enough that the larger problem wasn’t the spike in prices, it was availability.

The breathtaking crash in oil prices should not lull one into thinking it’s time to rush down to the auto dealer for that giant dream machine. Even if demand remains low for years, the resource is finite and will be drawn down on a daily and yearly basis. Another spike, therefore, is inevitable.

To date, developed countries world wide have been rushing around frantically grasping at straws trying everything they can think of to revive the old economy; essentially to get people to return to their profligate, devil-may-care, heavily-indebted ways. Fortunately for the people the banks have taken their trillions of handouts and hoarded their cash; what little they have used has been expended doling out handsome salaries and bonuses.

This is good: the mindless consumerist ways of the past should die an ignoble death. Unfortunately, the old patterns won’t die easily. The leadership is hoping against hope that numbskull consumerism won’t be totally finished off; that at most it will only be held in abeyance temporarily until a new crop of buyers can be cajoled and manipulated into running up their 28% interest, credit cards to the max.

Ok, I’m being cynical; most people will recognize that is folly and instead get behind frugality and savings until some important change happens in the world. That being the case the one certainty surrounding the present economic crisis is that demand for goods and services will remain dismal, even abysmal. In that case, the only thing that makes sense is to shorten the work week to share what’s available and embrace the deflation that’s inevitable and necessary (and beneficial in the long run) if people are working and earning less.

What’s required is a total rethink of the purpose of economic life and the value of work. What’s needed is a transformation of the concept of Gross National Product (that we must see rise in perpetuity or we tear our hair out in panic) to an accounting of Gross National Health and Happiness.

To that end I propose a two month national holiday in which only emergency and necessary work takes place, which gives people the time to get together and discuss what they want their world to look like, not to mention lets inventories catch up with purchases. This would be organized on neighborhood and local levels with daily meetings and debates on desired futures. Everyone would be eligible for unemployment benefits for that period. All interest payments and accruing interest would drop to zero for that time and there would be a moratorium on foreclosures and credit defaults.

Time to take stock…

Not that I think any of this will happen, but the world still needs its dreamers.

Meanwhile on another topic: Israel is in massacre mode once again using the same tactics that have failed it time after time: Sweet Revenge, it seems clear, trumps all. Next on the blog: being Jewish and relating to Israel.

The Financial World is Going to Shit Before Our Very Eyes

And it’s all happening so fast. A spark ignited in the US has turned into a world-engulfing wildfire. I was surprised at the ferocity at which it attacked European banks, who I assumed were less insanely greedy while subject to greater public restraint, but it seems they either bought into America’s toxic assets directly or copied the same shenanigans. They’ve also been hit with declining property markets – 16 of the world’s developed nations still have overvalued real estate – resulting in far less equity than they had assumed and the need to hoard resources.

Rising property values create a lot of ready cash. Until the financial system recently began to unravel, largely from declining real estate values, Americans kept their economy humming by borrowing vast amounts of cash against their properties – many of which now have mortgages greater than their house’s value. It would seem totally legitimate to borrow against equity in order to make long-lasting improvements to the house, but a lot of people essentially took out 30 year mortgages for purchases like luxury vehicles that they expected to have a less than a decade lifespan. About five percent of all property changes hands each year so a lot of money is also created simply through a rising market.

Well now, that money spigot has completely dried up. And you can bet that even when the mortgage money does starts to flow again, borrowers will have to come up with hefty down payments; which is exactly as it should be. Obviously, it has ominous portents for the real economy, since Americans will have to live within their means and actually save to be able to consume. While some will say this retrenchment couldn’t come at a worse time, it’s never fun to pay off old debts or cut back on the “Good Life”.

One way or another recession, or the scary “d” word, depression is inevitable. The capitalists are manically, frantically rushing around trying to save their asses with public money, but while they may stave off paralysis or bankruptcy in the banking system, nothing is going to change the fundamentals: the old economy is screwed and finished.

The credit system is currently frozen, banks aren’t lending to each other because they don’t trust each other, they’re afraid they won’t be paid back. However, after six months maybe a year, the money will start to move again and a new economy created from the ashes of the old. Certainly, there’s no way it can ever be the same, at least not for generations.

Thankfully, the US Treasury is moving toward purchasing stakes in troubled banks, as the UK is planning to do, rather than carelessly throwing money at them. As long as they are in some way nationalized people will not fear for their deposits. That should keep most from going under which in the end would cost a lot more than keeping them alive.

Every day it seems a new rescue plan is announced which is supposed to restore confidence in the markets. Each one is touted as the magic bullet that will bring stability and the speedy return of growth and prosperity. Forget it: pure wishful thinking.

The one thing, above all, that needs to change is the endless growth mindset. The entire world economic system is in thrall to a theoretical impossibility. It is unadulterated fantasy which cannot possibly outlive reality. By any sustainable standard, people in the developed world, but especially Americans, have been consuming far too much. Now’s the perfect opportunity to give the planet a rest, to develop an economic philosophy capable of providing a comfortable, if much less profligate, lifestyle.

While I applaud this calamitous economic correction, I don’t in any way wish to downplay its significance for the lower rungs of society: this is going to hurt. But the poor have always suffered, so they will take it in their stride. They haven’t even had more than the barest representation in government for a long time: What politician would ever propose a War on Poverty today? Yet that will be their biggest challenge in the coming years. Increased unemployment benefits, food stamps, general welfare, make work programs: the new New Deal is inevitable.

Meanwhile, even according to a former community organizer, soon to be our next president, the middle class now goes all the way up to $250,000 per year – and need a tax cut in the midst of spectacular deficits. They won’t suffer in the same way but they sure will have their dreams and aspirations severely truncated, not to mention have difficulty supporting their mcmansions and long distance gas-guzzler commutes.

Falling energy prices will provide a little respite but not for long. Within a year or two, China, India and other developing world economies, which will continue to barrel ahead, albeit a bit more slowly, will replace the demand that’s currently dropping in the developed economies. It’s still a finite resource in an expanding world; a world in which growth-forever economics will remain the Gospel.

All in all, it’ll be fun to watch.