Wednesday, December 23, 2009

Opiate of the classes...

Greetings good citizen,

Um, the markets way as well have remained closed for all of the movement that didn’t happen. Which we can suppose is just as well, I was reading a piece about high speed trading today and it struck me as, um, bizarre that these traders can move in and out of a stock in a millisecond and make money doing it! It is estimated that these special trading desks make billions of dollars a day buying and selling huge amounts of shares that fluctuate a penny or two in the course of a couple of hours.

What bugs me is where does that money come from? You can understand if you buy a billion shares of Rinky Dink Inc, the simple act of buying the shares will drive the price up and other investors, seeing the surge, are likely to ‘pile on’, boosting the price even more. Naturally, the difficulty is selling all of these shares ‘profitably’ or at least selling enough of them ‘in the money’ so you can ‘wash’ the slower moving blocks at ‘break even’ rather than a loss.

Since the whole transaction can be completed in a couple of hours, it’s hard to find the ‘value added’. If the ‘buy price’ was a dollar a share and in the course of the transaction the price drifted up to a dollar and two cents, tripping the ‘sell’ signal…how do you unload a billion shares in a couple of hours if the ‘target’ itself doesn’t buy them back? I’m sure there are ways for the really big dealers to ‘warehouse’ orphan stocks for a nominal fee but we’re delving into some pretty arcane matters here where answers aren’t likely to be forthcoming. Certain people are making tons of money chasing minute fluctuations in stock prices and they don’t want anyone looking too closely at the ‘mechanics’ because what they’re doing may not be, er, ‘kosher’…

Anyway, onward to tonight’s offering

[Purloined from Jesse’s Crossroads café. ]

Quantitative Easing: the Opiate of the Banks

Much is being made of Bernanke's program of quantitative easing, which is nothing more than an extreme form of artificially low rates of interest with direct monetization of debt in the aftermath of a financial crisis.

The current program of quantitative easing is not only no miracle cure, it will not work at all, it will not 'fix' the problems that are plaguing the American economy in any substantial manner. It is a misguided subsidy and reinforcement of reckless behaviour, and a corrupt distribution of wealth.

Quantitative easing would only be a cure if the crisis had been caused by an exogenous credit shock, a sudden withdrawal of liquidity due to an event unrelated to the workings of the domestic economy like a war or an act of nature. [And we know neither of these things occurred…]

But this is clearly not the case. For the cause of the financial crisis was in fact a lengthy period of artificially low interest rates under the chairmanship of Alan Greenspan, which allowed all manner of financial excess and mal-investment and even fraud to fester in the real economy for a protracted period of time until it became embedded, and one might even say a dominant force, in the economy. It warped and distorted the productive economy.

Applying quantitative easing may relieve the symptoms of the credit crisis but it is merely a palliative, not a cure. It is similar to the case of a debilitated addict who, being denied his narcotics, goes into shock and suffers a heart attack. Yes, a 'fix' of the drug of choice will relieve the short term symptoms perhaps, but will do nothing for the underlying state of health which will continue to worsen.

The very low rates of interest have 'cured' the short term credit seizure in the financial markets, thereby providing time an opportunity to engage in genuine systemic reform and rebalancing to repair the distortions that caused the crisis in the first place: an outsized and corrupt financial sector, and a system of global trade that is freakishly imbalanced and manipulated by command economies and multinational corporations. That, and a lapse of western governance overcome by greed.

Until those reforms are made, the US economy will experience a series of bubbles and crises that, through the US dollar reserve currency system, will shake the governments of the world to their foundations.

Posted by Jesse at 10:19 PM

I’d take exception to Jesse’s assertion that this situation can be ‘repaired’…it can be overhauled, with certain parts discarded and the entire mechanism replaced but there is no ‘fixing’ the broken capitalist model, the only way to ‘fix’ capitalism is to bring debt slavery back.

Yes, a new form of ‘indentured servitude’ where current generations would work off the debts of their forebearers, likely digging the hole deeper in the process.

Understand good citizen, like many ‘failed states’ before us, President Bush eliminated the usury statues in the US so we no longer have protection against onerous interest rates (and not for nothing, our pal Mr. Obama hasn’t done a damn thing about this issue either…)

Which brings us to a different issue altogether…the clock good citizen.

Do we have the time to wait around while the people we elect but have no control over fumble and bumble, lie, cheat and steal on the behalf of their campaign contributors, do we have the ‘luxury’ of waiting until the ‘time is right’ to do the right thing?

You can’t assume this situation will ‘correct itself’, that eventually the ‘special interests’ will coerce their bought and paid for stooges to enact legislation that will benefit everyone? Because if you believe that you are some kind of stupid! They may ‘go through the motions’ of restoring ‘trust’ but like the latest ‘hiccup’ out of the Supreme Court, you will do it and like it or you’ll pay the price, perhaps the ultimate price.

Ignoring the clock also ignores the rapidity with which events are unfolding. The starving millions will soon overrun the minimal safety net that remains…then it will be time to nut up or shut up.

Thanks for letting me inside your head,


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