I think Dow Jones MarketWatch indulges columnist Paul Farrell as the titular Cassandra – proof that Dow Jones takes in all perspectives just in case if markets and the world’s economies go terribly wrong, Dow Jones can point to their Cassandra and say “we told you so”. Here is a Whitman Sampler of Farrell’s forebodings in recent days:
Wall Street’s soulless, immoral, greedy bankers really believe that the vast majority of America’s 95 million investors are not only “predictably irrational” but “stupid,” as J.P. Morgan Chase’s chief investment officer put it in Forbes a while back.
Worse, Main Street investors are losers for continuing to trust Wall Street after they lost 20% of our retirement money the last decade. Now, worst of all, Wall Street’s traders have profiled Main Street investors in their algorithms: Yes, investors are “predictably stupid losers,” what Vegas croupiers call a mark, a dumb gambler that can be easily conned out of his money….And as we now know, in the stock market the vast majority of America’s 95 million investors are fools — predictably stupid losers.
Lewis says traders instinctively know that “the larger the number of people” chasing a trend, “the easier it was for them to delude themselves that what they were doing must be smart. The first thing you learn on the trading floor is that when large numbers of people are after the same commodity, be it a stock, a bond, or a job, the commodity quickly becomes overvalued,” making it easy for traders to generate hundred-million-dollar-profit days.
The essence of the Paul’s arguments is that a)Wall Street has built up a cotery of not only exclusive financial information/insights but b)has translated these insights into a computerized algorithmic advantages that are not easily duplicated. These trading mechanisms include the ability to track exclusively trade patterns and/or the ability to unleash trading stimuli to create events, scan for reaction patterns with predictable market movements, and unleash near riskless “no loss” harvesting algorithms. The Flash Crash of mid May 2010 is symptomatic of
Worse, our political leaders are becoming predictably stupid losers. Political animals? You bet. Reminds me of Alan Greenspan’s congressional testimony admitting that the Reaganomics free market trickle-down economics failed America: Greenspan admitted he made a “mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and equity.”
There was “a flaw in the model … that defines how the world works,” said Greenspan. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told Congress. Unregulated markets “held sway for decades” … then “the whole intellectual edifice, however, collapsed.”
And it’ll get worse, thanks to Bernanke, Obama and Goldman’s lobbyists. Greenspan’s deeply flawed Reaganomics remains anchored deep in America’s brain and DNA. So every promise made in every behavioral-economics book ever written about the principles originally defined by Kahneman will continue to mislead America’s 95 million Main Street investors … and fail.
Why? Because the insatiable greed driving the Goldman Conspiracy of Wall Street banks is so addictive, so powerful, so overwhelming, so much in control of the political process that nothing, absolutely nothing, can change the next inevitable mega-crash dead ahead.
So Paul describes what diverse others like Paul Krugman and Roger Lowenstein and Felix Salmon have also enunciated – the financial reforms are so flawed that a repeat of the 2007-2009 financial colllapse is highly probable.
Unfortunately the Financial Reform Bill leaves this conclusion by Paul and others highly plausible.
1)Still no meaningful limits on the size of too big to fail banks.
2)No attempt to break up the huge gargantua banks that came out of the 2008 rescue tactics.
3)Still no meaningful limits on capital requirements and allowed leverage ratios of financial institutions.
4)Still no meaningful limits on financial institutions ability to complete cash out of their deals.
5)Minimal effort to control compensation among all Financial Institutions.
6)No effort to establish clawback provision from board and top executives for failing financial institutions.
7)Minimal derivative reforms with many “studies” and other loopholes.
8)No outlawing of huge “synthetic” derivative trading which are pure financial gambling bets.
Perhaps even worse Obama’s team continues to give kid glove treatment to financial players & firms:
1)No attempt to prosecute the 3 major rating agencies for their
2)No attempt to prosecute the array of firms like BofA, Chase, Lehman that committed accounting and disclosure fraud on massive scale.
3)Gave up on prosecution of AIG for CDO trading malfeasance.
4)Continued allowance for Goldman and other investment banks to draw on Fed Bank Funds window and therefore access to cheapest capital while not servicing basic small business, private and commercial mortgage markets.
5)No basic internal government reforms – SEC, CFTC, FED just simply did not deliver on their mandates.
6)Regulation in government needs simplre and clearer rules – much of financial reform is spaghetti of responsibilities and subject to interpretation – great for financial lobbying and loophole artists.
7)The overlap of responsibilities among at least 16 agencies in Federal government is a mess. Yet no reform is being attempted because of 60 votes in Senate rule.
So the maybe there is some substance to Farrell’s Irrational Investor Rants.
More compelling is to scan world events and see how irrationality might provoke a Black Swan event:
1)Irrational North Korea blows up as China thwarts control on Kim Jong-Il and he or a zealot catastrophically missteps.
2)Irrational Iran and Israel come to near nuclear blows after lightning Hezbollah/Hamas induced escalation.
3)Irrationally greedy traders bring down Euro Southern Tier Sovereign debt holders starting deflation in Europe and then in the World.
4)Nature intervenes with a)massive 8++ earthquake on Richter in China or North American West Coast or US Madrid Fault or b)massive volcano eruptions in Iceland or Italy’s Vesuvius that cuts off air traffic for month and precipitates massive continental cooling or c)global warming continues to cause increased and catastrophic weather variations ruining harvests and/or devastating communities world wide. The irrational reactions of groups and/or markets to such natural disasters results in increased turbulence and market down turns. In short, the World resource slacks and financial buffers are at such a low as to tax any efforts at control or moderation. And given the prevailing of a “Lost” or Predictably Irrational collection of special interest groups ranging from Israeli extreme right fundamentalists to Contradictory American Tea Partiers through to South East Asian ultra-nationalists from Burma, China, Korea, Japan even to Thailand – and the ability of the World to act rationally in the face of an extreme financial and/or natural crisis is not encouraging.