Recently, I posted on Facebook that "Wall Streeters only do what the trading software tells them to do." It's become a bit of a mantra for me when I try to explain to folks who don't understand why these protests are happening. I had a chance last night to try and educate an obviously angry woman at our First Friday gathering as to why this all matters and what I think is at stake.

Simply: We have to "rehumanize" our economy and our country. Wall Street is one of the last places where people get to be human, to have the power to be human.



continued...

My next door neighbor in New Jersey was a Pakistani immigrant with a dual PhD in statistics and physics from a Swiss university. That's the best education you can get. His job? He created the trading algorithms that operated the "black box" for a large financial concern. What did this hedge fund do? It covered payroll for that concern. When this concern went under during the collapse of the housing market and was absorbed by a large US bank, he lost his job, but, interestingly, few, if any, of the traders and brokers who "signed off" on the output of his algorithms lost their jobs.

As he explained it to me, most of Wall Street operates on these algorithms, but the contractual and legal stuff requires a couple of human-based steps along the way. The old days of people making trades, face-to-face, on the floor are long gone and the quaint stuff one sees on the NYSE floor is basically a show. Still, someone has to sign off and, essentially, be exposed to the trade and its consequences. On average, the NYSE sees about 1.5 to 2 billion shares change hands every trading day. As mind boggling as this seems, there are still responsible parties tied to each and every share. But do they actually trade them? Well, no. That's mostly handled through the electronic bourses that exist today. Still, there's a name attached to it, and for that, they get paid big bucks. They work inasmuch as they can cook up a concept such as "mortgage-backed derivatives" and most of the "cook up" comes from consultation with statistical specialists who look at the feasibility of the models involved ... one would hope.

There's never been anything like this before. Capital accumulation schemes have always required investment, risk, and efficiency. I've been trying for the past three years to understand how two of these three things have been eliminated, and one has been pushed off onto national economies. Being exposed means, essentially, not being able to collect a fee, not under the gaze of regulation and punitive measures for market breaking activity. Investment meant skin in the game. With everything on margin, the skin is credit, not actual capital investment. Investment has been eliminated and risk is now expected to land in the laps of tax payers. As for efficiency, the one internal activity of a capitalist system that always made so much sense and suffered from so little contradiction has been exploited, via the black box, and rendered just another tool to accumulated, no longer by productivity, but by dispossession.

What's been pulled out to make this all work? What has disappeared from the system? Humanity. By dehumanizing the economy, we have created a world in which we are separate from and incapable of participating in, but one on which everything rides. For a few, that human interface still exists, but they risk so little. The difference between $10 billion and $5 billion means nothing to a single human life, but it means so much to several million human lives.

So, a woman asked us what was going on as the Occupy marchers went by. It was either be really wonky, or just try to explain it simply. My response was: "They just want to be human." She didn't seem to get it. "They should get jobs. They are trust funders. How can you live without corporations? You have to invest so you can retire." What can you say to someone who just repeats what they are told? "They want jobs. If they have trust funds, those trust funds are more and more worthless each day. They'd love to work for a just corporation that values its employees and community. They'd like to be able to participate in investment that does good." That's about it.

The system is arrayed in such a way that it can't be changed from the inside by its own rules, but it also can't be attacked from without. There is no "without." The only way out of this mess is to put humans back in place with all of our risk behaviors and all of our foibles. At least, that will give us accountability toward each other at every scale from life as lived to the global.

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Stick's picture

A cogent and clear

A cogent and clear articulation of a core issue facing our society. Kudos!

Being an old police fan... I can't resist. Re-Humanize Yourself.

metulj's picture

I was thinking of that when I

I was thinking of that when I wrote this up!

R. Neal's picture

Outstanding. The Mrs. and I

Outstanding.

The Mrs. and I were talking just a couple of weeks ago about supercomputer "hyper fast trading" (re. which some guy suggested there should be a 99% capital gains tax on any position held less than a second, 95% for less than a minute, and so on).

I joked (sort of) that we should go back to the "good old days" and you should have to put on a suit and tie and go down to your broker's office to conduct your trades in person and write a check on the spot to cover your positions.

I remember going with my Dad to the J.C. Bradford exchange (I think it was) down the block from his office on Gay Street. Guys would go down there and hang out during lunch and watch the tickers and argue politics and talk stocks and investment ideas.

That, of course, is the extreme. But one point I would emphasize along the lines of what you are talking about is the incomprehensible abstraction of our economy and "free markets" enabled by technology. When the financial "products" are so complex that Warren Buffet can't even understand them there's something wrong.

We need to get back to fundamentals, but fundamentals (such as risk, as you say, and balance sheets and other esoteric stuff like that) are quaint and obsolete. Instead, some finance minister in Estonia gets a cold and Wall Street sneezes, hyper-trading computers react, institutional fund managers panic, Average Joe sells his 401K at 52 week lows into the frantic news from "experts" on CNBC, and Goldman Sachs profits.

It's a rigged game. And the retail investor does not have a seat at the table. The best they can hope for is to catch a few crumbs falling off the table if they're lucky, but it's far more likely they will get cleaned out like the fish they have been set up to be and enthusiastically invited to come sit under the table at next week's game.

There's no such thing as "investing" any more for the retail investor, unless they're investing in their own company. "Buy and hold" in the current "free market" is a long con perpetrated by brokers, rating agencies and other assorted grifters, enabled by the revolving-door SEC.

The only other thing I would add to your remarks is the element of crime. Computers can't commit crime. People use computers to commit crime.

The mortgage crash was a crime, committed by people. The first crime was selling people mortgages they would never be able to pay off by assuring them that real estate prices could only go up so there was "no risk" at all of getting upside down and in fact they would make money.

The second crime was taking all these dodgy mortgages, packaging them into securities, then dividing the "securities" up into "tranches," and further dividing the riskiest bundles from the bottom of the barrel into more "tranches," and rating the top tiers (hey, dodgy mortgage dude at least has a job!) of those riskiest mortgages into "investment grade" securities, then selling them to banks, investors, pension funds, etc. at inflated prices relative to risk while shorting them out the back door.

I think I read that at one point all the derivatives, leverage and default credit swaps equaled the world GDP.

So there is most definitely a human criminal element to our current economic woes, enabled by sophisticated technology and ignored if not enabled by regulators. Curiously, no high-level grifter has yet gone to jail.

rikki's picture

Actually, the first crime was

Actually, the first crime was packaging mortgages into dodgy, unregulated securities that allegedly eliminated risk, statistically speaking. Once investors convinced themselves the statistical risk abatement was legitimate, that's when the second crime of conning people into dangerous mortgages and credit deals began.

First you convince yourself you've beaten risk, then you take big risks.

CE Petro's picture

Don't expect anyone to

I wouldn't expect anyone that had anything to do with the financial meltdown to go to jail anytime soon. In case you missed it, Obama pretty much pardoned the 1% earlier this week.

For perhaps the first time, President Barack Obama was forced to explain why there have been no prosecutions of Wall Street executives for their fraudulent actions during the run-up to the financial crisis. Asked by Jake Tapper to explain this behavior, Obama basically suggested that most of the actions on Wall Street weren’t illegal but just immoral, and that his Administration worked to re-regulate the financial sector with the Dodd-Frank reform legislation.

“Banks are in the business of making money, and they find loopholes,” the President said. Apparently forging and fabricating documents to prove ownership of homes that are subsequently stolen from borrowers is now a loophole.

Shannon S's picture

disgusting and immoral

Could the Wall Street protests be related to Obama’s attitude of forgiveness for fraudulent actions during the run-up to the financial crisis?

Could this be the signal for the start of the rebellion against the results of the Obama administrations failed attempt to re-regulate the financial sector putting the banks into an position of not lending to individuals and small businesses for fear of the FDIC and the OCC?

Could the Wall Street protests be “buyers remorse” from voters that believed hope and change was more than just an advertising ploy? Voters that believed there was a real plan to lower unemployment and make life better for the average citizen, not just an empty promise.

Obama’s attitude that “most of the actions on Wall Street weren’t illegal but just immoral,” is disgusting and immoral.

rikki's picture

The answer to the reasonable

The answer to the reasonable question lurking amid your lame rhetoric is "yes." These protests are a reaction to Obama's weak stance on prosecuting and reforming Wall St. The nonsense about empty employment promises and banks being fearful of regulators is just a reminder of why Republicans are even less trustworthy than Obama.

Shannon S's picture

theory

I see. To remain in denial would require a group or class of people to lay blame on.

That argument might work in theory if I was Republican.

You really don’t see any relationship between FDIC and OCC regulations modified by this administration and the lack of small business loans and home mortgages and the high unemployment in this country?

rikki's picture

I see a relationship between

I see a relationship between the banks' inability to untangle the huge mess of bundled tranches and collateralized obligations and their inability to issue new loans. I see a relationship between unemployment and the political stifling of the only entity that has adequate credit and standing to fund widespread job creation.

Your claim to not be a Republican would be more credible if you were not selling Republican economic tripe.

Shannon S's picture

not selling

I really don’t expect to sell anything. Most banks have written off the bad debts of the past and are sitting on large cash reserves, yet they will not loan funds to small business that can not produce collateral of 125% in a liquid asset. At 125% equity, that would mean the bank had no skin in the game.

No skin in the game makes for a bad financial partner.

metulj's picture

A head scratcher of a post

A head scratcher of a post there. What the hell are you talking about? For example, if BoA had written off bad debts in toto, it wouldn't exist anymore.

Shannon S's picture

business financial model used by local hometown banks

First off, Bank of America is a different animal from local banks, credit unions, or even regional banks. The OCC and FDIC use different rating systems for different classifications of banks. It has taken a few years but the banks I deal with have written down for a time and then written off or reorganized or sold most of their bad or lower rated loans. They are sitting on a lot of cash and want to make new loans but new regulations make it almost impossible as an individual or small business to qualify. Large corporations and existing businesses are getting some loans but the model for new businesses is almost impossible to fulfill the requirements.

Stick's picture

Death Spiral

B of A is very likely caught in a death spiral... There are lots of reasons that they're sitting on cash, and it is quite likely not enough.

(link...)

And it has nothing to do with undue regulation...

rikki's picture

Which new regulations are

Which new regulations are disqualifying small businesses from getting loans?

metulj's picture

The only regulation to asking

The only regulation to asking a bank like BofA or a local bank for money is whether or not the door is unlocked.

Stick's picture

While a good deal of the bad

While a good deal of the bad debt has been passed off to the public sector and written off, it is very likely that a vast amount of the junk is still there. The difference is that we now live in the age of "mark to make-believe" accounting. A large swath of the financial sector quite likely remains effectively insolvent.

In a capitalist system having a healthy financial sector is paramount therefore we should regulate it as though it were a public utility.

Lori Mize's picture

CDO swaps

I thought that I read somewhere that all the CDO swaps equalled three times more than the entire global GDP.

reform4's picture

Read "The Big Short"

There's a telling chapter where the author ends up talking to a CDO bond trader about "synthetic CDOs". Once the housing market turned down, there weren't enough new mortgages being written to package and meet the demands banks had for CDOs. So firms like GS and Bear created 'synthetic CDOs', which derived from the performance of other loans, but had no loans in them (effectively, they were the other side of the 'bet' made by the default swaps). There's no other way to characterize that arrangement other than being a bookie.

marytheprez's picture

derivatives...read a book that explains it all!

Keeping in mind that I know less than nothing about the financial markets, I learned from a report one day on NPR that the 'derivatives' market was a scheme that made billions for the traders...in a week, during the mid-90s. And the definition of the term is really based on nothing, on a myth, on an idea, not on a concrete item on which to invest.

Created in part by Texas Congressman Phil Gramm and his sister, along with a guy named John Mack at Morgan Stanley in the mid-nineties, these trades were protected and declared "legal" by Congress during Gramm's service. Thus at least part of this story is part of the reason the President declared goings on in Wall Street not illegal but immoral.

To learn more, check out this book, written by one of the original team of traders of derivatives, Dr. Frank Partnoy. It is called: "F.I.A.S.C.O", subtitled "Blood in the water on Wall Street". It is true, backed up by facts and evidence as listed.

This is part of the reason so few crooks and liars have not been charged with 'illegal' operations.

metulj's picture

Curbs on electronic trading

Curbs on electronic trading in the offering.

My idea is this: A modest tax on all stock and commodity transactions of 5 cents on each share. At current NYSE trading volumes this would generate about $20 billion a year in revenue off that exchange alone. I didn't do the calculation for NASDQ. OK. Here's the trick: This revenue does not goes directly onto the debt until the Debt-to-GDP ratio drops below 10%, then the tax drops by one half or more depending on circumstances. At that rate, it does not go into the general fund, but into a sovereign wealth fund. Let the people who caused the mess, solve the mess.

And Shannon S, you should stick to the KNS comments sections. Remember you only have powers on Bizarro Earth.

Shannon S's picture

powers? is that enlightenment?

The sooner you realize this is Bizarro Earth and none of us have any powers, just one vote…

Feel free to fill in the rest.

metulj's picture

Feel free to fill in the

Feel free to fill in the rest.

All bluster, no substance, and a reputation for it.

I noticed you didn't comment on my market-oriented approach to fixing the problem. Care to?

Correction of my post above:

Here's the trick: This revenue does not goes directly onto the debt until the Debt-to-GDP ratio drops below 10%, then the tax drops by one half or more depending on circumstances

The revenue goes directly onto the public debt until that ratio drops below the 10% floor.

Further thoughts on sovereign wealth fund: Once this fund reaches $700 billion or so (I've floated this idea before), it starts doing direct investing into core economic components like education, energy, transportation, and other infrastructure. Any return on investment is split at some ratio with a portion returned to the fund in addition to the revenues off transactions. The other portion is applied as a credit to every taxpayer.

bizgrrl's picture

Can't go along with the 5

Can't go along with the 5 cents per share since some shares sell at $10 and some at $300.

metulj's picture

It's a deterrent to splits.

It's a deterrent to splits.

bizgrrl's picture

I like splits.

I like splits.

metulj's picture

They are inflationary.

They are inflationary.

Shannon S's picture

Subprime

"A man named Bruce Marks became quite notorious during the last decade for pressuring banks to earmark literally billions of dollars to his organization, the "Neighborhood Assistance Corporation of America." He once boasted to the New York Times that he had "won" loan commitments totaling $3.8 billion from Bank of America, First Union Corporation, and the Fleet Financial Group. And that is just one "community group" operating in one city — Boston."

(link...)

metulj's picture

The CRA slight is a

The CRA slight is a thoroughly debunked bullshit line and you are doing nothing but race-baiting.

Stick's picture

Come on now...

Didn't you know that Barney Frank and the evil Democrat party [sic] created a global housing bubble? CRA has simply destroyed Ireland, the UK and Spain. They should really own up to this.

metulj's picture

Yeah, and I love the Lew

Yeah, and I love the Lew Rockwell reference. That guy would claim the sky is mauve if droolers would bump up his ad turnover to hear it.

EricLykins's picture

Sven had a good post linking

Sven had a good post linking to the history of this particular bullshit race baiting a while back

This is why liberals struggle in the "common sense" war:

and Darrel Issa is pretty much a scumbag.

rikki's picture

Can I assume from this

Can I assume from this response that you can't actually point to any new regulations that are disqualifying small businesses from getting loans?

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