The stock market is 90% computers trading with each other. So says this guest on Capital Account. That means that most of the part of the "free" market that is represented by stock trading is artificial.
Normally I try to avoid talking too much about one subject--especially economics as the number of people reading the blog drops off noticeably. But this interview and yesterday's interview fit hand in glove. We do not have anything close to a free market. The stock market is a combination of rigging (yesterday's interview), and robots trading as if they were real people (today's interview).
When the system has a crisis, and it will, do not think that this is a crisis of capitalism. It is a crisis of our mixed system that can best be described as a form of fascism.
No doubt if you watch much on the news you have seen the “failure” of the free market discussed. But in reality we do not have a free market. Do not misunderstand. Yes, there are areas where the market does not work well, environmental issues for example. But this is not what the pundits are talking about. The crisis was not caused by deregulation—after all, Banking is the most regulated industry we have. I am not saying that Glass-Steagall’s repeal was a good idea, it wasn’t.
The crisis was caused by a combination of fraud, rigging of the market, government interference, excessive debt, and excessive government spending. It is like the old Harold Brown joke, the government breaks your leg and then expects applause when they give you crutches.
How rigged is our market? No one really knows, except for those that are doing the rigging. Add in the weird regulations of the market, and you have a mess.
While I do not want to lose my libertarian creds, it seems to me that plunge protection teams, as they are called, are a good idea. These secret government groups intervene in the market when there is a massive failure of the market—smoothing out the market, often caused by programmed trading. Recently a programming mistake led to a several hundred million dollar loss by one firm. The program was supposed to buy at, for example, 17.24 per share and sell at 17.25, massive micro trading. This is not all bad, as it smooths out the market. Instead the program was selling at 17.24 after buying at 17.25 or higher. Oops.
This interview is interesting as it explores the rigging of the market that everyone knows is occurring. Is the rigging as large as Chris Powell on Capital Accounts thinks? I do not know. I fear he is right. At some point such rigging fails. We may live to see that failure in 3 to 7 years.
I do not know who said this, but it is an accurate assessment of our country’s situation. We have spent way, way too much over the last 30 years.
I heard an interesting analogy about what the government is doing. The usual procedure is for the government to use the people like a dairy cow, feeding itself like a parasite on the cow. But at some point the government started killing the cows and wondered why there was no milk.
Gerald Celente has been making the rounds on the alternative economic programs I watch. I chose this one because he got less excited than in some of his other appearances. His basic point is that crime is crime, and the big bankers are criminals. My title for today's post is not entirely accurate. The bankers got the chicken and all we got was some weak broth.
The Bloomberg interview with John Taylor that I have embedded at the end of my blog today impressed me. He is very pragmatic about the situation we are in. I think that too many people expect the impossible. Germany seems to be in a particularly tough spot. To paraphrase Taylor, Germany needs to stop selling Mercedes to people by loaning them money to buy them. It is worse to make the Mercedes, and never get paid for it, than to not make the Mercedes at all. Germany is just starting to understand this, and they are not happy.
Taylor also used a baseball analogy for the Euro crisis. "We are only in the second or third inning," he said. I agree. This is why I have been calling this period the Great Recession. I did not invent the term of course, but I think that it may be more than a decade before things return to normal—or we adjust to what some are calling the new normal.
Things will slow down next year, no matter who is elected. But this is not the crisis I have been predicting. I am still hopeful we can avoid the crisis, or in any event minimize it with proper action: a combination of large spending cuts, tax increases, and quantitative easing (the Federal Reserve buying government debt).
Maybe like the Germans, I too am believing the impossible. Am I the economic equivalent of a televangelist? I hope not.
Saturday, August 11, 2012 at 5:00AM 
