Juggling Dynamite

I always have to fight the ‘run for the sun’ instinct that hits me every year when the snowflakes arrive. I know… at least we aren’t in the Philippines today. Will try to be grateful…

A genius algorithm builder who dared to stand up against Wall Street. Haim Bodek, aka The Algo Arms Dealer. From the makers of the much-praised Quants: the Alchemists of Wall Street and Money & Speed: Inside the Black Box. Now the long-awaited final episode of a trilogy in search of the winners and losers of the tech revolution on Wall Street. Could mankind lose control of this increasingly complex system?
Here is a direct video link.

This all sounds very smart and sophisticated until you realize that everyone else using capital markets for conventional or legitimate economic or investment purposes are being used at our peril by those in possession of advanced technology and preferential access from the exchanges. The traders take the profits, the taxpayers have backstopped the losses, and investment markets are left a less stable and far more risky place for the rest of us to try and use. The public becomes the unsuspecting dupe.

This is actually pretty simple to fix by widening the bid/ask spread back to the historic norm of several cents rather than the fractional spreads now being used. In this way, a huge amount of present HFT trades would not be viable and would stop. In addition, anyone using HFT technology and platforms should be forced to trade on a separate exchange against each other and far away from everyone else’s life savings. Lastly, conventional deposit- taking bank activities that are backstopped by deposit insurance should be separated off from investment banking and trading activities (ala the old Glass Steagall-like division) so that the partners, shareholders and bondholders of risk-seeking firms all bear their own investment risk–live and die by their own algos.

Admitting his role in the largest ever embezzlement from Main Street to the banking sector in human history must be personally cathartic for this former Federal Reserve member. But with confirmation hearings now beginning for Greenspan 3.0–Janet Yellen–the question is what can the 99.9% do to get democracy, justice and free market principles out from under the bankers and captive regulators and back serving humanity? Read the whole confessional op-ed from the Wall Street Journal yesterday here: Confessions of a Quantitative Easer

Where are we today? The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.

And the impact? Even by the Fed’s sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn’t really working.

Unless you’re Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.

As for the rest of America, good luck…”

Also see: 12 questions Senators should ask Janet Yellen at her confirmation hearing Thursday and The Uncertain Future of Central Bank Supremacy