Fear Quantitative Trading

By Simon Johnson

Look forward.  The holy grail of any serious financial market player must now be: Become Too Big To Fail.  You can do it is as a megabank – this part is obvious.  But you can also do it as a hedge fund or some other lightly regulated pool of capital – this, after all, is the lesson of Long Term Capital Management that has never been addressed.

And quantitative trading, while in principle just one approach to investing or even only set of tools, greatly increases the complexity and opaqueness of markets – further allowing you to become big (in any future sense) relative to the political and economic system, and moving us closer to a more complete version of the stock market shut-down we saw on May 6. 

For more on this, see my review of Michael Lewis’s The Big Short and Scott Patterson’s The Quants - now in The New Republic’s on-line book section.

97 responses to “Fear Quantitative Trading

  1. The holy grail of any serious financial market player must now be: Become Too Big To Fail.

    Yes indeed, which is one reason why (as Simon has correctly said) the number one component of any serious reform must be to end TBTF forever by breaking up the rackets and never letting them arise again, ever. (The number two component is outlawing speculative derivatives, which also goes to the heart of the problem. Everything else is supplement or scam.)

    That’s true by definition, and by definition any alleged reform which does not contain this as its number one priority is not real reform but sham “reform”. Like the upcoming sham bill.

  2. George999x

    Another book for the list. Someone needs to tell these authors to slow down.

    Simon, are you following UK events? A new commision to review too-big-to-fail is being designed and staffed today, and its clear that the UK’s excellent lobby industry has already virtually ensured that the game has been won before it even begings:

    http://www.guardian.co.uk/politics/2010/may/12/osborne-cable-bank-reforms

    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7723823/Sir-James-Sassoon-set-to-be-Lord-of-the-City.html

    This week will be a crucial week in shaping UK banking reform.

  3. “His characters are exceedingly reminiscent of Daniel Ellsberg, a smart yet quirky fellow who confronted Defense Secretary Robert McNamara with skepticism and finally—in deep disgust—took it upon himself to leak what became known as the “Pentagon Papers.”

  4. Patrice Ayme

    Indeed, the universes of derivatives and shadow banking are the ultimate too big to fail that suck up nearly all capital, depriving the rest of civilization of sufficient economic activity.

    The hundreds of trillions of derivatives are as much capital which is not available for the real economy, entangled with itself in a useless frenzy. This is why important technologies either very different and practical, or futuristic and indispensable, are not developed. And why there is not enough money for education, and any other activity that could make the masses more clever (good for technology, bad for plutocracy).

    Plutocracy blocking technology, hence the evolution of society, is how the Greco-Roman empire crashed: the indispensable improvements were not made in a timely manner (the same scheme happened in most other collapses of civilizations).
    PA

    http://patriceayme.wordpress.com/

  5. engineer27

    Blame Lewie Ranieri for bringing in the smart guys. As quoted in Liar’s Poker, “Mortgages are about Maths.” Maths that he couldn’t understand.

  6. engineer27

    When finance gets too big even for the US and Europe to bail out, the Chinese will have to dip into their gigantic pool of reserve cash to save their own economy. Then we’ll see those Dollars coming back home.

    Perhaps this really is the long-term strategy. Import a bunch of stuff, then stiff the supplier when he tries to collect the bill. (Who remembers “The Long Con”?)

  7. Indeed. Why do you think the Chinese are building up their military?

  8. Agathocles

    Scott Patterson’s new book, The Quants, reads more like a sensationalist gossip column than an in-depth study of quantitative trading. He makes numerous mistakes trying to explain even basic financial statistics and doesn’t really provide much in the way of serious analysis. Furthermore, his characterization of the major players and events are grossly caricatured and inaccurate (as are most analyses of the events of May 6).

    Better reads:

    **Andrew Lo, What Happened to the Quants in August 2007: This mostly affected medium-term statistical arbitrage players and not HFT.

    **Rishi Narang, Inside the Black Box: Big-picture overview of algorithmic trading. As he demonstrates, most models (“boxes”) are not as “black” as perceived, and there are both algorithmic and human risk controls in place.

    **Larry Harris, Trading and Exchanges: Easy-to comprehend answers to the question of how markets are structured and the different types of participants.

    Lastly, it seems to me that the May 6th events can very easily be averted by creating national intraday price thresholds which, if activated, move the stock into a call auction. The Tokyo Stock Exchange currently uses this mechanism, as do many European exchanges. It prevents large scale price changes intraday. See: FAQ on the TSE’s website for more information.

  9. The QE1 was welcomed. Vast new money printing for the purpose of meeting federal deficits, rescuing big banks, and providing vast slush funds was deemed necessary. The end of QE1 was heralded but a lie. Perhaps it was proclaimed at an end so that QE2 can be launched amidst fresh needs. The QE2 seems to be launched in Europe with a grand US conduit. In March, US Fed Chairman Bernanke lied through his teeth to the US Congress about how Quantitative Easing had come to an end, that US Treasurys were not being monetized. In late April, Bernanke admitted his lie to the same US Congressional committee. Remove QE and the entire system grinds to a halt, then collapses under the weight of debt. Claims of QE removal serve as deceptive political clapp trapp, pure diversion from the reality. The QE is as crucial as the right leg. Uncle Sam cannot negotiate the mine field while skipping and hopping on one leg. The game of empire for us is over.

  10. I thought they needed all those tanks, guns, and missiles to invade and hold the enormous island of Taipei. (not)

  11. Given the interest in Paul Volcker, this article might be of some interest:

    http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/05/what_volcker_thinks.html

    “Here is what he believes can and will be done to mend broken finance, and where he sees the big looming risks.

    1) He has no doubt that Congress will pass the Volcker rule.

    …”

    Peter.

  12. Unfortunately, after beating the market for the past few years, I took the bait last week and gave back a large chunk of gains. Despite the fact that I researched the companies behind the stocks to the point that I felt I had a margin of safety, last week rattled me. So, another small investor has now left the flock. This is my defined contribution retirement I’m talking about here. When the market goes crazy to the downside the way it did last week, I picture myself old and destitute, wondering why I hadn’t protected my savings with some sort of sell stop order. So, I sold out at probably 500 pts. from the bottom. I think I fit the socio-psychological profile that the crash was designed for. Talk about feeling like the “shoeshine boy”! Ouch!

    A long time ago (like two weeks back), I was known as one of the most savvy investors in my circle of influence. Today I’m ashamed. I am the proverbial bag-holder.

    Admittedly, mine was an emotional sell, and should have been avoided. However, I was as much discouraged and dismayed that the system could drop that fast, on little new negative stimuli, with no backstop. Was there a backstop mechanism that purposely withheld their support at key junctures? Goldman Sachs perhaps? Their tentacles really do seem to be in everything. I know this has been talked about, but it was one of my first thoughts after the May crash.

    Regardless, I suspect that the market’s quick upside reaction is not from the small investor, quickly buying back in, but the large investment banks who made it all possible in the first place. Sure, I’m mad at myself for falling for it, but I’m also sad for America, as its capital markets are imperiled more and more, as the larger share of stocks are being owned and traded almost exclusively by the largest financial entities. Some entity succeeded in getting rid of another tiny competitor. I feel I’ve worked towards losing one of the last voices I had as an American, voting my shares.

    Now, here I sit, on the sidelines, trying to avoid the constant upbeat reports of what the market’s doing since I left it. Do you know how impossible it is today, to avoid hearing what the market’s doing? I will leave my money in cash, working towards the death by one-thousand cuts, until I start believing that the market isn’t as rigged as it appears today. It could very well be that I return someday, but I suspect it won’t be until just after cut number 999. Until then, congratulations to those attending the party.

  13. Mainly to bully and intimidate their own people, especially those who are natives of Xinjiang province and Tibet province. But generally anyone who crosses their useless/incapable/pathetic bureaucrats and police force. Think of an entire government filled with Dick Shelbys, Mitch McConnells, Chuck Schumers, and Kirsten Gillibrands and you start to get the idea.

    It wasn’t policemen who killed all those university students in the bloodbath of 1989

  14. Yeah, I propose a ban or at least some curbs on this HFA (high frequency authoring).

  15. It hasn’t escaped them also that the military is a means to effectuate foreign and economic policy. Or at least it has been to date.

  16. You made a very wise decision, Brian. I got out in April when it was also clear the insiders were selling by a 5 to 1 margin. Now I worry about the safety of dollar-denominated assets and bank-runs. The thought of buying exorbitantly priced gold makes me feel desperate.

    http://www.marketwatch.com/story/the-insiders-pick-up-their-selling-2010-04-14

  17. Scot Griffin

    I’m sure that you are still one of the most savvy investors out there. The problem is that the current market is for traders not investors.

    We don’t have a stock market, we have a casino, and the TBTF banks are the house. Only the house makes a profit every day.

  18. Brian, your response was entirely rational, not emotional. You saw signs of “no bottom” and panicked early. As we near retirement, panicking early is the smart move because we cannot expect to earn our way back by the time we retire.

    The market today should remain the province of those who can suffer short term losses — the young and the rich. Investment, i.e., employing capital in an activity that creates income, is still the best way to prepare for retirement.

  19. @ Patrice,

    Some authors (Tainter in particular) have a theory for “most collapses of civilizations”, which basically boils down to diminishing/decreasing returns on complexity.

    Thus, the reason that “indispensable improvements were not made in a timely manner”, according to Tainter, is that because of the diminishing returns rule, society ran out of the ability (or willingness) to cope with the need to add on more complexity to deal with the problems caused by the accumulation of complexity.

    In a sense, the ever increasing supply of energy-dense fossil fuels since the dawn of the industrial era has enabled our current civilization to more than offset the consequences of the diminishing returns to complexity – so far. But, as in the Merchant of Venice, the pound of flesh will have to be paid in the end.

  20. And the house is rigged. It is a complete con and you are right to stay well away from it.

  21. Brian,
    No “ifs”, “ands” or “buts”, you did the right thing buddy. Wait for the Greece/Eurozone thing to flush out, and the fundamentals to improve. Let those boys and Goldman “play with themselves” for awhile with their algorithm computers and see where it gets them. They can sneer and chuckle at the retail investors all they want, my money is on guys like you Brian. Turtle always beats the hare.

  22. Re: @ Patrice Ayme_____The Greco-Roman Empire crashed from their over indulgence of arrogance. They partied hardy on the laurels of the past. Sound familiar? Technology had nothing to do with it, but the over extention of its Armies into lands that were plunderless from past plundering. They killed the “Golden Goose”, period! This parallels the United States too the “T” ,with our perennial {Viet Nam,Iraq,Afghanistan,and Iran (if the Military Complex War-Mongers can get their way?)} wars accomplishing nothing, but moving us closer to the precipice of financial ruin! I ask you to question yourself – have America’s leaders become arrogant, and drunk with hubris?

  23. Ok, I’ll play devils’ advocate. You were merely a small fish swimming in an open ocean with a whole lot of other fish, many much bigger than you. Your story is hardly unique; many other fish up and down the food chain got gobbled up likewise. That’s just the way it goes. By the way, what ever gave you the idea that these intrinsically worthless pieces of paper that float through the secondary markets were ever necessarily valued based on anything real? That whole idea is a fiction, it always has been, and the big boys know it all too well. OF COURSE the market is a casino, what in the world did you ever think it was?

  24. Simon, having read all three, I say brilliant re David Halberstam in that context. Perhaps your next book could be “Why Smart People Aren’t Wise: And What to do About It”

  25. John Brennon

    First time visiting your community, but I had posted to another topic, and I thought it important to post this at least once more. I am sure you get plenty of us pesky college know it alls. Don’t take it that way…

    I read your remarks in many of the topics and the posts throughout this community. The critical reason I am posting within this topic post is to highlight one of your bloggers and to let you know of his rise in importance and the topics he has raised.

    First, I happened to come to this web-site because our professor, which I am attending FAU for my doctorate in economics and finance; made one of our assignments to actually read Mr. Gornick’s writings throughout all of the web-sites on the internet he has posted.

    The reason coming to this web blog is twofold. The assignment has Mr. Gornick showing he had signaled well before many others, as far back as 2007, well before any of the media or any within the blogging communities a concept of what was to occur in Greece and developing for others now around our world due to debt.

    He has been ahead of the curve even when it comes to the likes of those who had written or published books such as “To Big To Fail” by Andrew Ross Sorkin and the host of other books and authors, the topic and subject of a world of economist and central think-tanks, had missed in their formulas.

    Mr. Gornick noticed that you could not keep a credit faucet open endlessly without the balance of an oppressive outcome being the ends of the means being the end no matter what society may it be, Capitalism, Socialism and even the already severe life styles of the oppressive forms of Communisms.

    What spurs Mr. Gornick’s notoriety through many of the Universities as I have learned from a few of my fellow colleges, and to my pleasant surprise, he is now being heard in media areas,and followed in a few countries as you can see when searching the browsers.

    He speaks from his heart, and he actually cares about the human condition. He certainly has a love for the creator as this can turn people either off or on.

    I would try to tell everyone to rise above and allow you to learn, as he has tried to state or allow a line to be drawn in the sand for hope for smarter folks than he to take up the charge and turn our Nation first and then our World around. For us all to recognize as we can through collective learning fiscally responsible Consumer restraint to try to gage growth within economies, we may just turn this corner without the deep austerity measures that are or will be the plan for many if we do not get this right.

    Mr. Gornick has done through many of his writings, stated in his logic of reason. His reason for programs have been to slow the decent and bring a sustainable GDP Credit to debit modifier and allow an Increase Debt blanket relief blanket to ease the pain and despair of what is decay of the human unit.

    He has made an absolute clear statement that all programs of any success are based upon cutting back from the unit their ability as we count as a consumption to consume at a rate of X or Y, their ability to consumer at a debt to credit trigger that clearly triggers system warning before unit fails.

    The very nature that James in his Far-fetched themes clearly has struck oil or gold when the consumer unit needs to be re-taught to live within their means and for countries to relearn to live also within standards was written. The clarity of going to build a standard for the world to build trust to trade against and not go just from central banks wild printing presses of printing currency and promissory notes was a critical statement made by James.

    This statement of what they retain in holdings as once held has gold or whatever was used as precious back in the days of President Nixon, I believe as the last point and time we had such a standard in place was what I had read and stated within his writing.

    The Coase and Oppression Theorem came life in our modern times was brought to vivid color and depth by Mr. Gornick as he has only skimmed the surface as the depths of the math reveals far to many market and country seizing metrics as i had read in another response to one of his post prior in this community. That was a true statement.

    The next time, as James said it nicely, “To you other folks… Who in fact go nameless and are faceless the majority of your posts throughout this blogging community. Some of your posts may be witty at times but cowardly at best when one must hide behind a mask or a blank statement of words that mean really nothing for humanity or this blogging community” (James).

    Indeed these words are very powerful words as they are the ones that give great honor and notability to Mr. Gornick to stand up on the virtues for the cause for humanity and to a community of faceless words while he writes to Professor Simon Johnson or James Kwak or their guest writers of topic subjects.

    James, thank you for taking up the cause, you are an inspiration for moving a concept for minds to come to thought to move towards solutions or to at least pause for a moment and ponder what fate may await if these thoughts you have posed have full merit, then God help us all.

    Thanks.

    John

  26. You’re either betting with or against the Federal Reserve. That isn’t always an hourly thing, as you learned. No matter how one looks at it, casino, manipulation, everyone admits openly that the Federal Reserve is moving markets. Now, its just a matter of degree and their ability to maintain confidence.

    Your prime job is to situate yourself SAFELY for EITHER outcome.

  27. Re: @ Brian W____I have great empathy for you my friend. I am saddened,…but incensed by the raping of the retail investor that virtually has been herded (subtly coerced) to invest in the stock market. The reasons being where he/she can’t get a ROI higher than 0.0025% from a savings account ,or 0.015% from a useless (tying up precious money) CD! It’s sad Brian what these “Electronic Robber Barron’s” are doing unimpeded!

  28. Re: @ James____Sure the whale gobbles up all the small fish, but eventually the whale dies, and is gobbled up by the small fish. But, but, but, before the comeback,…the last I’ve heard,and seen, the whales are fast becoming extinct. Ironic,…as it is in nature, that were both mammals?

  29. Brain W wrote:

    “Today I’m ashamed. I am the proverbial bag-holder…

    …I will leave my money in cash, working towards the death by one-thousand cuts, until I start believing that the market isn’t as rigged. ”

    The only bad experience is the one that you don’t learn from. You still sound like a savvy investor. I’ve made plenty of mistakes at the school of hard knocks and I continue my education.

    As long as the system is sustained on a steady diet of financial crack, focus on asset preservation rather than chasing profits.

    Those prudent individuals that can remain solvent longer than the financial system can remain irrational, will be rewarded. Two-yeas ago I found safe harbour for 90% of my assets, which provide modest but substantive returns, the rest is “skin in the game”, part of my tuition.

    There is nothing wrong with temporarily sitting on the sidelines till a clearer picture emerges. It is an acceptable strategy, be it financial or military. Eventually everything changes, so keep your powder dry. My 2-cents.

  30. readerOfTeaLeaves

    The holy grail of any serious financial market player must now be: Become Too Big To Fail. You can do it is as a megabank – this part is obvious. But you can also do it as a hedge fund or some other lightly regulated pool of capital

    Indeed.

    If it’s obvious to the hoi polloi like myself, it makes me wonder what’s likely to happen in November when so many incumbents who failed to break up TBTF coming seeking votes.

  31. Scot Griffin

    “OF COURSE the market is a casino, what in the world did you ever think it was?”

    Like Brian W, I once bought into the notion that you actually INVEST in the stock market, an idea that is continually reinforced by the financial media, “investment” advisors, and a tax code that treats “long-term” (one year!) stock market gains as capital gains in spite of the fact that the BEA does not treat stock market “investments” as capital investment for GDP purposes.

  32. The Powers That Be certainly have been told by many that:
    ~ The TBTFs need to be broken up.
    ~ “Investment” banking and commercial banking need to be separated.
    ~ HFT and front-running need to end.
    ~ Speculative derivatives must be outlawed.
    ~ Fraudsters must be hunted down and prosecuted, even it that means Timmy, Hank, and Ben go to prison.

    Without these, distrust of the markets and government will continue to grow. However, I don’t think we can count on most of the current politicians to understand this, or take any action. That the Brown-Kaufman “Safe Banking Act of 2010″ went down to defeat says it all.

    It will take a revolution of sorts or additional severe natural disasters to end the Kleptocracy and return the U.S. to the citizenry.

  33. Wrote this about a week ago but it got killed by the Facebook problem:

    “I’m a mathematician with a longtime interest in systems with feedback, and in the kind of networks we’ve seen evolve in the banking industry. A well connected network with large institutions and smaller ones is probably just what we want, to a point. Such a system actually allows for greater “ecosystem” diversity.

    There is a down side: the larger the institution, the more likely it is that “knocking it out” will bring down some portion of the network. If it’s not too large that damage can still be contained within the “banking ecosystem”. If banks become too large, they become connected to every other institution. Their failure will then bring down the entire network. They have become too big to fail. It’s a simple as that.”

    The synopsis of this research, courtesy of some of the best minds in the field, with links to references, can be found here: http://www.nature.com/nature/journal/v451/n7181/full/451893a.html

  34. And why has Israel been selling them technology to do it with?

  35. Patrice Ayme

    I beg to disagree with Tainter. I believe it is sort of the other way around. It is the incapacity to handle complexity that went up. Basically, Rome became completely idiotic, and, although the situation was much simpler, it was incapable to deal with it. Rome had become idiotic because it was controlled by plutocracy, and it was in the interest of plutocracy to make Rome idiotic.

    So, when technological challenges appeared, Rome was unable to deal with them. Instead, technology stagnated, and society degenerated into a plutocratic theocracy… Although, recent archeology shows, the economy kept on improving.

    Technology would start advancing again, under the Franks (from beans to stirrups, to horses’ collars, to massive labor horses, to sophisticate agriculture and deep plows turning the ground, to Gothic cathedrals to wind and water power everywhere; by 1000 CE, the energy Frankish citizens had at their command was the highest in the world).

    In the case of Rome, it is pretty clear that the bizarre evolution of Roman society has nothing to do with increasingly complex problems.

    For it first seven centuries or so, Rome was confronted to enormous, extremely complex problems, of the most extreme lethality, which looked hopeless to solve. From the Etruscans’ colonization, to the Sabines, the invading Gauls, brazen Carthaginian plutocratic empire, Hellenistic dictatorships, violent marauding German nations, besides getting rid of kings, and giving increasing powers to the People, the status of the Allies, the very complex constitution and voting system, etc.

    Towards the end of the republic, the situation was much simpler: Rome was master of the world. Rome could not be killed, and actually was not killed: the Merovingian empire of the Franks (“Imperium Francorum”) replaced progressively the Greco-Roman empire (from the defeat of the last non Frankish Roman army 486 CE, to the capture of Constantinople in 1204 CE). But the queens of the Franks spoke Latin, and did so imperially (we have some of their letters!)

    At the end of the republic, only three military powers could be distinguished. Caesar intended to solve the military situation once and for all, with one giant military expedition that would submit Persia, Sarmatia and Germania in one shot. Unfortunately he was assassinated by plutocrats masquerading as republicans, the day before he was going to take his leave, in a drastic collapse of the ethics of survival of the republic (since when would good Roman republicans assassinate the commander in chief, as he was going to war against terrible threats?).

    In a few months, Rome lost it all. Marcus Antonius nailed the hands of Cicero, lately allied to his master, Caesar, on the doors of the Senate, an unimaginable gesture, prior. What had collapsed was ETHICS and morality (mores = customs in Latin). After that, the ruin of the empire was just a matter of time. The situation was simple in all ways, EXCEPT in the ethical realm, where plutocracy reigned on minds and society alike.

    It seems to me that Tainter does not know Roman history. When confronted with intractable military problems, Rome invented new military technology: Spanish short sword, to make short work of the phalanx, from the side, javelins that one could not throw back, sure to stay stuck in the enemy’s shields, advanced metallic armor, ballistics, and so on. Carthaginian ships were captured, and duplicated, etc. Confronted to huge ocean going Gallic sailing ships, the Romans invented a way to seize their sails. Having to feed the cities, they built a giant trading system, with aqueducts using waterproof cements of their own making. And so on.
    Under the empire, as it became obvious that further technological progress was needed, economically, energetically and militarily, the emperors deliberately made an anti-invention policy, paying inventors to NOT invent. Because, they said, inventions would increase unemployment (meaning: make plutocracy unstable). Interestingly the first industrial uses of water power occurred in Roman Gaul (where technology would soon blossom under the Franks, because the Franks had not enough slaves, having outlawed it for Christians and Jews).

    http://patriceayme.wordpress.com/

  36. We’re going to hear a lot from the teabaggers and extreme right Republicans — the ones who are taking over the party — about restoring the Austrian School of economics. As near as I can tell, the Austrian School promotes such a purist version of laissez-faire that one might call it economic Darwinism, disdains all quantitative data as being inherently biased, and holds that recessions and depressions are a healthy corrective that government must do nothing to alleviate. The Depression discredited the Austrian school; today, it has little credibility with mainstream economists, conservative or liberal.

    The Maine Republican party has already adopted the Austrian School as part of their official platform. This might mean little except that it came about as a result of an internal right-wing insurrection and that it is part of an overall platform that appears too slickly worded to be the product of amateurs. In others, an organization like Freedom Works has likely developed a template that they are feeding to local teabaggers.

    Plainly, a literal application of the Austrian School would magnify everything that Simon and James write about in 13 Banks. But these people will argue with fervor an economic theory that few of them had heard about until now.

  37. Meh. I taught him everything he thinks he knows.

    Search:

    Uncle Billy vs. Mt. Pelerin
    Uncle Billy Mental Widget
    Uncle Billy Mental Gidget
    Uncle Billy Mental Fidget
    Uncle Billy Snorts

    Going back to 2006.

    Or, go back to 1944 with Sigrid Schultz:

    “In Schultz’s book Germany Will Try It Again, she describes, based on her first-hand witness reports on what is in essence would equate with a German-Austrian ‘Military-Industrial Complex’ composed of wealthy landowners (Junkers), bankers, and corporate businessmen (of companies still thriving today), who fired World War I, then planned a comeback despite defeat in 1918, propped up Hitler, were planning a comeback in 1944 (ultimately leading to the formation of Die Spinne andODESSA (detailed in writings of Glenn Infield, Joseph Wechsberg, and Simon Wiesenthal), as well as the Vatican Rat Line to South America and the harboring of Nazi officers in the USA after 1945 (Infield, pp. 245-246). This true German corporate/banking elite class (obviously excluding Jews) had planned a Central European Empire (Mitteleuropa) that would subjugate Slavs to the German nation, and would restore the greatness of both the Habsburg Austrian Empire and the earlier so-called ‘Holy Roman Empire’. Schultz often refers to the Nazi’s skill at ‘war-in-peace’ which bears striking resemblances to the post-1945 ‘Cold War’, and may well have served as its roots. Schultz also covers the successful appeal of the Nazis to both British and American corporations to ally themselves with Germany in a fight against Communism. While not so successful in Britain, alliances were successful with American corporate investors such as Prescott Bush. Nazi agents in the USA promoted the ‘German American Bund’, the roots of many current neo-Nazi groups, and sought to provoke divisive American racial tensions through support of other American racist organizations. Lastly, Schultz covers the Nazi drive to build up business and political alliances in South America (Schultz, p. 2, p. 203), which led to the foundations of the Perón régime in Argentina, the Stroessner régime in Paraguay, and the more recent Pinochet régime in Chile.

    A well-researched text which validates many of Schultz’s first-hand observations is Unholy Alliance by Peter Levenda, who brings descriptions of the old German-Austrian Military-Industrial Complex up to date to the times we live in. In this book he also covers the Nazi’s extended fascination with and use of occult practices bordering on what is popularly referred to as ‘black magic’, involving mass psychology as well as skillful psychological manipulation of key political figures. Both Schultz and Levenda verify the insidious manipulativeness of the Nazis and adherents of similar ideologies still extant today

    Also fun: go to youtube and search Saskia Sassen / USC and listen to the half hour lecture on Cities and the New Wars. Pay particular attention to her manner. Then go look her up and see who her dad was. Keep in mind that the apfel might have fallen a distance from the baum. But one wonders. Reflect on the laurels that have been heaped on her and her husband and many academics like them. Reflect on whether or not Simon, Peter, and James are doing this blog, and others are doing their seemingly maverick blogs because they’re just nice guys, or not. Reflect on the skills of professional propagandists and what they can accomplish through companies like clear channel, and fox and reuters, etc.; through the internet. Reflect on why. They’re paying 3 card Monte with you and you’re not seeing it. Post after post… Geithner did this, Magnetar did that, deflation, disinflation, black-scholes, bellybutton lint, Cuomo’s investigating, Trichet has crabs, the PIIGS are getting roasted!, yield curve is convex, super-senior tranches of rotting pig’s knuckles are being sold to Croation chicken-shiners. The eyes dart back and forth. “Pretty” “Oooh” “Oh my”

    Find out who is pumping out the propaganda, find out who they work for, stop them, and then clean house.

  38. Marty, Brentwood NH

    The mathematician Michael Edessess had a similar low opinion of Scott Patterson’s book on The Quants, described here: http://www.thebiginvestmentlie.com/2010/05/quants-hagiographized-get-their-comeuppance.html

  39. Yeah, I know. As I said, I was just playing devil’s advocate. I have always been intrigued by the idea of trading what are essentially worthless pieces of paper in the secondary markets however, based on the assumption that they are somehow always and forever linked to underlying market fundamentals (as if most traders even understand those either!). My college profs could never adequately explain that to me, and I’ve never heard a good explanation since. I think recent market shenanigans are just exposing for all what I (and others) have perceived to be the truth all along. The stock market is nothing more than mass illusion/delusion. Fiat currency indeed!

  40. Norm Cimon referenced:

    Complex systems: Ecology for bankers

    “An analogous situation exists within fisheries management…
    ….There is common ground in analysing financial systems and ecosystems……

    Tipping points’, ‘thresholds and breakpoints’, ‘regime shifts’ — all are terms that describe the flip of a complex dynamical system from one state to another.”

    The “complex dynamical system” described in the article is non-linear and there are tools available to help observe and analyze such activity.

    The banking ecology and the ecology in the Gulf of Mexico may share a similar fate, but I don’t think we’ll need Chaos Theory to help explain the cause in either case. :-)

  41. Patrice Ayme

    Arrogance is not very much in evidence in the last few centuries of the empire. The Romans were extremely arrogant, wrapped as they were in a strong legal and ethical system under the republic, and it worked well for the republic. It was more like a mess under the empire, and arrogance went down as confusion went up.(This seems to support Tainter’s thesis, but not really, once one looks in the details).

    There are other character flaws besides arrogance, and the Romans , or more exactly the Roman plutocracy that ruled Rome, accumulated plenty of these. Cupidity and greed were foremost. The empire was not only ruled by the richest, but its soul was guided by Pluto.

    Technology played a huge role in the down going of the Greco-Roman empire. First of all, of course the technology of political organization (“political science, economics”), which became simplistic: an emperor seized power, and the army vowed to obey him. Plutocracy also voided Rome, and Italy, of all and any control on its destiny (putting millions on the dole, and making them impotent economically and militarily, before outright switching the capital out of reach).

    But, more important for the loss of military control was the disappearance of a technological edge in armaments. Composite bows used by the Parthians, and then the Huns, threw arrows that could pierce Roman armor. The economic technology also faltered: unexploited land grew (from the end of small farming by independent owners, another plutocratic problem). The mines with their indispensable metallic ores became unprofitable, from a dearth of slaves and difficulty of extraction.

    I answer george with a long comment which was blocked by moderation at this point. I will try to write a post including it for my own site.

    PA

    http://patriceayme.wordpress.com/

  42. ‘The next time, as James said it nicely, “To you other folks… Who in fact go nameless and are faceless the majority of your posts throughout this blogging community. Some of your posts may be witty at times but cowardly at best when one must hide behind a mask or a blank statement of words that mean really nothing for humanity or this blogging community” (James).’

    Please read the manifesto underneath;

    the zero hedge manifesto
    Submitted by zero on 05/17/2009 20:03 -0500

    our mission:

    •to widen the scope of financial, economic and political information available to the professional investing public.
    •to skeptically examine and, where necessary, attack the flaccid institution that financial journalism has become.
    •to liberate oppressed knowledge.
    •to provide analysis uninhibited by political constraint.
    •to facilitate information’s unending quest for freedom.
    our method: pseudonymous speech…

    anonymity is a shield from the tyranny of the majority. it thus exemplifies the purpose behind the bill of rights, and of the first amendment in particular: to protect unpopular individuals from retaliation– and their ideas from suppression– at the hand of an intolerant society.

    …responsibly used.

    the right to remain anonymous may be abused when it shields fraudulent conduct. but political speech by its nature will sometimes have unpalatable consequences, and, in general, our society accords greater weight to the value of free speech than to the dangers of its misuse.

    – mcintyre v. ohio elections commission 514 u.s. 334 (1995) justice stevens writing for the majority

    though often maligned (typically by those frustrated by an inability to engage in ad hominem attacks) anonymous speech has a long and storied history in the united states. used by the likes of mark twain (aka samuel langhorne clemens) to criticize common ignorance, and perhaps most famously by alexander hamilton, james madison and john jay (aka publius) to write the federalist papers, we think ourselves in good company in using one or another nom de plume. particularly in light of an emerging trend against vocalizing public dissent in the united states, we believe in the critical importance of anonymity and its role in dissident speech. like the economist magazine, we also believe that keeping authorship anonymous moves the focus of discussion to the content of speech and away from the speaker- as it should be. we believe not only that you should be comfortable with anonymous speech in such an environment, but that you should be suspicious of any speech that isn’t.

    http://www.zerohedge.com/about

  43. The biggest danger of the Austrian School as a “political issue” is that the banks potentially can manipulate one aspect of it, anti-regulation without implementing the rest – then the problems are much worse, agreed.

    Be very cautious of any sudden converts to the Austrian School for anti-regulatory purposes. They’re dreamers, frankly. I admire some for it. But, there will be a whole swath of bankers and corporatists in Austrian clothing advantaging themselves of particular aspects.

    I see it as a political tool used to cover-up financial crimes.

  44. Re: @ James____The Devil has been around as long as religion – he was created by the “Godless Deity’s” too foment deception. Being used to play the “Devil’s Advocate” is wise if you wish to survive today? It’s nice too know – “how evil thinks” ,as long as your not capivated by its subconscious majesty. Unfortunately for those that have flirted with “Wall Street” ,and its riches, have fallen into the pit of their once surreal, and betrothed evil advocate side? PS. I find it amazing that no one has looked into BarCap plc., and BlackRock Global, which both use HFT,and manage their accounts actively,and passively trading $Tn’s/daily. Thanks

  45. Re: @ Nemo____ The Chinese are building up their Navy (Nuclear Submarine’s by the truckload),Missile Defense Arsenal,Ground Armory Vehicle (Tanks, and Improvised Weapons SUV’s, using the Humvee Technology they bought from our bailed out Auto-Industry) Rifles Ammo,and last but not least, Fighter Jets,that are very capable and closely alligned to our own F-14 Technology but evolving fast. What’s the game plan? They will sell themselves to the world as the new “Arm’s Dealer” on the block, blowing Russia,France,England,N. Korea, and America’s Military Complex out of the water. This is serious stuff, but with all of America’s diversions regarding Afghanistan,Pakistan, and now Iran…has taken our eye off the ball once again. Pathetic!

  46. For the same reason Israel does ANYTHING.

  47. There is a way to evaluate the entire Austrian School in application to modern society. The Austrian School is opposed to the state granting property rights . That is, they oppose state support of services or intangible rights as in collective bargaining. There would be even greater disavowal by Austrian School types of suvh intangibles as being protected from pollution and natural habitat destruction across property lines. Yet, I suspect that these same people take no heed whatever of their utter reliance on such an intangible as the state granting of copyrights,patents and trademarks. None of these intangibles exist except through a strong state support of the intangible property right. The state is necessary to protect their definition of rights but not others definition of rights they hold equally dearly.

    In short, the Austrian School is another inherited delusion from simpler times made even more delusional by increased complexity.

  48. First: really enjoyed your writing style on this one, Simon. Just…a pleasure to read. You managed to combine both factual data with relevant, yet near poetic analogy…so well done!

    Second: “And there remain countless innovative ways for genius — stimulated by greed and groupthink and an open unregulated field — to lead us seriously astray and into more great danger.”

    Personal opinion: If you’re into groupthink, you’re not a genius.

  49. Then you would agree with this proposal to decrease the credibility asymmetry that exists in the credit information market. http://bit.ly/dfD7y5

  50. anti-elite-morons

    unfortunately most smarties e.g. mbas, are problems not solutions for the real productive economy anywhere.

    The Disadvantages of an Elite Education: Our best universities have forgotten that the reason they exist is to make minds, not careers.

    http://www.theamericanscholar.org/su08/elite-deresiewicz.html

  51. EXCELLENT POINT! +1000

  52. I had not even heard of the Austrian School until I came across it in this platform document. I smelled a rat, though, and did some rudimentary research. I’m inherently suspicious of any theory that refuses to use quantitative data as proof. The problems the school cites with data are things social scientists learned to correct for long ago.

    It’s also clear why the school fell out of favor: It didn’t anticipate anything as catastrophic as the Depression or the meltdown, and its “remedy” is inadequate for the kind of suffering caused by a major breakdown.

  53. Jerry J wrote:

    “In short, the Austrian School is another inherited delusion from simpler times made even more delusional by increased complexity.”

    A tip of the hat to Jerry J for his deeply thought out and concise description of the Austrian School. We need more economic bird dogs that can speak plainly and allow us to form an intelligent response.

    “The Austrian economics was ill-thought of by most economists after World War II because it rejected mathematical and statistical methods in the area of economics, which they considered not amenable to “scientification”.

    In their rejection of mainstream practices, Austrians have argued that mainstream economics has a poor record of “scientific” prediction and state that mainstream economists generally failed to predict or warn of major economic events such as the recent Global Financial Crisis and the Great Depression. However, there were multiple warnings from the mainstream about an economic bubble in the housing market, including advisement from Nobel laureate, Paul Krugman; additionally, economists associated with mainstream economic schools, such as Robert Shiller and Nobel laureate, Joseph Stiglitz, have received international recognition for warning of the impending crisis. Another economist who has become popular due to his warnings is Nouriel Roubini, who considers himself “pretty mainstream.” Heterodox economists, who are also not of the Austrian school, warned of the Global Financial Crisis, including Dean Baker, Wynne Godley, Michael Hudson, and Steve Keen.”

    http://en.wikipedia.org/wiki/Austrian_School

    Unfortunately in the past few decades official government organs have perverted the interpretation of accurate “mathematical and statistical analysis of the macroeconomic”, by altering the methodology of information gathering, to further short-term political gain. So, who is zooming who? My 2-cents.

  54. anti-elite-morons wrote:

    “The Disadvantages of an Elite Education: Our best universities have forgotten that the reason they exist is to make minds, not careers.”

    Morality

    “In its “descriptive” sense, morality refers to personal or cultural values, codes of conduct or social mores that distinguish between right and wrong in the human society.”

    http://en.wikipedia.org/wiki/Morality

  55. Scot,

    Welcome to the REAL world of investing, the one your broker dared not tell you about. The one where sharks – BIG SHARKS – lurk routinely.

    Big ocean out there baby – GOOD LUCK!

  56. Patrice Ayme wrote:

    “It seems to me that Tainter does not know Roman history. When confronted with intractable military problems, Rome invented new military technology…”

    I think Rome’s short-comings were, that they lacked people with the psychological adaptability demonstrated (albeit slow) by the Roman general Publious Scipio in his engagements against an intellectually superior military commander known as Hannibal.

  57. In other words….

    “There’s a sucker born every minute.”

    P. T. Barnum (1810–1891), an American showman.

  58. To control the rights when their commercial real estate market bubble pops in the near coming future.

  59. Patrice Ayme

    Hmm… My own discourse above needs to be made more precise
    For example in the preceding post I meant “republican Rome”, not just “Rome”, as Rickk guessed.

    So I am scrambling to post the whole exchange, with a bit more precision, on my site http://patriceayme.wordpress.com/

    The imperial “Principate” (Augustus and his ilk) was the exact opposite, in many ways of republican Rome. Especially as progress in technology and engineering was replaced by total stagnation.

    Hannibal may have been intellectually superior, but he lost half of his army crossing the Alps (destroyed by the Allobroges, who ambushed him). Then Scipio Africanus was given a sort of last army, crossed the sea, and disembarked in Africa. Hannibal had to rush back, before Scipio would seize Carthage. In the final battle, the only one that really counted,Hannibal was soundly crushed by Scipio, and Carthage had to surrender.

    The hare may be faster, and more hairy, but it does not matter, if the turtle eats it in the end.

    I was deliberately provocative when I said Tainter did not know Roman history. He just know enough to make his case, but the superficial facts he uses are well known, and his case very weak. It seems to me a deliberate attempt to exonerate plutocracy (which, BTW, was the old fashion explanation, from countless antique philosophers, and even statesmen).

    PAttp://patriceayme.wordpress.com/

  60. Patrice Ayme

    “Moralis” was apparently coined by philosopher, lawyer and consul Cicero to give a Latin equivalent of the Greek Ethykos. It came from “mores” meaning customs, habits, dispositions…
    PA

  61. Don’t misunderstand me. There are a lot of very guilty suits running around on Wall Street. Aside from the fraud and the deceit, however, there’s also a larger question. Did they understand that building a machine where there the feedback (from shorting companies, trades, investments, derivatives,…) could cause uncontrollable swings in valuations?

    If they didn’t they’re no where near the brilliant icons they posit themselves to be. Nonlinear dynamics have been conjectured for over a century, subjected to analysis for at least 60 years, and the subject of significant research since at least the mid-70s and the advent of significant desktop computing power. Where were these great minds when this stuff was thrown at them in college?

    If they did understand that they destabilizing the trading system then that’s even worse, wouldn’t you say?

    Either way, there’s not much to admire here, and a lot of questions to be asked about how this thing’s been wired.

  62. What tools are you thinking of? I’m not aware of any way, short of the actual market response itself, to observe the results of the stream of complex transactions that’s now at the heart of the modern financial complex.

    And we’d better find out, quickly, if there’s a “cause” or if it’s a property of the system that’s been created. So far, there’s no smoking gun to prove the former. There’s also a growing suspicion that hair-trigger automated trading suggests the latter.

    If so, the machine needs to be taken apart, and quickly.

  63. The guy that said that was better at suckering people than you think. P. T. Barnumdidn’t say that, so far as it’s known. Most likely it was a conman by the name of Joseph Bessimer.

  64. Won’t matter if it’s their typical domestically designed and produced product. Unless they get it together and suddenly start using real quality control processes, they’ll just spit out weapons that look nice and act tough but fail when it comes down to it.

  65. How do you propose we stop them after we watched the legal system hand over control of the political system to corporate interests? The same interests you would have to fight to stop the propaganda.

    The reason the military or terrorist or a coup takes over media first is that whoever controls it controls the country. Do you honestly expect to stop corporate interests with anything short of violence when they quite literally run things?

  66. Great article. Over-specialization present in the current university structure has struck me as a form of brain dead vocational training from the day I entered Stetson University 15 years ago. I had no place there, as I had no certainty where I wanted to be. I flunked out, even though I’m extremely bright and it was regarded as a great school. I had sleep walked through high school in to college, on the track directly to a job and eventually to the grave, I suppose.

    Falling out of the university system, getting lost, wandering the road less traveled by my peers was the best thing that ever happened to me. I’m still a bit dissatisfied with my work, and not quite as wealthy as I think I should be… but I feel no entitlement. Only independence and full responsibility for my own life.

    Several of my friends that graduated college, make more money than me, and have stable lives have expressed jealousy. Even now, they feel subservient to their parents and this perfectly planned life in their thirties, while I continue to simply wander down any path that strikes my fancy. My mind is free. Still troubled, still not as wealthy as it’s capable of being, but free. One day I’ll find what I want to do… it will make me wealthy AND enhance the world and people around me. On that day, even the elites will be jealous. I will have everything that have, and true happiness and friends to boot. ;-)

  67. Did you watch the Sassen video? They seem to be concerned with pockets of resistance. I have no background in strategy of any kind, but if we are dealing with the elitist sociopaths that regard others as inferior, it is likely worth our while to resist. The only way to do this is a guerrilla war. To this very day there are german aristocrats who describe what *they* do as “giving birth,” while others are “wholpen,” whelped. (Anecdotal, but from a credible source)

    I agree that this is a huge problem, and it involves not just the big corporates, but also the other industries that support it — academia, the legal world, the media. Step one might simply be to describe what’s happening in a convincing way, but in a way that avoids the spin and ridicule of the Glen Becks, Jon Stewarts, and anyone whose knee jerks and brain shuts down when they begin to hear about grand conspiracies. Step two is to let that message spread exponentially.

    Presented properly, it could get around the globe in days. Effective marketing of the argument is key: respected, credible academics should spread the message and carry the effort forward. Typical high profile economists and sociologists, for example, would shy away from such an enterprise because it would cost them their careers? Or can their tenure protect them for the most part?

    A means of communication must be developed or exploited. Perhaps a centralized blog, run by a group vetted in a truly transparent way.

    Millions of people have to be convinced to read and to listen to absolutely everything critically. It’s not enough to just say it; most of us learned in school that we should be doing this, but evidently it didn’t sink in all the way.

    Once the propaganda apparatus is crippled, and trustworthy means of communication are established, their ability to manufacture consensus will have been neutralized fairly well.

    At that point we already need to know how we want to repair things. Power and money snowball and get us to places like where we are today. It’s not enough to play Break Up The Big Banks — the people behind Standard Oil and I.G. Farben simply enjoy more freedom to operate in the dark when they’re not visible monopolies.

    Democracies are easily corrupted, and most everyone still has a distaste for monarchies. We really need to take our eyes off of the conman’s card game and think about the big picture for a while. What sort of government do we want? Need? Recently Noam Chomsky spoke not irreverentially about benevolent dictators. Do we want one of those? Perhaps some sort of variation on the village elders? Whatever direction we go, it’s supremely important to vet future leaders in a truly transparent way. They should, I think, be chosen with an eye for their detachment from worldly concerns. We could perhaps even establish schools to educate future leaders in a way that is generally acceptable, and then have them serve, say for no more than 5-10 years, completely exposed to world. No closed door meetings, no pork, no promised jobs for their kids, etc.

    Krugman doesn’t thing we should bother our little heads about trying to find incorruptible politicians. I think he’s wrong, in a way. Incorruptibles don’t exist, but we can keep corruptible mortals from getting corrupted. And they don’t need to be politicians, perhaps, except between themselves, to come to agreement on policy.

  68. This is really great. I could be wrong, but I believe we’ll want to keep our knives sharpened on this one. It has Dick Armey and Ron Paul written all over it.

  69. P.S. Krugman, as usual, is way ahead of everybody. He wrote this twelve years ago:

    http://www.slate.com/id/9593

  70. From Floyd Norris at NYT. First sentence pretty much says it all.

    http://www.nytimes.com/2010/05/14/business/14norris.html

  71. Sorry although it was one year later I believe I was much more on the dot when in 1999 I wrote the following:

    “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of the OWB (the only bank in the world) or the financial dinosaur that survives at that moment.

    Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

    http://bit.ly/cPhzRF

  72. Another interesting story from the NYT. Nelson Schwartz is the NYT writer. I’m not sure if I agree with the conclusion, but it’s worth pondering. Definitely some added insight here. I would be curious to know if individual investors have access to 500 E-minis. I suppose the answer is yes if your wallet is big enough.

    It still hasn’t been explained why retail investors couldn’t trade on their accounts, and I don’t think computers had a damn thing to do with Charles Schwab and other brokers telling their retail investors to go fly a kite when they wanted to sell/trade.

    http://www.nytimes.com/2010/05/15/business/15trader.html?ref=business

    One more thing, and I’m going to keep screaming this (or typing it) until my face turns purple and everyone has seen it enough times they are nauseated to read it. I DO NOT TRUST FINRA TO BE RESPONSIBLE FOR POLICING TRADES ON THE NEW YORK STOCK EXCHANGE (NYSE) AT ALL. It’s called “self-regulation” folks, and it never works.

    http://www.businessweek.com/news/2010-05-04/finra-to-take-over-surveillance-of-nyse-euronext-u-s-exchanges.html

  73. We have market fundamentalism. Then we have mathematical fundamentalism, aka quantitative trading, an irrational faith in numbers.

  74. curmudgeonlytroll

    I’m with you on a lot of stuff but not on hedge funds.

    Here’s a list of big blowups

    AIG – insurance company, not a hedge fund
    Bear Stearns and Lehman – broker dealers, not a hedge fund
    Madoff – regulated broker-dealer, not a hedge fund (should tell you somethingabout regulation?)
    Washington Mutual and others – S&Ls, not hedge funds
    Citibank – not a hedge fund

    The LTCM founders and investors lost all their money and had to start over from scratch. With the possible exception of Madoff, everyone above walked away exceedingly rich. Furthermore, LTCM posed systemic risk because banks allowed them to lever up in a dumb way, both in size and using financing structures that were unstable.

    The dynamism of the American economy, the formation of Microsofts and Intels and Googles, really does depend on there being big pools of risk capital to fund them and for them to IPO to. If you don’t have them, you become like France, which hasn’t had a new member of the CAC-40 in 40 years.

    Hedge funds are supposed to take risks. Sometimes they blow up, they pose no systemic risk and everyone walks away a little poorer but wiser.

    Guys like John Paulson, Bill Ackman, Jim Chanos saw this coming and gave loud warnings. They serve an important purpose in a free market, and in any fair world, they should be the good guys, not villains (I’m not saying every hedgie does God’s work, there are bad apples too).

    IMHO, the problem is not hedge funds, but poorly regulated fiduciaries attempting to act like hedge funds, while taking risks with other people’s money.

  75. curmudgeonlytroll

    meant to say, with the exception of Madoff, the people who built the firms that blew up walked away exceedingly rich.

  76. 100% with you… there is no future in the safety of the AAAs, much less fake ones… If you can risk your sons and daughters in wars… how can you not risk some of your money going forward? Or has the “land of the brave” been conquered by the wimps in Basel?

  77. Wimps in Basel (lol) … A reading of William Black might suggest the alleged wimps got themselves unwittingly implicated in a dubious practice known as Control Fraud.

  78. That might in some cases even be reassuring. I insist they are not clear on what they are doing. You see
    Financial Regulations are in many ways a National Security Issue.

    If regulators decide to subsidize risk-adverseness by means of assigning the banks lower capital requirements when financing something perceived as less risky, they are in fact sending out the message… “Nation, we have had enough… now let us try to defend what we have… even at the risk of others passing us.”

    Doesn´t anyone understand this in the land that calls itself of the brave?

  79. Unless the land of the brave is run by an oligarchy no?

  80. National security, writes Per.

    When I first came across Max Keiser I found Keiser over the top and I was not sure what to make of his rants against Goldman Sachs. Keiser keeps his message on focus. Goldman Sachs is engaging in “financial terrorism”. At first I found Keiser’s language extreme … Then I got his point. There are TBTF financial institutions that are destabilizing governments, the economies of entire countries, even the global economy. This is what Keiser means by financial terrorism.

  81. Terrorism implies a purpose. Not for a second do I imply there is in this case that purpose. Nor do I believe (or at least hope) that you do. Why do you want to exclude the possibility that, when for instance regulators of the same mindset get together in a little mutual admiration club, not allowing anyone to question them… really dumb and stupid things could happen?

  82. Re: @ curmudgeonltroll____My bookie makes his money hedging his bets, plus the vix$ – just ask Pete Rose?

  83. Norm Cimon:

    “Did they understand that building a machine where there the feedback (from shorting companies, trades, investments, derivatives,…) could cause uncontrollable swings in valuations? ”

    Large valuation swings are an investment bank and day trader’s best friends.

  84. Say what you will about the Romans, a least they knew how to fall on their sword.

  85. THAT REALLY MADE ME MAD – WHATEVER IT WAS

    “The sudden evaporation of meaningful prices for many major exchange-listed stocks in the middle of a trading day is unacceptable, and clearly contrary to the vital policy objective of maintaining fair and orderly financial markets.”

    – SEC Chair Mary Schapiro assures a U.S. Congressional hearing that she’s deeply concerned about last week’s high-speed stock market nosedive – even though she still hasn’t found an explanation for it.

  86. “There are TBTF financial institutions that are destabilizing governments, the economies of entire countries, even the global economy. ”

    This is what I’ve been saying for years. There is a destabilization program taking place. But it goes beyond the financial world. It’s massive and as 3-D mentions above, the media (The Mighty Wurlitzer) plays a very signicant role in this. And many of the same characters that presided over other coups, some silent, and others not so silent, are right here, explaining to us in gory detail just how corrupt everything is.

  87. Big Deficits, Mounting Debt: It’s Time For Hard Choices

    Something must be done, but Western political culture leaves us ill equipped to discuss the situation

    Saturday, May. 15, 2010 – Globe & Mail – excerpts

    “Advanced industrial countries have exceptionally hard choices in front of them, and their political cultures leave them largely ill equipped to discuss them, let alone decide what to do.

    What will be required is spending cuts and/or tax increases, which will meet furious resistance in the tax-adverse United States, and will not be an easy sell in European countries where sales, payroll and (in some countries) income taxes are already higher than in North America. The political difficulties of tax increases should not obscure that some can be justified, especially on consumption and the incomes of those who are better off.

    Serious spending cuts mean targeting big social programs (health, pensions, education…..”

    http://tinyurl.com/26fz9xm

    Schwarzenegger Budget Would Eliminate Welfare

    Friday, May. 14, 2010 – Sacramento Bee

    http://www.sacbee.com/2010/05/14/2751461/schwarzenegger-budget-would-eliminate.html

  88. “Whatever the answer, this much is true: These secretive firms are likely to grab the spotlight for a while now. And their trading might get even more frenetic.

    After the May 6 freefall, all manner of trading rules are up for debate. But it’s worth noting that until recently regulators were considering cutting the minimum spread again, possibly to half a penny.

    “People will be needing even better computers….”

    http://tinyurl.com/purple-kool-aide

  89. The challenge is that “quant” is much too broad a stroke. I am deeply involved in the business & have been for a long time. Structural market reform would go a long way towards eliminating the incentives for low-latency event driven auto-trading. There are plenty of “quants” who do not play those games, but instead are trying to play fair, by identifying undervalued and overvalued securities.

    What kind of reform? I believe that when we understand May 6, we will see that it is market fragmentation; NYSE “worked fine” but BATS & others did not. Call auction markets work great, except for providing immediacy. How important is immediacy, measured in seconds to minutes? If it’s truly important to a player, then something is wrong with the market itself.

  90. Yes, but what have the Romans ever done for us?

  91. Aren’t people sick of credit yet? If not, they might be in a few more years.

    We need to get rid of all the mechanisms that allow some to prey and profit on the weaknesses, fear and greed of others.

  92. ‘Terrorism implies a purpose. Not for a second do I imply there is in this case that purpose. Nor do I believe (or at least hope) that you do.’

    Denial and repression, that’s what its called Per and I do suffer from it also. Why? Simply because I don’t want it to be true! (I don’t want it to be true that Peter Drucker called Stalin, Mao and Hitler the 3 leaders of the 20th century).

    I have many gaps in my information, it is hard keeping up with Simon and James and commenters such as yourself on this blog in relation to financial and economic matters. I am absolutely confident however, proclaiming that you can only understand the Baselinescenario if you have read some of the articles and books of Noam Chomsky, e.g. Hegemony or Survival: America’s Quest for Global Dominance.

    http://chomsky.info/articles.htm

    We are living a nightmare (my view) and it sucks big time (also my view). Land of the brave, land of the free, the American Dream? Wake up! …eh, United We Stand, Divided We Fall…

  93. “Reading Chomsky today is sobering and instructive . . . He is a global phenomenon . . . perhaps the most widely read voice on foreign policy on the planet.” -“The New York Times Book Review”

    “An immediate national bestseller, “Hegemony or Survival” demonstrates how, for more than half a century the United States has been pursuing a grand imperial strategy with the aim of staking out the globe. Our leaders have shown themselves willing-as in the Cuban missile crisis-to follow the dream of dominance no matter how high the risks. World-renowned intellectual Noam Chomsky investigates how we came to this perilous moment and why our rulers are willing to jeopardize the future of our species.
    With the striking logic that is his trademark, Chomsky tracks the U.S. government’s aggressive pursuit of “full spectrum dominance” and vividly lays out how the most recent manifestations of the politics of global control-from unilateralism to the dismantling of international agreements to state terrorism-cohere in a drive for hegemony that ultimately threatens our existence. Lucidly written, thoroughly documented, and featuring a new afterword by the author, “Hegemony or Survival “is a definitive statement from one of today’s most influential thinkers.”

    http://www.americanempireproject.com/bookpage.asp?ISBN=0805076883

  94. According to Noam Chomsky, all U.S. leaders are schizophrenic.

    http://chomsky.info/onchomsky/20091204.htm

  95. Market Fragmentation May Get Review After Stock Drop

    May 7 (Bloomberg) — “Federal regulators reviewing yesterday’s stock plunge will try to determine if the fivefold increase in the number of American equity exchanges has left them unable to manage the biggest surges in volume.

    The selloff erased $700 billion from U.S. markets in eight minutes after actions by the New York Stock Exchange to slow trading increased volatility on other platforms, said Joe Ratterman, chief executive officer of the five-year-old alternative exchange Bats Global Markets Inc. NYSE Euronext Chief Operating Officer Larry Leibowitz said the Big Board prevented a bigger decline.

    “There are times when differences in behavior are not good for the market or the investors,” said Ratterman, who recommends trading be halted across networks when investors are panicking. “This Thursday may have been one of those times.”

    “If you look at the charts you can see fairly clearly where the trades came in,” he said from New York. “It’s that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split-instant because there really was no liquidity in electronic markets.”

    More than 29.4 billion shares changed hands in U.S. markets yesterday, the most since October 2008. In addition to traditional exchanges such as the NYSE, rivals Bats in Kansas City and Jersey City, New Jersey-based Direct Edge Holdings LLC handled millions of trades. About 2.6 billion shares traded on the NYSE, the lowest level relative to overall volume in three years, data compiled by Bloomberg show.

    Rapid-fire orders trigger what the NYSE calls liquidity replenishment points, or LRPs, shifting trading into auctions overseen by market makers. While the system is designed to restore efficient trading on the Big Board, selling is so fast during times of panic that orders routed past the exchange may swamp other venues and exhaust buyers, said James Angel, a finance professor at Georgetown University in

    That’s when prices may plummet as orders execute against so-called stub quotes. Brokers can set those as low as a penny a share because they’re never expected to be used.

    “In a situation where only one market stops trading, not only does it not help, it likely exacerbates the situation,” said William O’Brien, CEO of Direct Edge, which was founded in 2005. “Yesterday is a day that no exchange should be proud of.”
    Increasing automation and competition have reduced the NYSE and Nasdaq’s volume in securities they list from as much as 80 percent in the last decade. Now, less than 30 percent of trading in their companies takes place on their networks as orders are dispersed to as many as 50 competing venues, almost all of them fully electronic. Twenty years ago, fewer than 10 exchanges competed for all U.S. equity trades.” – excerpts

    http://tinyurl.com/39bebt3

  96. James Gornick

    Far-fetched, but sometimes we miss the little things that weigh so much…

    I must also add a quick note. John, thank you for your comments, but many within this community have been ahead of the curve long before I had written thoughts on these matters. You would of found that many of my posts and efforts had pointed many around the world-wide web to this blogging community for there insight and take on matters concerning our welfare and the state of our economy. I think their are a lot of sharp folks here, but don’t let it go to their heads because we don’t know what that can cause for a crises…

    I think where I can take a little smidgen of claim in pushing anything within this community or a lot of publishing sites is the COASE and Oppression theorem and the importance for all learned minds that can make a difference get a handle on it and move it to the forefront and main stream of thinking.

    NOW WITH THAT SAID, I WAS DOING A LITTLE MORE THINKING AND WANT TO SEE WHAT OTHERS THINK ABOUT THIS NEW TWIST of THE VOLKER EFFECT…

    It depends on whether, when currencies weaken, people switch to gold; and on whether when currencies strengthen, they become more confident about the value of currencies, and switch from gold. Even though gold no longer has any role in the monetary system of any major country, such behavior could still be sensible.

    WELL THE ANSWER TO THIS IS WRONG…

    GOLD IS VERY MUCH IN THE PICTURE as United States since Richard Nixon, along with many within the Debtors nations have had to retrieve this precious commodity to buoy their reserves to give shoring to their sovereign debts and ratings. It happens to be, coincidental that an old member still be alive from the Tri-lateral commission of our friend Mr. Paul Volker.

    Mr. Volker was instrumental during the Nixon Presidency to put the final fate to the gold standard of our country and the safety.

    Was this the end of the America, as we KNEW?

    Is this the sweeping changes towards, Good or BAD and Coase Oppressive form of economics…?

    Gold is now a full hedge against the U.S Dollar and against the backdrop of a world emerging with the need to consume at ever a more fever of a pace of consumption than-ever before. It was these years of economics of changes and the handing of the baton over as the reins given Alan Greenspan and then his counterpart predecessor of Big Ben Bernanke.

    Now between all three financial held titans of Volker, Greenspan, and currently Ben Bernanke of 39 years of opened printing presses for the world to amass untold credit to debt levels. We are still trying to figure out the liar-debtors of nation’s world poker table of next to fail nation.

    This is though the interesting catch to the title or theme as I began. The United States has actually and will have, by the next reporting, if not too far off on this prediction. Be almost up to a reserve not less than 84% of that of the total percentage of Reserves as followed by the World Gold Council.

    What does this also mean to all that are shorting the U.S. Stock market and the S&P.? It may mean that they may be in for a surprise that Ben Bernanke along with Timothy Geithner may have just of pulled off the biggest turn around play in bench mark hedge plays ever seen as you can see the dollar raising against all other currencies along with the Gold.

    Talk about a stockpiling of gold bullion under the noses of the whole world while Volker is still alive and being the one that took us off the pesky stuff in the first place.

    What a great story to catch all the baby boomers that are shorting the market and think they know it all. What a great way to show that the U.S. is actually going to be able to shelve a safety for a moment, if only for a short moment. A moment while the rest of an world is reeling in debt against the rest of the world that does not have this gold or precious metal as collateral to give support to their currency. A currency of countries holding masks of liars’ in need of true support in a world of debtors of unknown sovereign masks.

    Gold also will retain even more value as China, and all other countries will have to come out to so formal standard to return to normalizations of formal trusts of debt trade to measurable and sustainable debt to credit trust banking relationships moving forward in this new world order that now has been created.

    Call this week and the following weeks as may be market rallies in the Small caps along with the Semi(s). I know for one, once many figure this all out. It will be a mad scramble to start to cover and get their houses n order. U.S. as their act together and they are on tract. Make no mistake about that statement. History has three levels of wisdom in-place even along with this darn Tri-Lateral Commission that Volker has ties to from reading.

    What this all means to world economics is a continued slide for OIL to go down, as GDP needs to be reconciled with a more realistic global sustainable growth metric. Oil should see much lower prices than where it is resting as it currently trades.

    Who are the world’s biggest debtor nations? The rankings may surprise you!”

    20. United States External debt (as % of GDP): 95.9%

    19. Australia External debt (as % of GDP): 108.8%

    18. Hungary External debt (as % of GDP): 124.2%

    17. Italy External debt (as % of GDP): 154.6%

    16. Greece External debt (as % of GDP): 175.3%

    15. Spain External debt (as % of GDP): 184.7%

    14. Germany External debt (as % of GDP): 189.4%

    13. Finland External debt (as % of GDP): 205.7%

    12. Norway External debt (as % of GDP): 208.9%

    11. Hong Kong External debt (as % of GDP): 218.8%

    10. Portugal External debt (as % of GDP): 231.5%

    9. France External debt (as % of GDP): 247.2%

    8. Austria External debt (as % of GDP): 268.9%

    7. Sweden External debt (as % of GDP): 275%

    6. Denmark External debt (as % of GDP): 315.2%

    5. Belgium External debt (as % of GDP): 345.6%

    4. Switzerland External debt (as % of GDP): 390%

    3. Netherlands External debt (as % of GDP): 395.6%

    2. United Kingdom External debt (as % of GDP): 427.6%

    1. Ireland External debt (as % of GDP): 1,352% Source.

    Ireland’s $2.39 trillion debt is a whopping 1,352% of their Gross Domestic Product, which is only $177.3 billion. How can they possibly keep that going? That is like one of those high interest, and penalty, credit cards that the consumer can NEVER actually pay back. It’s going to be a rough road ahead for all the countries on this list.
    I am not an Analyst but I suggest you talk with yours or do your due diligence, as these are no longer far-fetched concepts anymore.

    Best of luck in the markets and keep your eyes on “I am”; as number one in your heart and soul, you might find that “”I am” another name for “God” will give you greater harmony within all the disorder around you.

    Peace I am out-of here..

    James G.

  97. The HMMWV was not sold off. That remained part of AM General. While the civilian Hummers were built in the same facility they were based on Tahoe’s and Trailblazers.

    The Chinese however have been making a licensed copy of the HMMWV for years. But remember that design is almost 30 years old now.