Archimedes famously said, “Give me a lever and a place to stand and I will move the world.” People have been trying to find a platform or a lever so as to move the current regime of institutionalized cannibalism off top-dead-center and have all met failure. Comes now pop-caricaturist Michael Lewis lifting a flap of dead skin covering the Wall Street underworld; the result has been a bomb going off:
Nothing is real in America unless it’s as seen on TV. For some inexplicable reason, Lewis has been stumbling into television studios where cameras are running.
Lewis, a native of ‘Big Easy’ New Orleans, grew up around money and ‘colorful’ (corrupt) characters in equal parts. After turns at Princeton and London School of Economics, Lewis began writing about finance beginning in the late 1980s. His first, the semi-autobiographical ‘Liar’s Poker’ archly regarded bond salesmen at Wall Street investment firm Salomon Brothers before it was absorbed into Travelers Insurance/Citigroup complex. Lewis’ genial approach is to sketch finance’s roach-like wise-guys and smaller-than-life stooges as somewhat comical cartoon characters, inflating them up until they float like balloons in the Macy’s Thanksgiving Day Parade. The outlines become a little stretched but it doesn’t matter; the characters exist solely to populate Lewis’ picaresque tales, like the pirates that inhabit ‘Treasure Island’.
Lewis is true to his blue-blood background, he studiously avoids rocking the stockbrokers’ yachts. Lewis goes out of his way to genuflect to the pieties of free-marketry; ‘Flash Boys’ is no ‘Communist Manifesto’. Lewis discovers an over-eager, ‘Dudley Do Right’ investment broker by the name of Brad Katsuyama working for a giant bank in Canada and follows him as he tried to uncover the reasons why his stock market orders are never filled completely. To the surprise of absolutely nobody, it turns out that high-frequency traders are reading Katsuyama’s orders at the exchanges and hoovering the needed stock prior to selling the same stock back to him at higher prices. The insiders — the flash boys — are stealing, trading on insider information, targeting the system and its (contrived) latencies; “The market is rigged!” cries Katsuyama while Lewis chortles in the background.
Eschewing prosecutions, Katsuyama finds hedge fund backers and opens a competitive exchange that eliminates the speed advantage of the high-frequency traders. Says Lewis,
“This is what I think … that the regulatory process always seems to generate something that ends up being gamed by smart people. What I love about this moment right now in market history, is that you have this exchange that’s found a market solution to the problem, and if people just get out of the way … “
This idea is as idiotic as a ‘free market solution’ to murder or armed robbery. Since the Great Inflation began in 1980, the criminals have had the run of US and Western markets which have become as honest as Meyer Lanksy’s Havana casinos. The retail investors have long-ago fled or have been extinguished; the giant ETFs, the mutual- and pension funds who are in aggregate the stewards of America’s private retirement funds have been reduced to little more than market fools and dupes. Interest rates are repressed by way of the Giant Banks’ collusion; stocks and bonds elevate without any basis in objective reality, assets are boosted by the banks with one hand, investors in the same assets are robbed by the same banks with the other hand …
The looting isn’t limited to siphoning a few thousand off the top in protection money to wise-guys. Under the country’s nose is the implementation of a multi-billion dollar matrix of fiber optic cables, co-location of trading company servers, payment of millions for the right to settle and front run third-party trades; all designed from the ground up to cheat the citizens.
Central banks front-running the banks’ manipulation of interest rates => the markets are rigged. The costs are in the trillions, where is the outrage?
‘Flash Boys’ may turn out to be far more subversive than Lewis could have imagined, or perhaps as subversive as he feared. Pop culture works this way: if it wasn’t for television, Americans would not realize the depth of its teenage vampire problem. Apocalypse doesn’t trouble consumers, instead, it is the movie about Apocalypse that causes the uproar. Market rigging has existed since the beginning of markets, it did not exist in the American public mind until a few weeks ago with its emergence into the media zeitgeist. While Peak Oil blows up markets and entire economies in the real world, the fatal prick is administered on CNBC: “You are part of the problem!” cries Katsuyama, because it matters now.
Interestingly enough, the economists are silent, more likely for the best- self-interested reasons, they hope the storm will blow over. Market rigging is not a component of Wall Street’s ‘Efficient Market Hypothesis’ propaganda, the 21st century’s version of ‘Invisible Hand’. Offered by Eugene Fama in 1970, hypothesis insists investors are rational self-maximizing agents acting on best-available information. Markets regulate themselves, information about securities and businesses is reflected in prices, everything important is ‘priced in’.
The Efficient Market Hypothesis is joined at the hip to equilibrium macro-economics and the current run of DSGE models as well as other monetary idioms: Austrian, MMT, post- neo-Keynesian, Dynamic Stochastic General Equilibrium models of central banks, etc. Monetary theory insists that economies are essentially exchanges whose components are rational, self-maximising agents who respond to price signals regarding technology/means of production and institutional ‘friction’. As with efficient market counterparts, economies at their best need only to police themselves with minimal interference from regulators; the efficiency of the process is reflected in agents’ price decisions; the role of institutions is to offer support in the background and otherwise, stay out.
Figure 1: What would Capone do? According to Fama, problems emerging out of efficient markets are caused either by incomplete information or a broken model. Markets, efficient and otherwise, don’t always tell the participants what they want to hear. The petroleum market suggests that providers and customers of West Texas Intermediate will both be underwater by the Spring of 2015. It is hard to see how market rigging at this late stage can change this, at some point the market itself breaks down under the weight of its own internal contradictions.
Fuel prices have been manipulated since the middle of the nineteenth century and John D. Rockefeller’s Standard Oil Trust. Petroleum fuel became a loss-leader for the wide range of fuel consuming industries including the manufacture of automobiles, roads, refineries, distribution, tract-house development, insurance and all the nonsense that goes along with these things. Manipulation reduced the price of fuel to lease- extraction and processing costs plus small per-unit profits. Had fuel been properly priced at its human labor equivalent any use of fuel would have required real value to be added to the use process in order to meet the very high cost: had we done so we would not be facing fuel shortages right now, most of the world’s oil would remain in the ground right now awaiting remunerative use.
How much will fuel manipulation in the late 19th century cost the country in the 21st? Not just trillions, it will cost everything.