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Why Wall Street Isn’t Useful for the Real Economy


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#1 AnBr

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Posted 25 December 2018 - 09:14 AM

http://evonomics.com...ful-lynn-stout/
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#2 George Rowell

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Posted 25 December 2018 - 10:55 AM

View PostAnBr, on 25 December 2018 - 09:14 AM, said:

Don't know about Wall Street but speaking about local bank branches the last time they were prepared to take risks based on a manager-customer relationship was in the 80's. Since then self serving is the appropriate word. No loans without security.
A doctor knows a little about a lot. A specialist knows a lot about a little. In time the doctor knows less and less about more and more and the specialist knows more and more about less and less until ultimately the doctor knows nothing about everything and the specialist knows everything about nothing.

#3 LFC

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Posted 25 December 2018 - 11:10 AM

I've grasped the concept of the primary and secondary markets for ages but never really had the figures. And the statement that "165 percent of shares are bought and sold every day" is just staggering. I had no idea it was that far off the rails.
" 'Individual conscience' means that women only get contraceptives if their employers, their physicians, their pharmacists, their husbands and/or fathers, pastors, and possibly their mayors, Governors, State Secretaries of Health, Congressmen, Senators, and President all agree that in that particular case they're justifiable." --D.C. Sessions

"That's the problem with being implacable foes - no one has any incentive to treat you as anything more than an obstacle to be overcome."

"The 'Road to Serfdom' is really all right turns." --Progressive Whisperer

""The GOP ... where every accusation is also a confession." --Progressive Whisperer

#4 JackD

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Posted 25 December 2018 - 12:44 PM

It's a casino.

#5 pnwguy

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Posted 25 December 2018 - 03:21 PM

View PostJackD, on 25 December 2018 - 12:44 PM, said:

It's a casino.
My ex worked for Goldman 20 some years ago in software. She would say it’s all about The Churn. Reps constantly pushed trades while the high ups focused on M&A. Marketing a better return through one deal or another was their entire business model.
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#6 Traveler

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Posted 25 December 2018 - 09:35 PM

Quote

This figure reflects the imbalance between the primary issuing market (which is relatively small) and the secondary trading market (which is enormous). In 2010, corporations issued only $131 billion in new stock (Table 1202). That same year, the World Bank reports, more than $15 trillion in stocks were traded in the U.S. secondary marketmore than the nation’s GDP. Yet secondary market trading is fundamentally a zero sum game—if I make money by buying low and selling high, it’s money you lost by buying high and selling low.

Is this true?
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#7 LFC

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Posted 26 December 2018 - 01:17 PM

View PostTraveler, on 25 December 2018 - 09:35 PM, said:

Is this true?

I don't think quite. It "creates value" by inflating prices. Stock value has long since been untethered from dividends or even reasonable growth assumptions. The greater fool theory is a (the?) major market mover.

FYI if you ever want to see how magic thinking has permeated market believers all you have to do is watch the famous Art Laffer / Peter Schiff TV debate, the one where Schiff got Laffer to enter into a $1 bet on the future of the markets. Watch Laffer explaining how the wildly inflated real estate represented real, permanent value. Schiff was gobsmacked and tore him a new one.

BTW Schiff won the bet. Laffer never paid. I'll try to find the video later.


EDIT: Here's Schiff owning multiple people including Laffer and Ben Stein. It's a complete repudiation of all the right-wing "economists."




EDIT 2: I noticed at 7:00 they were recommending Goldman at $175. It recently closed at $160.
" 'Individual conscience' means that women only get contraceptives if their employers, their physicians, their pharmacists, their husbands and/or fathers, pastors, and possibly their mayors, Governors, State Secretaries of Health, Congressmen, Senators, and President all agree that in that particular case they're justifiable." --D.C. Sessions

"That's the problem with being implacable foes - no one has any incentive to treat you as anything more than an obstacle to be overcome."

"The 'Road to Serfdom' is really all right turns." --Progressive Whisperer

""The GOP ... where every accusation is also a confession." --Progressive Whisperer

#8 Bact PhD

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Posted 26 December 2018 - 02:24 PM

And one if the panelists recommended Washington Mutual...ouch!
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#9 LFC

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Posted 26 December 2018 - 02:42 PM

View PostBact PhD, on 26 December 2018 - 02:24 PM, said:

And one if the panelists recommended Washington Mutual...ouch!

Ben Stein around 6:26 (bold is his emphasis): "I predict Merrill Lynch, which is an astonishgly well run company, ..." Unfortunately I don't suspect if you followed up with these people you'd find that any of them learned any humility. I can't believe any of them learned more about economics.
" 'Individual conscience' means that women only get contraceptives if their employers, their physicians, their pharmacists, their husbands and/or fathers, pastors, and possibly their mayors, Governors, State Secretaries of Health, Congressmen, Senators, and President all agree that in that particular case they're justifiable." --D.C. Sessions

"That's the problem with being implacable foes - no one has any incentive to treat you as anything more than an obstacle to be overcome."

"The 'Road to Serfdom' is really all right turns." --Progressive Whisperer

""The GOP ... where every accusation is also a confession." --Progressive Whisperer

#10 D. C. Sessions

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Posted 26 December 2018 - 06:16 PM

You can see why they're so totally terrified of a parts-per-million financial transaction tax.
The way a lot of catastrophes happen is that X doesn't occur because there are safeguards in place, therefore people assume X isn't a worry and they remove the safeguards. Then X happens.
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#11 J-CA

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Posted 26 December 2018 - 09:19 PM

View PostLFC, on 26 December 2018 - 01:17 PM, said:

I don't think quite. It "creates value" by inflating prices. Stock value has long since been untethered from dividends or even reasonable growth assumptions. The greater fool theory is a (the?) major market mover.

FYI if you ever want to see how magic thinking has permeated market believers all you have to do is watch the famous Art Laffer / Peter Schiff TV debate, the one where Schiff got Laffer to enter into a $1 bet on the future of the markets. Watch Laffer explaining how the wildly inflated real estate represented real, permanent value. Schiff was gobsmacked and tore him a new one.

BTW Schiff won the bet. Laffer never paid. I'll try to find the video later.


EDIT: Here's Schiff owning multiple people including Laffer and Ben Stein. It's a complete repudiation of all the right-wing "economists."
...
Schiff is a moron, feel free to laugh at Laffer and Stein but the idea that Schiff "tore X a new one" based on substance is, laughable.
Schiff has predicted that the credit card industry would collapse in 2008, he predicted $5000 gold, and thinks that $2/hour is a reasonable rate to pay someone provided they are mentally handicapped, his understanding of trade imbalances is exactly on par with what we make fun of Trump for, and he has spent the last decade predicting some combination of hyperinflation and a USD currency crisis.
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#12 J-CA

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Posted 26 December 2018 - 10:10 PM

View PostAnBr, on 25 December 2018 - 09:14 AM, said:

Another in a long string of absolute garbage Evonomics articles!

Quote

In 2009, for example, less than 10 percent of the securities industry’s profits came from underwriting new stocks and bonds; the majority came instead from trading commissions and trading profits.
What is the argument here? Does your local bank make more money lending to established businesses or to new ones? Does anyone think that the local credit union should be shamed for financing existing businesses?

Quote

In 2010, corporations issued only $131 billion in new stock (Table 1202). That same year, the World Bank reports, more than $15 trillion in stocks were traded in the U.S. secondary marketmore than the nation’s GDP...
This article was written in 2016, why are we citing 2009 and 2010 numbers here? Are we cherry picking, perhaps?
And let's be serious here, we are comparing GDP to gross trading volume? Anyone with a modicum of understanding of the economy understands that when a trader buys stock A at $10 and then sells it at $12 and then uses that $12 to buy 3 shares of stock B how do we measure that activity relative to GDP? The world bank number cited is $22 of activity - does any reasonable person think that adding up the number of trades per day in dollar values vs. GDP reflects in any way on the value of the liquidity provided?
And then the assertion that secondary market transactions are all "zero-sum" - this is correct in terms of th buyers and the sellers of the individual stocks, but without the buyer and the sellers are we to pretend that liquidity suddenly has no value?

Quote

...long-term investors don’t really need much liquidity, and they certainly don’t need a market where 165 percent of shares are bought and sold every year. They could get by with much less trading—and in fact, they did get by, quite happily. In 1976, when the transactions costs associated with buying and selling securities were much higher, fewer than 20 percent of equity shares changed hands every year. Yet no one was complaining in 1976 about any supposed lack of liquidity. Today we have nearly 10 times more trading, without any apparent benefit for anyone (other than Wall Street bankers and traders) from all that “liquidity.”
This seems like the wrong question to ask, doesn't it? In a world where equities changed hands that much less, would we all be better off? A half a trillion dollar payroll for wall street seems like a lot, it seems like a lot to me! But the US economy is 20 trillion, and stock trading is a near 100% service business, 4% is a lot, I think it should be less, but it is not like a crazily large amount. And I think it is telling that the author likes multiples of GDP for trading value and then prefers absolute figures when referencing Wall Street salaries.

Quote

So, what does Wall Street do that benefits society? Doctors and nurses make patients healthier.Firefighters and EMTs save lives. Telecommunications companies and smart phone manufacturers permit people to communicate with each other at a distance. Automobile executives and airline pilots help people close that distance. Teachers and professors help students learn. Wall Street bankers help—mostly just themselves.
Funny how all of the industries of the professions cited above also make up larger amounts of GDP than the Wall Street traders being discussed..
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#13 George Rowell

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Posted 26 December 2018 - 10:44 PM

View PostD. C. Sessions, on 26 December 2018 - 06:16 PM, said:

You can see why they're so totally terrified of a parts-per-million financial transaction tax.
I would like to see that applied to high frequency traders.
A doctor knows a little about a lot. A specialist knows a lot about a little. In time the doctor knows less and less about more and more and the specialist knows more and more about less and less until ultimately the doctor knows nothing about everything and the specialist knows everything about nothing.

#14 D. C. Sessions

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Posted 27 December 2018 - 09:06 AM

View PostGeorge Rowell, on 26 December 2018 - 10:44 PM, said:

I would like to see that applied to high frequency traders.

Wouldn't we all?
The way a lot of catastrophes happen is that X doesn't occur because there are safeguards in place, therefore people assume X isn't a worry and they remove the safeguards. Then X happens.
— Nate Silver
"Robots aren't the problem. Capitalism is." -- Last words of Stephen Hawking.
These days, "libertarian" is just a euphemism for a Nazi who's afraid to commit.
"If you're not outraged, you're not paying attention." -- Heather Heyer
"I'd rather have my child, but by golly, if I gotta give her up, we're gonna make it count." -- Her mother
"Your purpose, then, plainly stated, is that you will destroy the Government, unless you be allowed to construe and enforce the Constitution as you please, on all points in dispute between you and us. You will rule or ruin in all events." -- some RINO

#15 Sinan

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Posted 27 December 2018 - 10:49 AM

I think the question one must ask is whether the stock market is for investing or gambling. It is hard to be both. If it is for investing, legislation and tax policy can make it unattractive to gamble. If gambling is more important then investing, then keep the status quo. The average person invests, they are told over and over again to dollar cost average for the long term. Yet the market itself exists today so that high speed trading goes on unabated making billions for the market makers. What good do these trades do for the average investor? Nothing. The average investor is the mark, all of us and our 401k keep the money coming in so that these trades can produce the profits fueling Wall Street. Like someone else said, its a casino.
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#16 LFC

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Posted 28 December 2018 - 01:15 PM

View PostJ-CA, on 26 December 2018 - 09:19 PM, said:

Schiff is a moron, feel free to laugh at Laffer and Stein but the idea that Schiff "tore X a new one" based on substance is, laughable.

Are you saying Schiff was wrong about "debt financed consumption" in the pre-2008 economy? I'd be very interested to read that explanation.

View PostJ-CA, on 26 December 2018 - 09:19 PM, said:

Schiff has predicted that the credit card industry would collapse in 2008,

Was that prediction before or after the U.S. government's largest bailout of the financial industry in history? Many of the people who predicted global cooling did soon the basis of the facts at the time which was that the world was spewing enormous amounts of particulates. That was cleaned up, taking away the basis for the cooling prediction. Trashing a prediction that failed to materialize after a massive effort to prevent that very same prediction from coming true seems to me a bit ... unfair.


I can't speak to his other predictions since I don't know the details but when it comes to what he said pre Great Recession he certainly seemed to display a lot more knowledge than the entire right-wing economic corps (OK, low bar there but still...) and a lot of mainstream economists. And of course my original point had nothing to do with praising Schiff and everything about the "magical thinking" of the time that, in the example video, was "brilliantly" displayed by Art Laffer.
" 'Individual conscience' means that women only get contraceptives if their employers, their physicians, their pharmacists, their husbands and/or fathers, pastors, and possibly their mayors, Governors, State Secretaries of Health, Congressmen, Senators, and President all agree that in that particular case they're justifiable." --D.C. Sessions

"That's the problem with being implacable foes - no one has any incentive to treat you as anything more than an obstacle to be overcome."

"The 'Road to Serfdom' is really all right turns." --Progressive Whisperer

""The GOP ... where every accusation is also a confession." --Progressive Whisperer

#17 pnwguy

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Posted 28 December 2018 - 04:29 PM

View PostLFC, on 28 December 2018 - 01:15 PM, said:

Trashing a prediction that failed to materialize after a massive effort to prevent that very same prediction from coming true seems to me a bit ... unfair.
That's my take on the Y2K problems at the end of 1999. For once, my industry got it's collective sh*t together, pinpointed the time bombs from old logic, and fixed or replaced critical systems. If the sky-is-falling hype hadn't been there to drive the huge effort, it wouldn't have had the pressure that was needed. The issues with climate change are like that as well, not to mention various pandemics averted. The problems come from shallow thinkers that can't grasp the preventative logic.
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#18 Traveler

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Posted 28 December 2018 - 05:40 PM

Well said!
"Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing had happened."-- Winston Churchill
"Anyone who has the power to make you believe absurdities has the power to make you commit injustices" Voltaire

#19 LFC

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Posted 28 December 2018 - 07:50 PM

View Postpnwguy, on 28 December 2018 - 04:29 PM, said:

That's my take on the Y2K problems at the end of 1999. For once, my industry got it's collective sh*t together, pinpointed the time bombs from old logic, and fixed or replaced critical systems. If the sky-is-falling hype hadn't been there to drive the huge effort, it wouldn't have had the pressure that was needed.

Oooooooh, you just hit a button for me. I've torn into multiple asshats who said that Y2K was bullshit. I was there. I trolled through tens of thousands of lines of code. I fixed problems. I worked 1/1/2000 and got to go home around 4:00 AM. I carried a special pager and phone for 2 months before 1/1/2000 and 2 months after. Don't think that Y2K was all that? Then you're ignorant. Maybe stupid too but DEFINITELY completely and utterly ignant.
" 'Individual conscience' means that women only get contraceptives if their employers, their physicians, their pharmacists, their husbands and/or fathers, pastors, and possibly their mayors, Governors, State Secretaries of Health, Congressmen, Senators, and President all agree that in that particular case they're justifiable." --D.C. Sessions

"That's the problem with being implacable foes - no one has any incentive to treat you as anything more than an obstacle to be overcome."

"The 'Road to Serfdom' is really all right turns." --Progressive Whisperer

""The GOP ... where every accusation is also a confession." --Progressive Whisperer

#20 J-CA

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Posted 01 January 2019 - 04:32 PM

View PostLFC, on 28 December 2018 - 01:15 PM, said:

Are you saying Schiff was wrong about "debt financed consumption" in the pre-2008 economy? I'd be very interested to read that explanation.
Yes, he is essentially wrong about that. His idea, for example, that personal indebtedness is a direct cause of the large federal debt is completely nonsensical.
His correct argument was that fundamentally there was a lowering of standards in lending and a bubble in the housing market and that bubble burst, but as one person once said, he has successfully called 17 or the last 2 recessions.
Better to listen to any one of the many other qualified people who made better and more specific arguments about what was to come, most of whom were wise enough to not stick a specific date on their predictions. (Dean Baker or Roubini both come to mind.)

View PostLFC, on 28 December 2018 - 01:15 PM, said:

Was that prediction before or after the U.S. government's largest bailout of the financial industry in history? Many of the people who predicted global cooling did soon the basis of the facts at the time which was that the world was spewing enormous amounts of particulates. That was cleaned up, taking away the basis for the cooling prediction. Trashing a prediction that failed to materialize after a massive effort to prevent that very same prediction from coming true seems to me a bit ... unfair.


I can't speak to his other predictions since I don't know the details but when it comes to what he said pre Great Recession he certainly seemed to display a lot more knowledge than the entire right-wing economic corps (OK, low bar there but still...) and a lot of mainstream economists. And of course my original point had nothing to do with praising Schiff and everything about the "magical thinking" of the time that, in the example video, was "brilliantly" displayed by Art Laffer.
Credit card debt was not addressed by TARP and was, rightly, never regarded as a system risk in 2008 and onwards. There was no scramble to "fix" credit cards because they were never really a problem. Credit card leverage is an issue of lax standards for certain but it is not something that is impacted by an asset bubble because it is unsecured credit. This is not like Y2K where there were warning signs and the problem got fixed, it just isn't. The revolving credit card market is fundamentally different, and really small.
There is that, but then there are also all the other things I listed.

Schiff's record speaks for itself, he is certainly more credible than the least credible talking heads on television, but on the spectrum.. I mean, if you had taken his advice and put your money on gold in 2009 and waited for the $5000 ounce you'd still be waiting and you'd have made more money if you had locked in on a 4% bond for the last decade. And frankly, the hyperinflation predictions are just completely disqualifying and have the whiff of a grift on them given the sort of funds he runs (and the offshore(!!) bank he runs).

I think the best way to put this into perspective is that if you think Paul Krugman knows what he is talking about then you are kind of forced to concede that Schiff doesn't.
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