Monday, November 9, 2009

The big chimera

Moral: Wherein we need a series that can be done as an independent, and honest, assessment of the practices, based upon the usual market ideology, that we can observe without any inside information and that we can analyze because they use modern, computationally-supported frameworks that have had applicability in all the modern advances including the marvels behind ubiquitous computing and other major engineering systems.


As mentioned before, recent review of the changes that have occurred these past couple of decades shows mind-boggling improvements, yet many of the supposed advances that have been implemented, albeit there were probably many more hair-brained notions never put into place, were suspect, as recent un-foldings of the whole financial scenario have shown. We're in a situation where no one knows what is good and what might be bad in all these schemes just as we do not know how many, and of what possible pain, are the toxic assets that have been shoved under the table. Things froze because those who do the playing know just how suspect are their practices; we, the taxpayers, had to bail them out in order for the game of musical chairs to begin again.

That the FED threw oodles of money at the problem to loosen liquidity has only made the problem worse, and it is more than just an issue of moral hazards.

Of course, some financial schemes stunk to high heaven (Madoff gave us new definitions). Yet, there is no axiomatic basis from which to found a proper view on either side, even though finance did lure many trained engineers and scientists into the game that has been coined as casino capitalism. Methods, of a quasi-empirical nature, can be established and, in fact, are essential to the health and safety of our economy.

That we have time to explore these options must be emphasized, as no train of any substance has left the station. We need to take the time to get this right.


We can proceed in discussing markets as the train the drives things. Or, so one ideology might go. The trouble is that we think of concrete things being sold when we think of the market. At one time, a share had some definition and value. But it is not true now that anything real is processed in the financial markets, for the most part. Just like the gab standard founds our money, these markets mainly push ephemeral entities whose value is a matter of resolving issues related to highly abstracted models and the interpretations of associated rules that are legal, operational, and strategic. And, all this is done under layers of algorithmic mishmash.

What has evolved in the markets is a chimera supported by high-speed computing and algorithms whose potential impact no one has a real handle on. Oh, of course, some are filling their pockets, but the game is near-zero (in fact, it has been nothing but negative for the US taxpayers). Trouble is, as well, that those with numeracy skills have the roles in keeping this chimera going. For some reasons, we don't have any notion of fiduciary duty or of ethics.

Given the fact of innumeracy (which is not idiocy, by the way), the whole population is not served by the methods that have evolved. No way. In fact, the whole claim of best-and-brightest is a form of hubris, suggesting that what we have now is incredibly fantastic.

No, it is not. Rather, it's a house of cards of the most flimsy manner that has been pushed upon the unsuspecting public through the failings of several, especially lawmakers who ought to know better. Proper analysis will show that the markets need to be dampened which action will have several looks.

That some are making money in the current scheme, actually many, yet it's only a small subset, may suggest that things are fine. Well, it is not; the extreme imbalances between Wall and Main Streets, about which there is much clamor, is real, folks. And, it has been greatly exacerbated by computational advances of the past couple of decades.

Since it's rather complicated, we'll amber about while trying to keep some coherence. We can use two players to juxtapose a balance. The first would be Goldman Sachs whose recent overview (of the market structure, pdf) needs to be discussed. Actually, it is nice that they were so open with itemizing the important financial concepts and in explaining their side.

We need to look at ECN, dark pools, alternative trading systems, and much more. As an aside, the definition of the dark pool raised flags immediately as being a means to thwart natural market purposes. We'll have to look at the history of this thing.

The second player will be BATS Trading of Lenexa, KS. Why? They are relatively new and are not located near any other of the major players. Also, they offer an alternative system that has been successfully applied by traders. BATS has their own index which will be interesting to watch in comparison to those updated every day in the media (DOW, et al).

We'll have an old firm and a new one. The latter can serve as an example of what an open economy allows, that is, new entities to enter with a new game plan.

The intent is not to be anti-market. Rather, that which is called casino capitalism must be deconstructed so that we can allow a better approach to the 'market' and its majesty. These things, by the way, ought to be run in a non-profit mode (ideally, by monks who took the vow of poverty - some of those have a lot of numeracy).

Note: This is an introduction. Next up will be the start of the analysis and discussion. However, some thought will need to be put to (this view of, pdf) liquidity. Here's the deal. Okay, using the metaphor of blood, we do want flow. Yet, there are other phases (gas, solid, ...). Besides, the blood carries things, such as nutrients, defense cells, etc. There is something amiss, as what we're seeing is large outflows to bonuses and to supporting lifestyles that are far removed from any ever seen by Main Street. Hang on, as we're going to look from the basis forward. Whose basis? Good question. But, consider this. Cash flow, real liquidity, is only one concern of management. Some type of imbalance has been allowed to come forward where money churning (and froth) is seen as of real value. 'Why?' and 'how?' are the questions. That 'liquid' state, desired by finance, seems to not have any natural analog (remember, we cannot get perpetual motion).


03/15/2015 -- Finally, getting around to the pending business.

12/15/2012 -- Coase, on the subject.

10/05/2012 -- Yes, yes, chimera it is.

03/11/2012 -- We need to update this, especially with a nod to Alan M. Turing.

04/03/2011 -- Need to look at some background. Too, tranche and trask.

03/16/2011 -- On the rise of the professional politician (will there ever be the citizen polico? that is, those who do not salivate when a buck is passed beneath the nose) toward robber barony. The M & Ms are apropos. As well, need to bring in Schervish's viewpoint.

10/28/2010 -- Warning, train wreck ahead. What train, I had asked? Yes, there is already a wreck, despite the inflated market (those who lost big are still behind).

05/25/2010 -- Who will (or can) lead out of the morass?

05/07/2010 -- Out of control, essentially, and not healthy for the backbone.

01/07/2010 -- We need to look at capitalism, closely.

01/03/2010 -- More news on Goldman Sachs as the uber example of 'not on the behalf' comes to fore regularly. It'll need to be a separate subject at some point. Thanks to McClatchy: Nov 1, 2009 & Jan 3, 2010 (update). Goldman has to respond, of course.

11/29/2009 -- Risk and rationality. As well, we'll need to go further into innumeracy.

11/27/2009 - Roubini on the coming unwinding.

11/20/2009 -- Societe Generale is getting negative?

11/10/2009 -- Glass-Steagall, again. Why not? Also, more on the gab standard.

11/10/2009 -- A floor guy (Chicago) reported on firstbusinessx today that GS was a big buyer yesterday. Was this on the behalf of? Or, is it to keep the boosting going? This type of buying, no doubt, has a floor to staunch any bleeding if things move downward which they are expected to do.

11/09/2009 - Forgot to mention securitization, which definitely requires computational support in its current form, as something to look at closely. It is more problematic than many think, and actually is more of an example of flim-flam than most. So, expect in depth analysis. Ah, structured finance, the bane of our existence, it seems.

Modified: 03/15/2015

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