Quote :

"have been run by the government, which they were"

What, just because they're NRSRO? Come on, they are RECOGNIZED not RUN by the SEC. Please don't just make shit up. They are expressly prohibited by interfering with the actual ratings process. The government has little to do with even recognizing them, much less running them.

Quote :

"Government sponsored"

How are they sponsored again?

Quote :

"Then by your definitions, no bailouts were necessary as everyone properly priced their own risk back before 2008?"

I never said that. Please don't make things up.

I said some companies did accurately price risk and were still punished because of companies that did not because of failures in CRAs. This could cause companies that should prosper to suffer because of the interdependence of our economic system. Things just aren't as simple as you need them to be for your simplistic ideas to work.

9/3/2010 1:24:35 AM

Any business whose product is required by law and by law only the government gets to say who can satisfy this law, is a government sponsored enterprise.

Quote :

"I said some companies did accurately price risk and were still punished because of companies that did not because of failures in CRAs."

Then they did not accurately price their risk. Had they known their fellow firms were going to blow up, they would have borrowed less and not themselves blown up. The world is not as simple as your simplistic ideas need it to be. You cannot classify everyone as either evil or a victim. They are all victims and at the same time all guilty of making mistakes.

9/3/2010 2:06:23 AM

Quote :

"Well, that one we certainly can. If Chrysler had gone bankrupt in 1979 then it would not have existed to need a bailout in 2008."

Only GM and Ford didn't get a bailout in 1979 and yet are suffering similar fates.

Quote :

"Had they known their fellow firms were going to blow up, "

Which is why you're theories die on the vine all the time. Information isn't available to everyone all the time.

Btw, which companies were bailed out in the 19th century 2-3 times then disappeared?

9/3/2010 7:27:25 AM

Quote :

"Any business whose product is required by law and by law only the government gets to say who can satisfy this law, is a government sponsored enterprise. "

That's not what sponsored means. That would be government recognized. By the way does this mean that your earlier statement that they were "government run" was false?

Quote :

"Then they did not accurately price their risk."

Then how do you win at this game? Just not play? Irrational fear is just not something you can price accurately, just like irrational confidence. This is the very reason we have the booms and busts.

Quote :

"they would have borrowed less and not themselves blown up"

Do you mean "leant less"?

Quote :

"You cannot classify everyone as either evil or a victim."

I said something similar in this very thread.
"I don't think you can really blame either side. The borrowers were following the will of the market as were the lenders. It will always be either the lack or existence of legislation. You can't blame the ship for hitting the iceburg and you can't blame the iceburg for sinking the ship, the blame will always reside on the captain for either steering it too much or too little."

9/3/2010 9:18:16 AM

Quote :

"Do you mean "leant less"?"

I said what I meant. Yes, depending on their business many did something different in terms of miss-pricing their own risk. AIG lent nothing to no one, it sold insurance. But many failed because they borrowed 30 times their investment capital.

Quote :

"Then how do you win at this game? Just not play? Irrational fear is just not something you can price accurately"

How can it have been irrational if you turn out to be right? And no, it isn't irrational fear to have believed AIG might not pay or that you should stop lending even more to a business partner which is already leveraged 30 times over. On the other hand, why even bother when you are pretty sure all your neighbors will be bailed out, so any prudence on your part would have been irrational. Which is what can only be fixed by refusing bailouts.

9/3/2010 9:57:04 AM

Quote :

"I said what I meant. Yes, depending on their business many did something different in terms of miss-pricing their own risk. AIG lent nothing to no one, it sold insurance. But many failed because they borrowed 30 times their investment capital. "

I assumed we were talking about MBS's since we talked about CRA's

Quote :

"How can it have been irrational if you turn out to be right?"

Irrational confidence leads to irrational fear.

Quote :

"On the other hand, why even bother when you are pretty sure all your neighbors will be bailed out, so any prudence on your part would have been irrational."

The same problem is on the opposite side. If you know you're not getting bailed out and that a downturn in AIG is going to cause a downturn in your business then your ability to do business is directly dependent on the clairvoyance you seem to velieve that businesses have.

9/3/2010 10:41:53 AM

Quote :

"then your ability to do business is directly dependent on the clairvoyance you seem to velieve that businesses have."

Kris, I understand you work in one particularly industry, so you are clearly having difficulty thinking things can be organized any differently than they are. But they can. And it has nothing to do with them being clairvoyant. If you are leveraged 30 to 1, then a hit of 4% of your investments leaves you bankrupt. If you are leveraged 1 to 1, then it takes a 50% hit to bankrupt you. After previous bailout-free recessions, investors invariably turned away from debt, which had landed many in bankruptcy, opting instead for equity, which cannot. Business can operate just fine and allocate capital with relatively puny debt levels. Congress can even help, by equalizing the relative tax levels for debt and equity transfers.

But, no. You and Congress believe that the only way the system can work is as it does work, with 30 to 1 leveraging and widespread bailouts every decade.

[Edited on September 3, 2010 at 6:09 PM. Reason : .,,]

9/3/2010 5:56:58 PM

Quote :

"Kris, I understand you work in one particularly industry, so you are clearly having difficulty thinking things can be organized any differently than they are. But they can. Nearly every business in this country has been hit by the recession, the vast majority are not bankrupt. And it has nothing to do with them being clairvoyant."

We're not talking about every industry, we're talking about the ones at the center, not the fallout.

Quote :

"But, no. You and Congress believe that the only way the system can work is as it does work, with 30 to 1 leveraging and widespread bailouts every decade."

You know that wasn't every case, not even most of them. The bailout wasn't to save these companies, that was a byproduct. The bailout was to keep the economy from grinding to a halt.

9/3/2010 7:39:44 PM

Quote :

"The bailout was to keep the economy from grinding to a halt."

Facts not in evidence. Financial panics are common throughout history, most avoided bailouts, and recovery always followed, so what made this crisis so different that a phenomenon unknown to human existence outside communist states or war, an economy grinding to a halt, would result?

9/4/2010 2:51:24 AM

Quote :

"Financial panics are common throughout history, most avoided bailouts, and recovery always followed"

Sure recovery always followed eventually, but why have that long period of economic suffering and market failure?

Quote :

"so what made this crisis so different that a phenomenon unknown to human existence outside communist states or war, an economy grinding to a halt, would result?"

Our biggest busts have grinded the economy to a halt.

9/4/2010 10:17:54 AM

Quote :

"but why have that long period of economic suffering and market failure?"

Is this recession not going on longer than any since the depression, even with the massive amount of stimulus.

You're making solid arguments against pure laissez fair capitalism prior to booms but you're not making a good case that the government has the ability to fix it after the fact. History isn't on your side either.

Quote :

"Our biggest busts have grinded the economy to a halt. "

Only to have them recover pretty soon after.

9/4/2010 10:32:27 AM

Quote :

"You're making solid arguments against pure laissez fair capitalism prior to booms but you're not making a good case that the government has the ability to fix it after the fact."

I'm not trying to make that argument, although LoneSnark is trying his best to divert it to that. I'm trying to discuss "Who's REALLY at fault for the economic meltdown", not have another thread where I explain Keynesian economic theory to everyone, I've done that in plenty of other threads.

Quote :

"Only to have them recover pretty soon after."

That period of inactivity is waste. It's thrown away money. It is failure.

9/4/2010 10:47:29 AM

If you didn't want to have a discussion about the recovery, why answer this

Quote :

"Sure recovery always followed eventually, but why have that long period of economic suffering and market failure?"

Quote :

"That period of inactivity is waste. It's thrown away money. It is failure."

Now you aren't making a bit of sense.

9/4/2010 10:50:48 AM

If there had been no bailouts, we'd probably be well on the way to recovery by now. But politicians, who subscribe to the same theories as Kris, won't let a crash happen. Now, we're just building up a bigger crash. The crash in 2007 was a result of too low interest rates during the early 2000s. Now we're had (and are going to continue to have) 0% interest rates, which means the crash is going to be much, much worse the next time around.

9/4/2010 11:08:05 AM

Quote :

"If you didn't want to have a discussion about the recovery, why answer this"

I didn't catch the attempted derailing of the thread quite early enough. I should have noticed that he was ignoring my actual arguments and instead bringing up irrelevant things.

Quote :

"Now you aren't making a bit of sense."

Why not. Booms and busts are periods in which the market is not able to accurately price goods (mainly credit), that's the definition of market failure.

Quote :

"Now, we're just building up a bigger crash."

Ok, like I said in the other thread, when?

9/4/2010 11:18:23 AM

I was not derailing anything. As you appear to have missed it, let me re-state: Bailouts are at fault for the economic meltdown.

And some market failure cannot or should-not be fixed.

[Edited on September 4, 2010 at 11:28 AM. Reason : .,.]

9/4/2010 11:27:04 AM

So this is the best we can do? Constant booms and busts? Forever inefficiency? It's those kinds of ideas that would have us still riding horseback to get around everywhere.

9/4/2010 8:14:42 PM

Liberty is rife with inefficiency. We tolerate the rampant inefficiency of liberty and freedom because the alternative is vastly more inefficient. In comparison, two years of bust induced recession is cheap compared to 10 years of "New Deal" experimentation induced Depression. 70 years of liberty induced boom and bust is cheap compared to 70 years of Soviet Socialism.

9/4/2010 10:31:58 PM

Quote :

"We tolerate the rampant inefficiency of liberty and freedom because the alternative is vastly more inefficient."

I like the bivalence you've created here. Unfortunately this is not as binary as you hope it to be.

9/5/2010 4:19:03 AM

PottyMouth:

Quote :

"Just like at the current state of high frequency trading. Everyone outside of the players profiting off of this business can look at it and say this serves no utilitarian purpose to society and carries with it unnecessary risks and yet the SEC won't even go so far as to say "turn the machines off until we come up with prudent regulation". "

Quote :

"This paper examines the impact of high frequency traders (HFTs) on equities markets. I analyze a unique data set to study the strategies utilized by HFTs, their profitability, and their relationship with characteristics of the overall market, including liquidity, price efficiency, and volatility. I find that in my sample HFTs participate in 77% of all trades and that they tend to engage in a price-reversal strategy. I find no evidence suggesting HFTs withdraw from markets in bad times or that they engage in abnormal front-running of large non-HFTs trades. The 26 high frequency trading (HFT) firms in the sample earn approximately $3 billion in profits annually. HFTs demand liquidity for 50.4% of all trades and supply liquidity for 51.4% of all trades. HFTs tend to demand liquidity in smaller amounts, and trades before and after a HFT demanded trade occur more quickly than other trades. HFTs provide the inside quotes approximately 50% of the time. In addition if HFTs were not part of the market, the average trade of 100 shares would result in a price movement of $.013 more than it currently does, while a trade of 1000 shares would cause the price to move an additional $.056. HFTs are an integral part of the price discovery process and price efficiency. Utilizing a variety of measures introduced by Hasbrouck (1991a, 1991b, 1995), I show that HFTs trades and quotes contribute more to price discovery than do non-HFTs activity. Finally, HFT reduces volatility. By constructing a hypothetical alternative price path that removes HFTs from the market, I show that the volatility of stocks is roughly unchanged when HFT initiated trades are eliminated and significantly higher when all types of HFT trades are removed. "

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1641387

9/11/2010 8:33:28 AM

Quote :

"I find no evidence suggesting HFTs withdraw from markets in bad times "

http://online.wsj.com/article/SB10001424052748704392104575475781704072278.html?mod=e2tw

Quote :

"Briargate says it didn't sustain losses during the May 6 flash crash because it closes its books when the market tends to be volatile. "We actually had a pretty good day," Mr. Oscher says."

You'll understand if I don't bother to read one bit of that link you posted.

9/11/2010 9:32:50 AM

Yes, academic research should never be allowed to get in the way of your preferred unfounded beliefs and your one anecdote from a newspaper. Which begs the question, how do you have "a pretty good day" if you withdrew from the market? Doesn't that mean you lost money on the day by failing to cover your operating costs?

[Edited on September 11, 2010 at 4:26 PM. Reason : .,.]

9/11/2010 4:25:35 PM

Look, I'll take a shop operating in New York, boots on the ground and shit, over your stupid fucking Federal Reserve economist wanna-be PHd candidate.

Not to mention other shops are on the record saying they turned the machines off when the plunge started getting ugly on May 6. So much for liquidity.

One of these days, you'll wake up and realize humans don't follow predictable equations and the most recently accepted theory of their behavior.

Are you at all surprised that a quant would find no flaws with HFT

Quote :

"Quantitative Researcher Chicago Alternative Investment Partners, LLC (Investment Management industry) September 2007 — May 2009 (1 year 9 months) As a quantitative developer at Chicago Alternative Investment Partners, LLC, a recently formed hedge fund, I was responsible for several aspects of the investment process. I developed, tested, and optimized profitable trading strategies. In addition, I regularly prepared clear, concise reports of quantitative findings for management. Finally, I served as an expert resource for econometric and financial analysis techniques of which I used to perform scenario analysis and risk analysis on the trading strategies."

[Edited on September 11, 2010 at 4:39 PM. Reason : more more mroe]

9/11/2010 4:36:07 PM

Quote :

"One of these days, you'll wake up and realize humans don't follow predictable equations and the most recently accepted theory of their behavior. "

Humans might follow predictable equations, but we just have no way to measure the necessary variables, or even know what those variables are.

9/11/2010 4:38:34 PM

^^And some day you'll realize that legislation should be a product of more than "just don't like their kind."

All traders leave the market sometime. I guess to be consistent you should want to ban all traders for the crime of being human?

[Edited on September 11, 2010 at 4:47 PM. Reason : .,.]

9/11/2010 4:46:21 PM

Do you have any idea what you are talking about? You always do the "liberty, freedom, government bad" reply when your position is thoroughly undermined and you have nothing else to add (until you go research it for a few days and come back to the thread)?

9/11/2010 4:51:41 PM

I did no research. the article came us as reference material for a Duke University economics discussion a few days ago, and I thought you might be interested. It didn't occur to me that you had all the information you would ever need on the subject from the newspaper, and this being a university and all, academia had nothing else to offer you. My bad.

Everything I personally had to offer, I already offered earlier in the thread. I thought my argument was damning: the organizations operating these markets are free to regulate or ban any type of trading, they choose not to, therefore such trades must not be that harmful for their customers. The benefits must exceed the costs, because customers clearly prefer exchanges where such trading is allowed, otherwise one exchange would ban them and gain all the trading business.

9/11/2010 8:46:42 PM

Quote :

"and I thought you might be interested."

Why would I be interested in reading a PHd candidates paper who spent a lot of time in the quant world that came to a conclusion that is squarely in conflict with an actual outfit that runs HFT algorithms.

He's saying "I analyzed data, reverse engineered if you will, and found the firms don't withdraw during uncertain times even though there exists one firm who has stated in public that they do as much".

This is before I even consider how the Federal Reserve has prostituted the economics profession starting in academy
http://www.ritholtz.com/blog/2010/07/kartik-athreya-for-fed-chairman/

Quote :

" Today, the Federal Reserve Board is monopolized by mad professors. This is simple to understand, and impossible to ignore, by any non-economist who reads their ravings. However, it seems that the hypnotic spell under which Americans revere academic credentials blinds the public to the utter incapacity of the Federal Reserve Board of Governors to accomplish any activity beyond finding the men’s room."

Quote :

"I thought my argument was damning: the organizations operating these markets are free to regulate or ban any type of trading, they choose not to, therefore such trades must not be that harmful for their customers. The benefits must exceed the costs, because customers clearly prefer exchanges where such trading is allowed, otherwise one exchange would ban them and gain all the trading business."

I think HFT is still too new and too misunderstood for any of them to take such drastic measures. I don't think you realize that the same houses that profit from manipulating the system are the same houses that have large blocks and order flow to run through said system. I can imagine Goldman Sachs saying...we'll steer more of our order flow through your exchange if you look the other way as we frontrun and game your exchange to our advantage. Win-win for the exchange and Goldman to the harm of everyone else.

9/12/2010 7:45:42 PM

Quote :

"Win-win for the exchange and Goldman to the harm of everyone else."

Then why wouldn't everyone else go to another exchange? If informed customers can't be bothered to care, then who are you to second guess them?

9/13/2010 1:51:43 AM

Quote :

"Then why wouldn't everyone else go to another exchange? If informed customers can't be bothered to care, then who are you to second guess them?"

Because there is nowhere else? Do you know what the NBBO is and how it works?

And if you look at market volume from the April/May time frame to today it is down ~30%. It seems like retail and institutional investors alike are trusting the stock market less and less.

9/13/2010 8:58:23 AM

There is somewhere else. There is NYSE, Nasdaq, Chicago, London, Hong Kong, lots of competing exchanges.

And if customers are leaving in droves, then competition is working, leave it be. The exchanges will do whatever it takes to stop losing customers.

Now, if you want to discuss eliminating some legal restrictions on competition, which I'm sure there is, have at it.

9/13/2010 9:34:15 AM

Well, this is timely

http://www.finra.org/Newsroom/NewsReleases/2010/P121951

Quote :

"WASHINGTON — The Financial Industry Regulatory Authority (FINRA) today announced that it has censured and fined New York-based Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy and related supervisory failures."

Go ahead, herald this as the free market at work, you know you're going to. Just remember, you were the one over the past several posts that said this type of manipulation wasn't occuring because exchanges hadn't outright banned it

9/13/2010 7:45:25 PM

How is it not the free market at work? FINRA is not the government. I said if it was a problem then private exchanges would ban the practice. No need to get Congress involved. It seems I was completely right: an obscure trading strategy that harms others has been banned. Well, FINRA has no rules against high-frequency trading by itself, just non-bona fide trades with strategic cancellation. As such, this seems like evidence that HFT is safe, what TBS did was not, so one is banned, the other is not. If it ever becomes harmful, then they will happily voluntarily ban it for you. Economic Liberty is sustained. So, please, mind your own business, and keep your legislators to yourself.

9/14/2010 12:18:48 AM

The point of my last post had nothing to do with private markets and governments. It was about how god damned arrogant you are. I posted several things damning HFT and you claim that its fine because markets allow it.

I guess it was fine until it wasn't allowed, now it isn't? In which case, why even bother commenting here? We always and forever know how you stand, markets good, governments bad, market is final arbiter.

9/14/2010 6:49:52 AM

I am arrogant? For having an opinion on this subject? Absolutely. That was my point! Neither you nor I can claim this subject as our personal business. It has almost nothing to do with us, so we should keep our opinions out of Congress. That was my opinion. Your opinion was that you knew better than everyone, including the friggin' stake-holders, that this was a bad practice and that Congress should ban it.

Your opinion required two assumptions. #1, that the harm of the practice outweighed the benefit; and #2 that stake-holders were incapable of handling such a problem themselves. Well, I eventually had academic evidence that #1 was not the case, but I personally didn't know. Meanwhile, you offered no evidence to back up #2. That was, until you posted evidence that #2 is not the case. In the rules of online forums, I've won, hence why you have turned the topic of conversation to how arrogant we both are, for expressing our opinions on an online forum? Amazing.

9/14/2010 9:48:41 AM

having bested you according to the rules of online combat, i bid you goodday sir!

9/14/2010 9:53:51 AM

Quote :

"Your opinion was that you knew better than everyone, including the friggin' stake-holders"

I AM A STAKEHOLDER YOU ASSHAT. And every individual with money at risk in the stock markets is a stakeholder. I don't think understand how market making works, how order flow works, how the NBBO, and how stock exchanges profit. I'm no expert, but I can tell I've read a bit more about the topic than you have.

Quote :

"that this was a bad practice and that Congress should ban it"

Let's just get one god damned thing straight, this is what I originally said about the topic of HFT:

Quote :

"and yet the SEC won't even go so far as to say "turn the machines off until we come up with prudent regulation""

I guess that doesn't imply I'd be in favor of some sort of compromise enforced from the outside ? I dunno, maybe a 1 or 2 second life before a quote can be canceled would be a fantastic start. You do realize there are a myriad of other laws regulating stock exchanges, right? Again, this is where you point out how glorious life would be if even those regulations were removed...if only we could test your anarchist theories!

Quote :

"that the harm of the practice outweighed the benefit"

I didn't just make assumptions. The May 6 flash crash as well as other single stock crashes since then coupled with exodus from the markets was evidence that investor confidence had in fact been damaged coupled with scores of those

Quote :

"claim[ing] this subject as ourtheir personal business."

speaking out against it. The only things I read in favor of it were from the quant houses, wanna-bes like your PHd candidate, and those uber-libertarians like yourself who don't mind seeing harm (in spirit though not necessarily in law) done so long as the market eventually works itself out.

Quote :

"Well, I eventually had academic evidence that #1 was not the case"

Lack of evidence is evidence of lack.

Quote :

"Meanwhile, you offered no evidence to back up #2"

Again, please go study how the exchanges profit. One exchange coming out with a fine is merely window dressing to keep regulators away from the honeypot. And we can be sure the group busted was the dumbest, weakest of the herd. There are certainly more powerful players running predatory algos as we speak and exchanges looking the other way as the pockets of their execs and shareholders are enriched as the Casino capitalism game goes on.

[Edited on September 14, 2010 at 10:34 AM. Reason : ///]

9/14/2010 10:34:00 AM

Quote :

"IN THE RULES OF ONLINE FORUMS IVE WON"

9/14/2010 2:10:04 PM

More damning evidence that Fannie and Freddie (and thusby extension Frank, Dodd, the CRA, and all socialists everywhere including Republicans who pushed home ownership) were the cause of the blowup

http://modeledbehavior.com/2010/08/27/fannie-freddie-acquitted/

9/22/2010 9:52:18 AM

I blame Chance

9/22/2010 9:58:04 AM

Quote :

"If the GSEs had such a small role in the crash, why do they need the biggest bailout?"

9/22/2010 1:21:51 PM

How does their bailout in terms of % of assets compare to other bailed out institutions?

9/22/2010 7:19:36 PM

^^ is that a joke question?

Quote :

"Fannie May and Freddie Mac ... control nearly two thirds of the home loans on the US market. That means, if your mortgage isn’t controlled by Fannie or Freddie, chances are your neighbors’ on both sides of you probably are. In case it hasn’t sunk in yet, that’s a shit load of mortgages."

http://www.homeloans.org/if-fannie-and-freddie-go-bye-bye/

9/22/2010 8:17:15 PM