Opinion

Parallel Universe: How Wall Street & Republicans Thrive On False Negative Hype

  • by: Raphael Sassower

If you listened to the last GOP presidential debate in South Carolina or have watched with anxiety the tumbling of the stock market, with a downward spiral that comes close to the 10% official "correction" designation, you'd think that the United States is on the verge of collapse. If you were young and ambitious or retired with a sufficient nest-egg, you'd be checking the Internet on where to immigrate.

Who would want to live in a country that is unsafe, led by a president who "doesn't care about America," and an economy that is so bad that more illegal immigrants are leaving than entering our southern border (by as much as 140,000 from 2009-2014, according to Pew Research Center). The political climate in Washington, DC is so contaminated and corrupt that some leading members of congress (Steve Israel of the 3rd district of New York is the latest casualty) are simply not seeking re-election (which is a guarantee to incumbents at the rate of over 96%, according to Louis Jacobson in Politifact).

But this isn't the America I live in.

But this isn't the America I live in. I recall the announcement by the Bureau for Labor Statistics that some 292,000 non-farm jobs were added in December 2015, that the economy was growing fast enough for the Federal Reserve to increase interest rates by .25%, that lower oil and gas prices and the discontinuance of the prohibition of oil exports will make the United States not only energy independent and a net exporter of oil and gas, but one of the leading producers of oil and gas in the world, and that overall we still enjoy civil rights that are denied by many of our allies, like Saudi-Arabia (whose legal system is based on a very strict orthodox interpretation of Sharia law).

Paying less than $2/gallon for gas will allow all of us to spend more of our money on other goods and services which in turn will boost the economy, since about 70% of our Gross Domestic Product comes from consumer spending. Lower oil prices will lead to greater spending, and greater spending to economic growth; this, at least, is what neoclassical economic theory teaches us. But maybe this theoretical rosy picture is too naïve, maybe in the real world things work differently, even without a conspiracy theory at work.

In the real world of brokerage houses on Wall Street, a stable economy that is slowly but steadily growing is not volatile enough for daily trading spreads. A bit of bad news followed by good news and vice versa ensures enough volatility to guarantee great profits.

In the real world of brokerage houses on Wall Street, a stable economy that is slowly but steadily growing is not volatile enough for daily trading spreads. A bit of bad news followed by good news and vice versa ensures enough volatility to guarantee great profits. You can check the financial reports of any of the major investment banks in the United States and see right away that the largest contribution to their bottom line comes from trading, what some call arbitrage (which is simply buying low and selling high). The margins are minuscule, but the volume is so large -- billions of dollars daily -- that by the end of the year there are substantial amount of money being made from little movements in stock or commodity prices. And when a bunch of hedge funds collaborate to bring prices down or up, as they have been fined after legal discovery, then the trust we have in the fairness of markets and the supposed reflection of prices of efficient information about supply and demand (EMH) falls apart. And if these margins aren't sufficient, inside-trading is always available, as hedge funds, such as SAC Capital and its CEO Steven A. Cohen, have admitted as much when paying $1.8 billion(!) in fines.

Add to this the technically-enhanced "high-frequency trading" which finds the buying and selling prices of stocks nano-seconds before these prices appear on the market itself, and therefore are able to "game" the buy and sell orders before anyone else has a chance to fill them. You have, once again, inside-trading plain and simple: information gained before anyone else has a chance to compete with you is still unfair, no matter what technical trick or loophole you were able to find.

So, is volatility the dream of any trader? Yes, it is. Is knowing a bit before anyone else what someone is willing to pay for a stock inside-trading? Yes, it is. Grand conspiracy? Maybe not; but definitely an advantage to elite hedge-funds and investment banks that can game the system in the name of "free markets"; the term "collusion with impunity" seems apt. And when caught, years later, as Goldman Sachs was in its involvement with mortgages and the collapse of the economy, then a fine of $5.1 billion(!) makes it all okay. it's the price of doing business. And the 6 million Americans who lost their homes can be forgotten.

For those who are interested in a simple, straight-forward explanation of the mortgage bubble and its ensuing Great Recession, go watch the recently released movie "The Big Short."

For those who are interested in a simple, straight-forward explanation of the mortgage bubble and its ensuing Great Recession, go watch the recently released movie "The Big Short." It's plain why Republican presidential contenders claim that the country, led by a Democrat, is doing poorly. They want to build an argument for changing the guard: Democrats are bad, we are good, ergo: your next president must not be a Democrat, but a Republican. It's also plain why they would portray such a negative picture of America's national security and its economy, not giving any credit to the president for any policy decision that helped us get out of the (Republican-induced) Great Recession of 2008-2012 or spending more on the Department of Defense than the entire world put together (ABC News 2/24/14), a budget which, incidentally, is voted on by Congress which, incidentally, is controlled by the Republicans. So what about the media?

You'd think the media would be smarter than all of that, telling us if the king has no clothes or telling us the truth about our own country.

You'd think the media would be smarter than all of that, telling us if the king has no clothes or telling us the truth about our own country. But you'd be sorely disappointed. What happened to independent reporting, cool-headed analysis, and a long-range perspective on what's going on in the economy? What about calming the population, rather than scaring it half to death, especially when there is no reason for alarm? Last I checked, there is something called self-fulfilling prophecies, the kind of alarmist pronouncements that make people withdraw their money from their local banks, only to perpetrate a run on the bank that in fact leads to its collapse... Have we learned nothing from our own economic history? Don't journalists and pundits realize that the more positive their pronouncements are -- given positive economic data -- the better the economy (of consumers) will function? It's plain that the latest negative hype is just a hype, nothing more nothing less. And the quicker we get over it, the better, because the American economy is still very strong!

Raphael Sassower profile.jpegRaphael Sassower is philosophy chair at the University of Colorado, Colorado Springs. Prof. Sassower's latest books are Compromising the Ideals of Science (2015), The Price of Public Intellectuals (2014), and Sports and Religion in American Culture (2014, with Jeff Scholes). He grew up in Israel and moved to the United States as a young man after serving as an officer in the IDF.

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