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I think the crux of the argument is really against speculative trading as a whole. The stock market has nothing to do with allocating resources. When you buy/se

I think the crux of the argument is really against speculative trading as a whole. The stock market has nothing to do with allocating resources. When you buy/sell stocks, you have a counter party that is doing the opposite. No part of that transaction has to do with allocating resources. An angel investment allocates resources. A VC round allocates resources. And yes, an IPO does allocate resources. But trading stocks is just a way for mutual fund managers to charge a fee. Once, owning stock had to do with dividends. But that's back in the day. Now, the only way to reliably make money in the stock market is to spend other people's money and charge them for the honor. If I'm investing in a company, I should have an asymmetric informational advantage or an ability to direct management. Public companies, by definition, don't make this possible (unless you have significant voting power).

tptacek 16y ago
Equities are a fraction of what's traded on "the markets", and a huge chunk of "everything that is traded" is traded on electronic markets that could or are HFT'd (fixed income being a notable counterexample, a paragon of the ideal universe you sort of allude to, and an unmitigated debacle when it comes to transparency and fairness). One doesn't really need to engage your argument about whether equities are truly about allocating resources to observe that electronic markets do play a pivotal role in resource allocation. How do you think anyone knows what wheat, iron, or bulk block cheddar costs?
- joshklein 16y ago
  That's the argument I hear from trader friends, to which I respond, the people who produce wheat/iron/cheddar and the people who consume wheat/iron/cheddar can figure that out perfectly well in the absence of speculators and high frequency trading. Your other points are well taken, but I do think Krugman is largely referring to equities, and I sort of parrot part of the argument made by Mark Cuban in the following link without sharing how I got to that line of thinking: http://blogmaverick.com/2008/09/08/talking-stocks-and-money/ http://blogmaverick.com/2008/09/08/talking-stocks-and-money/
  - tptacek 16y ago
    There are tens of thousands of consumers and tens of thousands of producers for many commodities. Each of them have different cash flow demands and different tolerances for risk. All of them operate in a world that creates risk. Sure, products could still be moved without all the market's actors. But they'd move at inferior prices, jackpotting some producers and bankrupting others by sheer chance with little opportunity for smart producers to mitigate (or even profit from) risks. Even pure speculators serve a purpose in the market; if nobody wants to hedge a risk or lock in a price by dealing with them, they can't succeed; if people do want to do that, the speculator is providing a service to them. This, by the way, isn't any great insight on my part; it's the first chapter in any book that explains futures and options.
    - joshklein 16y ago
      Absolutely agreed - speculators make the market more efficient. But why is it that this is the only half of the equation included in the chapter? All the negative impacts of speculators are left out of chapter one, the rest of the book, and the next twenty more advanced texts? For such a clever & informed group, finance types like to quantify their positive contributions and qualitatively dismiss their negative contributions ("there are -some-inefficiencies when...") We lose a lot of peak potential value when we depress high finance's ability to leverage and exploit markets, but we also shave off the deepest parts of the trough we inevitably fall into when the "markets" swing back the other way. History suggests we shouldn't consider the boom-bust cycle as part of our inevitable march forward; sometimes, you bust big enough and you reach your day of reckoning. Why is it a given that this cycle needs to be so dramatic?

tptacek 16y ago

Equities are a fraction of what's traded on "the markets", and a huge chunk of "everything that is traded" is traded on electronic markets that could or are HFT'd (fixed income being a notable counterexample, a paragon of the ideal universe you sort of allude to, and an unmitigated debacle when it comes to transparency and fairness). One doesn't really need to engage your argument about whether equities are truly about allocating resources to observe that electronic markets do play a pivotal role in resource allocation. How do you think anyone knows what wheat, iron, or bulk block cheddar costs?

joshklein 16y ago
That's the argument I hear from trader friends, to which I respond, the people who produce wheat/iron/cheddar and the people who consume wheat/iron/cheddar can figure that out perfectly well in the absence of speculators and high frequency trading. Your other points are well taken, but I do think Krugman is largely referring to equities, and I sort of parrot part of the argument made by Mark Cuban in the following link without sharing how I got to that line of thinking: http://blogmaverick.com/2008/09/08/talking-stocks-and-money/ http://blogmaverick.com/2008/09/08/talking-stocks-and-money/
- tptacek 16y ago
  There are tens of thousands of consumers and tens of thousands of producers for many commodities. Each of them have different cash flow demands and different tolerances for risk. All of them operate in a world that creates risk. Sure, products could still be moved without all the market's actors. But they'd move at inferior prices, jackpotting some producers and bankrupting others by sheer chance with little opportunity for smart producers to mitigate (or even profit from) risks. Even pure speculators serve a purpose in the market; if nobody wants to hedge a risk or lock in a price by dealing with them, they can't succeed; if people do want to do that, the speculator is providing a service to them. This, by the way, isn't any great insight on my part; it's the first chapter in any book that explains futures and options.
  - joshklein 16y ago
    Absolutely agreed - speculators make the market more efficient. But why is it that this is the only half of the equation included in the chapter? All the negative impacts of speculators are left out of chapter one, the rest of the book, and the next twenty more advanced texts? For such a clever & informed group, finance types like to quantify their positive contributions and qualitatively dismiss their negative contributions ("there are -some-inefficiencies when...") We lose a lot of peak potential value when we depress high finance's ability to leverage and exploit markets, but we also shave off the deepest parts of the trough we inevitably fall into when the "markets" swing back the other way. History suggests we shouldn't consider the boom-bust cycle as part of our inevitable march forward; sometimes, you bust big enough and you reach your day of reckoning. Why is it a given that this cycle needs to be so dramatic?