11 ms·

The Market Has Spoken - and it is Rigged

108 points by SagelyGuru 14y ago

confluence 14y ago
I feel that a lot of the blame heaped upon the finance industry is unnecessarily antagonistic (and personal). The problem, at the core, appears to be one of misaligned incentives meeting societal level trust. Do you blame the fox for eating your chickens, when you yourself placed him in the coop, to protect them from marauding wolves? Or should you blame yourself for foolishly trusting a fox with your chickens? It is all well and good to blame the "evil" finance guys for all your problems. But it is much too simple a solution. We, as a society, have given these people the power to do such damage at such scale to incredibly important societal systems. We must design our systems such that we never entrust anyone with the ability to manipulate public common systems (markets/government). This is because no matter how "noble" people say they are (they may be sincere!) - abuse will inevitably become rampant - it is human nature. This is also why communism/Marxism and libertarianism can't work in reality. > Power corrupts. Absolute power corrupts absolutely. We need to stop trusting people - period. This is why, at least in the US, we have 3 branches of government, so that each one will check the other out of self-interest and balance possible abuse/corruption (not perfect - but pretty darn good!). An easy fix would be to require all big traders in any market to not have a sell-side department at all - the Chinese Wall in financial institutions is a complete farce (as a cynic once told me: If it can be exploited - it will be exploited). Other examples would be to have all trades rate limited that they can't lock up the market at any one point in time - similar to DDOS measures used by websites (click too many times and you just gotta wait). You shouldn't be able to dump a $4 billion short position on the futures market over just one second, let alone over an hour. You must rate limit entry and exit of trades so that we can smooth market dislocations and reduce the thundering herd problem found in extreme volatility. Anyone else got suggestions?
- azundo 14y ago
  The problem with having a no-trust rules-only society is it would be terribly inefficient and things would grind to a halt. Every day you take actions and make decisions that rely on trusting others. In general people do not steal and cheat at every opportunity, and treating the world that way would be counter-productive. Taking the argument to the extreme, if you trust no one, you must have no expectations of any privacy as that is the only way to really be sure that people aren't acting differently than you would like them to. If everyone else is being watched you better believe you will also be watched. The cost of this regulation and surveillance would be obscene and the pace of progress would grind to a halt. I think the reaction here is appropriate. There are laws that were broken. This is not scapegoating, it is punishing behaviour as should be expected. Yes reforms may be needed, and they should certainly be considered and I am sure they will be, but punishing those who knowingly broke the law and abused power for personal gain cannot be considered scapegoating, or punishment of any criminal activity must be considered scapegoating as it means society simply gave them too much power and trusted them too much to allow that activity to happen.
  - confluence 14y ago
    Note I didn't say no trust. I merely said watch incentives and balance of power. I also didn't say every decision. It's a balance. You have drivers licenses to ensure a standard of safety and trust - but after that you leave people alone (risky if driver's do bad things). It's a tradeoff. However in this case, society has seen it fit to give a few individuals too much power, without placing the correct checks and balances upon them. This creates a situation that allows "nasty" agents to exploit it for their own benefit. Don't blame the hackers. Blame the system designer (a security researcher told me this). You must assume, upon creation of a system, untrusted and "nasty" agents and deal with them (at some cost). This is how cryptographers and security researchers work to ensure our safety. Maybe we should get them to look into this problematic mess (they love finding flaws in systems :D). It's easy to blame Hitler for the Holocaust (which was a despicably evil thing). But you must also consider how one could've stopped a situation from developing such that an artist drop out could end up seizing control of an industrial powerhouse.
    - danmaz74 14y ago
      If you say don't blame only the hackers, I agree. But the hackers that - knowingly and selfishly - violated the law must be punished, not given a free pass because it was the fault of the system. Then you should also improve the system; the two things aren't mutually exclusive.
      - confluence 14y ago
        Ah but you see here is the kicker (and I totally understand your point). When designing systems you must severely reduce the ability of "nasty" agents to take advantage and exploit you for personal gain. We should also enforce standardized punishment for those that successfully exploit the system. LIBOR left the gate wide open! That's 10x more important than punishing any one person that just walked in (and they should be punished - I don't disagree). But focusing on the people is the wrong mental attitude to adopt. I keep hearing things like "So and So has $100 million dollar salary and he should be punished for bringing the house down". I really want to hear things like - "Who the bloody hell let this happen in the first place?". That's all I'm saying. Punish hackers all you want but if you want true robustness you must rectify the exploits present in the system.
- netcan 14y ago
  In one sense you are very right, on the other I think this is a very wrong way of thinking of these things. At some point liberal economics-philosophy became very uncomfortable with the whole concept of ethics, norms, conventions and such. Slightly ironic as Smith was (IMO) a moral philosopher primarily (eg "The Theory of Moral Sentiments") with "economics" being a supplementary way of understanding right & wrong. When you view the word entirely from an economics/incentives/meta-institutions I think you are giving up on some things that are extremely important. Societal norms, shame, morality: these are a natural and integral part of how human society works. Laws and regulations are important too, but one cannot replace the other. There is a problem with diffusion of responsibility combined with corporate mandates and institutional mentality eroding how people behave. Taking the cold incentives view, you look at employment for example as an agreement fully captured in a contract with no further responsibilities on either side. It's negotiated based on market prices. That's true in one sense, but looking at employment that way does not capture a lot of crucial nuances. Treating it that way is not a natural way for humans to interact and will not achieve the best results, psychologically or economically. You need employees to be intrinsically motivated, believe in the company, belong, be obligated. They expect respect and care and empathy and responsibility from the employers. This is very basic and it plugs into parts of human behavior that are older than money and older than humans as a species. Its hard to capture in an equation or a model. It's even hard to capture in a "theory" of psychology, sociology, history or whatever. So, there's a tendency by people trying to understand things to ignore these crucial elements. That's absurd. A society from a household to a company to a country cannot function based on individuals narrowly and coldly following their self interests (even though you can prove that they do). More importantly, no "law" can work if the only reason anyone follows it is fear of punishment.
  - confluence 14y ago
    I'm not purely incentive (that would be much too simple :). We must use any and all tools at our disposal to ensure the correct working order of valuable systems - such as finance (proper allocation of capital to risk is a great thing!). Exploiting human desire, psychology, biases, irrationality and behaviour to create robust systems is a great idea! The are just some of the many tools that we have at our disposal to protect ourselves from abuse by "nasty" agents. This then allows us to move forward towards a more prosperous, robust and stable society in the future. What I don't like is treating the symptoms (these financial hackers if you will :), instead of the cause (improperly checks and balances at centres of power). Bring on the shame and the like - I'm all for it. But we should at the very least focus on fixing the causes (exploits in the system) rather than the hackers that exploit them (just like in security research).
- jonnathanson 14y ago
  Disagree pretty strongly with the first few paragraphs here. The vast majority of U.S. and U.K. citizens had jack-all to do with putting the fox in the henhouse; financial regulators are appointed, not elected. But I agree with a large part of what you're saying. This is, in many ways, a systems problem and not a people problem. Even if it's a people problem at the local level, it's a systems problem at the macroscopic/scale level -- and so it's much more effective to work at the systems level than at the people level. That's what our regulations attempt to do: put in place systems, checks, and balances, that will prevent bad behavior via incentive structures and pure mechanics. Unfortunately, some of the key systems and stopgaps in place have been vastly eroded in recent years. And I'm not even talking about Glass-Steagall. I'm not even talking about the blatant failures in oversight that allowed the banks to grow as large, as consolidated, as vertically and horizontally integrated, and as systemically important to the economy as they are ("too big to fail"). I'm talking about things like the Citizens United decision, which will only exacerbate these problems in the long run by allowing money to completely influence our political system. It isn't the U.S. taxpayer who put the fox in charge of the henhouse. It's the fox who purchased the henhouse. That shouldn't be allowed to happen. Instead of playing a game of constant one-upmanship with financial regulations, forever trying to outwit the "financial hackers," we should start by drawing clearer divides between money and politics.
  - confluence 14y ago
    Of course it isn't the common man I'm blaming - he has enough trouble paying the damn electricity bill! This is not the fault of the common man. This is the problem of intelligent people doing stupid things for selfish reasons. We (meaning those who understand these systems) must fight and convince the common man that regulation IS good IF the situation calls for it. People think regulation is bad and capitalism is good. We should convince them that both are great GIVEN the correct situation. I love capitalism - I also love having my electricity stay on and stable (remember Enron energy trading in Northern California people? - dark times (pun intended!). I merely state that regulation has a PR problem and that the people who have the ability to change that, should.
    - jonnathanson 14y ago
- forgotAgain 14y ago
  Anyone else got suggestions? Break up the banks.
  - ajross 14y ago
    I keep thinking that it really is this simple. All the problems of recent years are problems of scale. In a world of thousands of banks landing to each other in a big market, you can simply measure the rates instead of trusting a handful to come up with LIBOR. In a world with thousands of banks, a handful would have gone under from bad exposure to real estate volatility and spooked the rest into being more conservative, instead we had to wait for Lehman to fail to realize how bad things were. There's no social or economic value to the BofA & Chase-sized monsters that I can see. Just chop them up and put an incentive in place (extra tax beyond a certain revenue, say) that encourages them to spin off more banks.
    - forgotAgain 14y ago
      I see it pretty much the same way. All of the talk is just putting too fine a point on it. The benefit to society for having banks so large is negligible compared to the costs.
- intended 14y ago
  Analogy wise - We didn't let the foxes in the hen house, the hens asked and got more freedom to manage the coop. They invited hens and animals from other farms over used them to run an abbatoir. Our imagination can't believe it, so we talk of foxes. I agree with most of your points, except that the umbrage directed at the Fin industry is too personal or heated. I think most people who are intelligent, can't fathom the level of the atrocity being committed here. For Libor, they are being accused of flat out fraud. Fraud so utterly blatant that it was normal for the industry. And Barclays is one of the 'good banks' - its getting off of on good behavior. This is just rapacious greed, fraud, and abuse at a scale that the word definitions come across as weak. ----------------- Link for interest Morgan Stanley's stab at what the fines might look like/via FT alphaville - http://ftalphaville.ft.com/blog/2012/07/12/1081181/some-more-big-scary-libor-risk-numbers-to-digest/ http://ftalphaville.ft.com/blog/2012/07/12/1081181/some-more...
- glesica 14y ago
  I agree that social systems should be designed to minimize the amount of damage corrupt individuals can do. But that doesn't mean we shouldn't blame the corrupt individuals for their behavior. The author mentions regulatory capture and specifically refutes it as a defense for bad behavior. I also don't think it is possible to build a complex social system that doesn't rely on trust. I suggest reading "Liars and Outliers" (http://www.schneier.com/book-lo.html http://www.schneier.com/book-lo.html) if you're interested in this stuff. I enjoyed it a great deal.
- afterburner 14y ago
  "I feel that a lot of the blame heaped upon the finance industry is unnecessarily antagonistic (and personal)." This is clearly a response to the defensive, entitled, and holier-than-thou attitude the financial industry had in the wake of the 2008 crisis, not to mention the lack of consequences to finance directors or serious financial reform. They closed ranks, hard, which by necessity elevates the level of the attacks against them, which therefore seems antagonistic. Tried talking to a banker about this stuff in 2009? Impossible to have a discussion not rife with blame-shifting.
- nathansobo 14y ago
  Of course it's a systemic problem. But individuals are components of that system. If you don't punish people who engage in fraud, you remove a valuable disincentive against fraud. So while the system as a whole needs to be reformed, making individuals take personal responsibility for wrongdoing is part of that.
- sehugg 14y ago
  This is because no matter how "noble" people say they are (they may be sincere!) - abuse will inevitably become rampant - it is human nature. We have this thing called "prison" which is supposed to curb those abusive tendencies when they get out of hand. We seem to be underutilizing this resource in our handling of financial fraud.
- dpatru 14y ago
  > We need to stop trusting people - period. This is why, at least in the US, we have 3 branches of government, so that each one will check the other out of self-interest and balance possible abuse/corruption (not perfect - but pretty darn good!). I think you have the right intuition, but you don't go far enough. The root problem in finance is that people have turned over to government the power to control money. There is too much trust in government officials and in the banks that fund them. Government's ability to control money has resulted in fiat money that is constantly being devalued, encouraging people to make risky investments and to take on debt. This has been very profitable for government, which has ready access to low-cost funding. Fiat money has also been very profitable for banks, which through the "magic" of fractional-reserve banking, have been able to loan with interest money they can simply create. The solution is to take away the power to control money from government. Let people decide what they will use as money and they will choose money that maintains its value. They will also invest in institutions that do not use fractional-reserves and other risky schemes and thus are not subject to bank-runs. A US politician that is talking about real reform is Ron Paul. The bill that would allow currency competition is The Free Competition in Currency Act. It's about one page long. http://www.govtrack.us/congress/bills/112/hr1098/text http://www.govtrack.us/congress/bills/112/hr1098/text Give people the freedom to choose their money, let them choose to invest it in the institutions of their choice, and problems like the Libor scandal will stop being so important. The people who committed fraud will be prosecuted. Damages will be paid. Reputations will be damaged. People will choose to bank elsewhere. No problem. By trusting government to control money, fraud in the few institutions favored with a bank charter becomes a very important issue. It doesn't have to be.
  - base698 14y ago
    Indeed... We need to go back to feudalism where we can sell our hacking skills in exchange for slavery to our VCs for 8 years. After the 8 year mark we can finally start drawing a salary instead of just getting room and board and catered lunches. The reason for fiat money is to allow for venture capital and allow new people (immigrants, new births) room in the economy. Granted what has gone in recent times clearly gives certain people more leverage and ability to escape punishment when they play outside the rules. Something should be done about that, but going back in time to feudalism isn't going to solve the problem.
shareme 14y ago
The actual harm is when the general public gets the notion that 'The Market is Rigged' and goes into other markets with the assumption that the next market is not rigged..for example crowd funding startups..
deleted 14y ago
[deleted]
alpine 14y ago
I don't think the problem is with the financial industry. The issue is most definitely with the financial/political system. We haven't run true capitalism in the Western nations for decades. It has been a hodge-podge of crony capitalism mixed with token dribs of 'social democracy' championed by wealthy political elites that no more understand the life of eg a bus driver than a tea leaf understands the history of the East India Company. Take the Libor scandal. Would this have happened if the banks had not been repeatedly bailed out - 'too big to fail' - giving traders the impression that they worked in a politically-sanctioned realm where the normal rules of capital did not apply? There is no danger of your company going bankrupt through loss of reputation or massive, penal fines for criminal behaviour if you have an unconditional sovereign back stop.
- bedris 14y ago
  Exactly. Take entrepreneurship: the founder is rewarded financially if he/she succeeds but is punished financially if he/she fails. The banks, on the other hand, were rewarded financially when they made money for their clients (in the form of performance bonuses), but were bailed out when they failed to carry out their job successfully. This asymmetry is antithetical to capitalism. I like how Nassim Taleb put it: "the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses."
  - confluence 14y ago
    One should also beware the insurance industry - it has essentially the same incentive structure. Sell cheap insurance while times are good - take profit/options/stocks and leave. When a catastrophe happens - go bankrupt and allow the government/people to socialize the losses for improper risk management. They also take advantage of socialized protection such as national defence, fire-fighters, police officers and ambulance drivers. They don't have to pay for them in proportion to the reward they receive for their services (society pays for them). Hence their risk is mitigated by society whilst privately profiting from our shared risk. Insurance is a great thing (no doubt about it!) - but these moral hazards exist in many systems around the world and they must be addressed. This is also why insurance is so highly regulated - the ability for financial impropriety and abuse is just too damn high!
mark_l_watson 14y ago
I think that this is the kind of cronie-capitalism that Ayn Rand and her modern day followers attack. Their idea is that capitalism is good in a purer form where large inefficient businesses are simply allowed to fail. In fact this is a major theme of "Atlas Shrugged," that the government supports weak businesses run by cronies of political leaders.
- debacle 14y ago
  The government has supported weak businesses run by cronies of political leaders since Ancient Greek times, and probably earlier.
  - mark_l_watson 14y ago
    I certainly agree with you that this is a long term trend but in my lifetime (I am 60) it seems to have become much worse in the last couple of decades.
    - debacle 14y ago
      The sentiment has always been as bad, the problem is we have a complicit, apathetic populace and a much more organized and empowered aristocracy. I can't help but feel that this situation has been engineered.
- rst 14y ago
  This wasn't government arranging favors for large, well-connected businesses. It was large, well-connected businesses arranging favors for each other, at the expense of everyone else. What's happening now is the government putting a stop to it. You may believe that there's some alternative to government regulation that would prevent this sort of thing happening --- but to date, that's what's worked most effectively, and Rand & co. would take it away.
  - mark_l_watson 14y ago
    I think that Rand is an excellent writer and she does have interesting, if idealistic, ideas. That said I have not drank the Rand cool aid. For example, the idea of totally dismantling the EPA (current republican political plank) grosses me out. Also, one of the few valid functions of government is to enforce a small set of laws. Remember that 50K new government regulations were created in 8 years of W. Bush and I am confident that it will be as bad at the end of the Obama administration. There really are no absolutes: different philosophies all have their own strengths and weaknesses, but in different ratios :-)
intended 14y ago
In Case you want an idea of how LIBOR rates looked to people in the industry while this was going on - "Frankly, anyone with a Bloomberg terminal in 2008 would have been in on this, as one could see that the rates various banks had submitted did not reflect where they could fund. Deals were getting torn apart all over the place because no one could ramp up funding at a decent rate, despite what those screens said." ..... "But it was just accepted. A great number of people didn’t even clock that there was a whistle to blow. Why might that be? We’d posit it’s because they didn’t even perceive what was going on to be wrong, and that it probably has a lot to do with social conformity (within the sphere of banking)." Source: - http://ftalphaville.ft.com/blog/2012/07/02/1067701/libor-manipulation-and-the-invisible-whistle/ http://ftalphaville.ft.com/blog/2012/07/02/1067701/libor-man...
T_S_ 14y ago
The solution is close to hand and it does not involve regulation--at least the kind that regulators want. The solution is transparency. Just make all the big banks report their actual transaction on a live feed. This simple solution would have been infeasible even 20 years ago, but not any more. The implications would be enormous. No more need for accounting reports, indexes or anything else that requires a judgement call by a corruptible human. The job of watching the banks would pass from the power hungry (or worse, sleepy) regulators to the public (you and me). Once upon a time I performed the risk mgmt. function for a portion of a large bank. We used a couple of servers running every night to track a few thousand positions. The system knew every detail of about 95% of the positions. Today a team of 50 could track the entire banking system--given the right feed. Make the same information I used public and open to competing teams of analysts and then risk becomes a known quantity. Of course, banks and regulators would be strongly opposed to this approach. They will howl about privacy, proprietary information etc. But the fact is when you ask a bank for a loan, they know all of your relevant financial information in order to judge your risk. It's only fair for the taxpayers to turn the tables and end our old-fashioned and broken system of disclosure. And if the risky part of banking is driven into a part of the industry that doesn't share information, then their investors should do without a safety net.
- vegas 14y ago
  But won't this level of transparency hurt profits?
  - huragok 14y ago
    Adapt or die.
  - vijayr 14y ago
    what if it is not real time, but delayed by a few days or weeks? Will it still hurt profits?
  - T_S_ 14y ago
    It certainly would if only one bank did it. However such a rule would have to be evenly applied. My belief is that this would drive down volatility in markets since it would end the game of "Old Maid" in a crisis. Depending on how many institutions were under this rule, trading volumes may decrease, although I could argue this the other way as well.
T_S_ 14y ago
The solution is close to hand and it does not involve regulation--at least the kind that regulators want. The solution is transparency. Just make all the big banks report their actual transaction on a live feed. This simple solution would have been infeasible even 20 years ago, but not any more. The implications would be enormous. No more need for accounting reports, indexes or anything else that requires a judgement call by a corruptible human. The job of watching the banks would pass from the power hungry (or worse, sleepy) regulators to the public (you and me). Once upon a time I performed the risk mgmt. function for a portion of a large bank. We used a couple of servers running every night to track a few thousand positions. The system knew every detail of about 95% of the positions. Today a team of 50 could track the entire banking system--given the right feed. Make the same information I used public and open to competing teams of analysts and then risk becomes a known quantity. Of course, banks and regulators would be strongly opposed to this approach. They will howl about privacy, proprietary information etc. But the fact is when you ask a bank for a loan, they know all of your relevant financial information in order to judge your risk. It's only fair for the taxpayers to turn the tables and end our old-fashioned and broken system of disclosure. And if the risky part of banking is driven into a part of the industry that doesn't share information, then their investors should do without a safety net.
snorkel 14y ago
I always compare Wall St to Las Vegas, as both offer a very similar financial service, ie. gambling, except Wall St has two distinctions: 1. Wall St pretends it is not gambling when in fact it is. Actual return on investment for any stock or fund is completely non-deterministic, and therfore it is gambling. 2. Las Vegas casinos are more carefully regulated than Wall St banks. In Las Vegas the rules and the odds are clearly known, and standards are carefully enforced. Indeed casinos don't even need to cheat to be profitable, because the math of the already works in their favor. So Wall St and Las vegas are the same, except Las Vegas is honest.
- eliasmacpherson 14y ago
  I would add a third, being scale, when Wall St. panics the US government steps in.
  - saraid216 14y ago
    It's not just scale, if I understand things correctly. One problem is that a lot of state and city treasurers think that it's smart to take some of their tax revenue and hand it over to banks for investment, making them as vulnerable as normal citizens. In theory, this is a good idea because that money gets loaned out to startups and homebuyers. In practice, well... crises and stuff. This is largely what I've gathered from my brief foray into understanding why a state bank is a good idea.
- deleted 14y ago
  [deleted]
  - snorkel 14y ago
    Wall St brokerages pretend they are not in the gambling business by presenting their offerings as something every resposible adult should be pruchasing to secure their financial future, and then only making passing obligatory mention of the risks in way down the fine print. In fact the general public has bought into the whole notion that not giving your entire retirement savings over to Wall St to manage for you is irrepsonsible on your part, and letting money sit in the bank and do nothing is irresponsible.
d2vid 14y ago
> The notional size of the derivatives involved is on the order of $360 trillion. Total worldwide wealth is estimated at only $200 trillion. These derivatives are not serving their useful function as a hedge and are instead being widely used for speculation. http://www.zerohedge.com/article/detailed-look-global-wealth-distribution http://www.zerohedge.com/article/detailed-look-global-wealth...

108 points by SagelyGuru 14y ago

I feel that a lot of the blame heaped upon the finance industry is unnecessarily antagonistic (and personal). The problem, at the core, appears to be one of misaligned incentives meeting societal level trust. Do you blame the fox for eating your chickens, when you yourself placed him in the coop, to protect them from marauding wolves? Or should you blame yourself for foolishly trusting a fox with your chickens? It is all well and good to blame the "evil" finance guys for all your problems. But it is much too simple a solution. We, as a society, have given these people the power to do such damage at such scale to incredibly important societal systems. We must design our systems such that we never entrust anyone with the ability to manipulate public common systems (markets/government). This is because no matter how "noble" people say they are (they may be sincere!) - abuse will inevitably become rampant - it is human nature. This is also why communism/Marxism and libertarianism can't work in reality. > Power corrupts. Absolute power corrupts absolutely. We need to stop trusting people - period. This is why, at least in the US, we have 3 branches of government, so that each one will check the other out of self-interest and balance possible abuse/corruption (not perfect - but pretty darn good!). An easy fix would be to require all big traders in any market to not have a sell-side department at all - the Chinese Wall in financial institutions is a complete farce (as a cynic once told me: If it can be exploited - it will be exploited). Other examples would be to have all trades rate limited that they can't lock up the market at any one point in time - similar to DDOS measures used by websites (click too many times and you just gotta wait). You shouldn't be able to dump a $4 billion short position on the futures market over just one second, let alone over an hour. You must rate limit entry and exit of trades so that we can smooth market dislocations and reduce the thundering herd problem found in extreme volatility. Anyone else got suggestions?

azundo 14y ago
The problem with having a no-trust rules-only society is it would be terribly inefficient and things would grind to a halt. Every day you take actions and make decisions that rely on trusting others. In general people do not steal and cheat at every opportunity, and treating the world that way would be counter-productive. Taking the argument to the extreme, if you trust no one, you must have no expectations of any privacy as that is the only way to really be sure that people aren't acting differently than you would like them to. If everyone else is being watched you better believe you will also be watched. The cost of this regulation and surveillance would be obscene and the pace of progress would grind to a halt. I think the reaction here is appropriate. There are laws that were broken. This is not scapegoating, it is punishing behaviour as should be expected. Yes reforms may be needed, and they should certainly be considered and I am sure they will be, but punishing those who knowingly broke the law and abused power for personal gain cannot be considered scapegoating, or punishment of any criminal activity must be considered scapegoating as it means society simply gave them too much power and trusted them too much to allow that activity to happen.
- confluence 14y ago
  Note I didn't say no trust. I merely said watch incentives and balance of power. I also didn't say every decision. It's a balance. You have drivers licenses to ensure a standard of safety and trust - but after that you leave people alone (risky if driver's do bad things). It's a tradeoff. However in this case, society has seen it fit to give a few individuals too much power, without placing the correct checks and balances upon them. This creates a situation that allows "nasty" agents to exploit it for their own benefit. Don't blame the hackers. Blame the system designer (a security researcher told me this). You must assume, upon creation of a system, untrusted and "nasty" agents and deal with them (at some cost). This is how cryptographers and security researchers work to ensure our safety. Maybe we should get them to look into this problematic mess (they love finding flaws in systems :D). It's easy to blame Hitler for the Holocaust (which was a despicably evil thing). But you must also consider how one could've stopped a situation from developing such that an artist drop out could end up seizing control of an industrial powerhouse.
  - danmaz74 14y ago
    If you say don't blame only the hackers, I agree. But the hackers that - knowingly and selfishly - violated the law must be punished, not given a free pass because it was the fault of the system. Then you should also improve the system; the two things aren't mutually exclusive.
    - confluence 14y ago
      Ah but you see here is the kicker (and I totally understand your point). When designing systems you must severely reduce the ability of "nasty" agents to take advantage and exploit you for personal gain. We should also enforce standardized punishment for those that successfully exploit the system. LIBOR left the gate wide open! That's 10x more important than punishing any one person that just walked in (and they should be punished - I don't disagree). But focusing on the people is the wrong mental attitude to adopt. I keep hearing things like "So and So has $100 million dollar salary and he should be punished for bringing the house down". I really want to hear things like - "Who the bloody hell let this happen in the first place?". That's all I'm saying. Punish hackers all you want but if you want true robustness you must rectify the exploits present in the system.
netcan 14y ago
In one sense you are very right, on the other I think this is a very wrong way of thinking of these things. At some point liberal economics-philosophy became very uncomfortable with the whole concept of ethics, norms, conventions and such. Slightly ironic as Smith was (IMO) a moral philosopher primarily (eg "The Theory of Moral Sentiments") with "economics" being a supplementary way of understanding right & wrong. When you view the word entirely from an economics/incentives/meta-institutions I think you are giving up on some things that are extremely important. Societal norms, shame, morality: these are a natural and integral part of how human society works. Laws and regulations are important too, but one cannot replace the other. There is a problem with diffusion of responsibility combined with corporate mandates and institutional mentality eroding how people behave. Taking the cold incentives view, you look at employment for example as an agreement fully captured in a contract with no further responsibilities on either side. It's negotiated based on market prices. That's true in one sense, but looking at employment that way does not capture a lot of crucial nuances. Treating it that way is not a natural way for humans to interact and will not achieve the best results, psychologically or economically. You need employees to be intrinsically motivated, believe in the company, belong, be obligated. They expect respect and care and empathy and responsibility from the employers. This is very basic and it plugs into parts of human behavior that are older than money and older than humans as a species. Its hard to capture in an equation or a model. It's even hard to capture in a "theory" of psychology, sociology, history or whatever. So, there's a tendency by people trying to understand things to ignore these crucial elements. That's absurd. A society from a household to a company to a country cannot function based on individuals narrowly and coldly following their self interests (even though you can prove that they do). More importantly, no "law" can work if the only reason anyone follows it is fear of punishment.
- confluence 14y ago
  I'm not purely incentive (that would be much too simple :). We must use any and all tools at our disposal to ensure the correct working order of valuable systems - such as finance (proper allocation of capital to risk is a great thing!). Exploiting human desire, psychology, biases, irrationality and behaviour to create robust systems is a great idea! The are just some of the many tools that we have at our disposal to protect ourselves from abuse by "nasty" agents. This then allows us to move forward towards a more prosperous, robust and stable society in the future. What I don't like is treating the symptoms (these financial hackers if you will :), instead of the cause (improperly checks and balances at centres of power). Bring on the shame and the like - I'm all for it. But we should at the very least focus on fixing the causes (exploits in the system) rather than the hackers that exploit them (just like in security research).
jonnathanson 14y ago
Disagree pretty strongly with the first few paragraphs here. The vast majority of U.S. and U.K. citizens had jack-all to do with putting the fox in the henhouse; financial regulators are appointed, not elected. But I agree with a large part of what you're saying. This is, in many ways, a systems problem and not a people problem. Even if it's a people problem at the local level, it's a systems problem at the macroscopic/scale level -- and so it's much more effective to work at the systems level than at the people level. That's what our regulations attempt to do: put in place systems, checks, and balances, that will prevent bad behavior via incentive structures and pure mechanics. Unfortunately, some of the key systems and stopgaps in place have been vastly eroded in recent years. And I'm not even talking about Glass-Steagall. I'm not even talking about the blatant failures in oversight that allowed the banks to grow as large, as consolidated, as vertically and horizontally integrated, and as systemically important to the economy as they are ("too big to fail"). I'm talking about things like the Citizens United decision, which will only exacerbate these problems in the long run by allowing money to completely influence our political system. It isn't the U.S. taxpayer who put the fox in charge of the henhouse. It's the fox who purchased the henhouse. That shouldn't be allowed to happen. Instead of playing a game of constant one-upmanship with financial regulations, forever trying to outwit the "financial hackers," we should start by drawing clearer divides between money and politics.
- confluence 14y ago
  Of course it isn't the common man I'm blaming - he has enough trouble paying the damn electricity bill! This is not the fault of the common man. This is the problem of intelligent people doing stupid things for selfish reasons. We (meaning those who understand these systems) must fight and convince the common man that regulation IS good IF the situation calls for it. People think regulation is bad and capitalism is good. We should convince them that both are great GIVEN the correct situation. I love capitalism - I also love having my electricity stay on and stable (remember Enron energy trading in Northern California people? - dark times (pun intended!). I merely state that regulation has a PR problem and that the people who have the ability to change that, should.
  - jonnathanson 14y ago
forgotAgain 14y ago
Anyone else got suggestions? Break up the banks.
- ajross 14y ago
  I keep thinking that it really is this simple. All the problems of recent years are problems of scale. In a world of thousands of banks landing to each other in a big market, you can simply measure the rates instead of trusting a handful to come up with LIBOR. In a world with thousands of banks, a handful would have gone under from bad exposure to real estate volatility and spooked the rest into being more conservative, instead we had to wait for Lehman to fail to realize how bad things were. There's no social or economic value to the BofA & Chase-sized monsters that I can see. Just chop them up and put an incentive in place (extra tax beyond a certain revenue, say) that encourages them to spin off more banks.
  - forgotAgain 14y ago
    I see it pretty much the same way. All of the talk is just putting too fine a point on it. The benefit to society for having banks so large is negligible compared to the costs.
intended 14y ago
Analogy wise - We didn't let the foxes in the hen house, the hens asked and got more freedom to manage the coop. They invited hens and animals from other farms over used them to run an abbatoir. Our imagination can't believe it, so we talk of foxes. I agree with most of your points, except that the umbrage directed at the Fin industry is too personal or heated. I think most people who are intelligent, can't fathom the level of the atrocity being committed here. For Libor, they are being accused of flat out fraud. Fraud so utterly blatant that it was normal for the industry. And Barclays is one of the 'good banks' - its getting off of on good behavior. This is just rapacious greed, fraud, and abuse at a scale that the word definitions come across as weak. ----------------- Link for interest Morgan Stanley's stab at what the fines might look like/via FT alphaville - http://ftalphaville.ft.com/blog/2012/07/12/1081181/some-more-big-scary-libor-risk-numbers-to-digest/ http://ftalphaville.ft.com/blog/2012/07/12/1081181/some-more...
glesica 14y ago
I agree that social systems should be designed to minimize the amount of damage corrupt individuals can do. But that doesn't mean we shouldn't blame the corrupt individuals for their behavior. The author mentions regulatory capture and specifically refutes it as a defense for bad behavior. I also don't think it is possible to build a complex social system that doesn't rely on trust. I suggest reading "Liars and Outliers" (http://www.schneier.com/book-lo.html http://www.schneier.com/book-lo.html) if you're interested in this stuff. I enjoyed it a great deal.
afterburner 14y ago
"I feel that a lot of the blame heaped upon the finance industry is unnecessarily antagonistic (and personal)." This is clearly a response to the defensive, entitled, and holier-than-thou attitude the financial industry had in the wake of the 2008 crisis, not to mention the lack of consequences to finance directors or serious financial reform. They closed ranks, hard, which by necessity elevates the level of the attacks against them, which therefore seems antagonistic. Tried talking to a banker about this stuff in 2009? Impossible to have a discussion not rife with blame-shifting.
nathansobo 14y ago
Of course it's a systemic problem. But individuals are components of that system. If you don't punish people who engage in fraud, you remove a valuable disincentive against fraud. So while the system as a whole needs to be reformed, making individuals take personal responsibility for wrongdoing is part of that.
sehugg 14y ago
This is because no matter how "noble" people say they are (they may be sincere!) - abuse will inevitably become rampant - it is human nature. We have this thing called "prison" which is supposed to curb those abusive tendencies when they get out of hand. We seem to be underutilizing this resource in our handling of financial fraud.
dpatru 14y ago
> We need to stop trusting people - period. This is why, at least in the US, we have 3 branches of government, so that each one will check the other out of self-interest and balance possible abuse/corruption (not perfect - but pretty darn good!). I think you have the right intuition, but you don't go far enough. The root problem in finance is that people have turned over to government the power to control money. There is too much trust in government officials and in the banks that fund them. Government's ability to control money has resulted in fiat money that is constantly being devalued, encouraging people to make risky investments and to take on debt. This has been very profitable for government, which has ready access to low-cost funding. Fiat money has also been very profitable for banks, which through the "magic" of fractional-reserve banking, have been able to loan with interest money they can simply create. The solution is to take away the power to control money from government. Let people decide what they will use as money and they will choose money that maintains its value. They will also invest in institutions that do not use fractional-reserves and other risky schemes and thus are not subject to bank-runs. A US politician that is talking about real reform is Ron Paul. The bill that would allow currency competition is The Free Competition in Currency Act. It's about one page long. http://www.govtrack.us/congress/bills/112/hr1098/text http://www.govtrack.us/congress/bills/112/hr1098/text Give people the freedom to choose their money, let them choose to invest it in the institutions of their choice, and problems like the Libor scandal will stop being so important. The people who committed fraud will be prosecuted. Damages will be paid. Reputations will be damaged. People will choose to bank elsewhere. No problem. By trusting government to control money, fraud in the few institutions favored with a bank charter becomes a very important issue. It doesn't have to be.
- base698 14y ago
  Indeed... We need to go back to feudalism where we can sell our hacking skills in exchange for slavery to our VCs for 8 years. After the 8 year mark we can finally start drawing a salary instead of just getting room and board and catered lunches. The reason for fiat money is to allow for venture capital and allow new people (immigrants, new births) room in the economy. Granted what has gone in recent times clearly gives certain people more leverage and ability to escape punishment when they play outside the rules. Something should be done about that, but going back in time to feudalism isn't going to solve the problem.

shareme 14y ago

The actual harm is when the general public gets the notion that 'The Market is Rigged' and goes into other markets with the assumption that the next market is not rigged..for example crowd funding startups..

deleted 14y ago

[deleted]

alpine 14y ago

I don't think the problem is with the financial industry. The issue is most definitely with the financial/political system. We haven't run true capitalism in the Western nations for decades. It has been a hodge-podge of crony capitalism mixed with token dribs of 'social democracy' championed by wealthy political elites that no more understand the life of eg a bus driver than a tea leaf understands the history of the East India Company. Take the Libor scandal. Would this have happened if the banks had not been repeatedly bailed out - 'too big to fail' - giving traders the impression that they worked in a politically-sanctioned realm where the normal rules of capital did not apply? There is no danger of your company going bankrupt through loss of reputation or massive, penal fines for criminal behaviour if you have an unconditional sovereign back stop.

bedris 14y ago
Exactly. Take entrepreneurship: the founder is rewarded financially if he/she succeeds but is punished financially if he/she fails. The banks, on the other hand, were rewarded financially when they made money for their clients (in the form of performance bonuses), but were bailed out when they failed to carry out their job successfully. This asymmetry is antithetical to capitalism. I like how Nassim Taleb put it: "the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses."
- confluence 14y ago
  One should also beware the insurance industry - it has essentially the same incentive structure. Sell cheap insurance while times are good - take profit/options/stocks and leave. When a catastrophe happens - go bankrupt and allow the government/people to socialize the losses for improper risk management. They also take advantage of socialized protection such as national defence, fire-fighters, police officers and ambulance drivers. They don't have to pay for them in proportion to the reward they receive for their services (society pays for them). Hence their risk is mitigated by society whilst privately profiting from our shared risk. Insurance is a great thing (no doubt about it!) - but these moral hazards exist in many systems around the world and they must be addressed. This is also why insurance is so highly regulated - the ability for financial impropriety and abuse is just too damn high!

mark_l_watson 14y ago

I think that this is the kind of cronie-capitalism that Ayn Rand and her modern day followers attack. Their idea is that capitalism is good in a purer form where large inefficient businesses are simply allowed to fail. In fact this is a major theme of "Atlas Shrugged," that the government supports weak businesses run by cronies of political leaders.

debacle 14y ago
The government has supported weak businesses run by cronies of political leaders since Ancient Greek times, and probably earlier.
- mark_l_watson 14y ago
  I certainly agree with you that this is a long term trend but in my lifetime (I am 60) it seems to have become much worse in the last couple of decades.
  - debacle 14y ago
    The sentiment has always been as bad, the problem is we have a complicit, apathetic populace and a much more organized and empowered aristocracy. I can't help but feel that this situation has been engineered.
rst 14y ago
This wasn't government arranging favors for large, well-connected businesses. It was large, well-connected businesses arranging favors for each other, at the expense of everyone else. What's happening now is the government putting a stop to it. You may believe that there's some alternative to government regulation that would prevent this sort of thing happening --- but to date, that's what's worked most effectively, and Rand & co. would take it away.
- mark_l_watson 14y ago
  I think that Rand is an excellent writer and she does have interesting, if idealistic, ideas. That said I have not drank the Rand cool aid. For example, the idea of totally dismantling the EPA (current republican political plank) grosses me out. Also, one of the few valid functions of government is to enforce a small set of laws. Remember that 50K new government regulations were created in 8 years of W. Bush and I am confident that it will be as bad at the end of the Obama administration. There really are no absolutes: different philosophies all have their own strengths and weaknesses, but in different ratios :-)

intended 14y ago

In Case you want an idea of how LIBOR rates looked to people in the industry while this was going on - "Frankly, anyone with a Bloomberg terminal in 2008 would have been in on this, as one could see that the rates various banks had submitted did not reflect where they could fund. Deals were getting torn apart all over the place because no one could ramp up funding at a decent rate, despite what those screens said." ..... "But it was just accepted. A great number of people didn’t even clock that there was a whistle to blow. Why might that be? We’d posit it’s because they didn’t even perceive what was going on to be wrong, and that it probably has a lot to do with social conformity (within the sphere of banking)." Source: - http://ftalphaville.ft.com/blog/2012/07/02/1067701/libor-manipulation-and-the-invisible-whistle/ http://ftalphaville.ft.com/blog/2012/07/02/1067701/libor-man...

T_S_ 14y ago

The solution is close to hand and it does not involve regulation--at least the kind that regulators want. The solution is transparency. Just make all the big banks report their actual transaction on a live feed. This simple solution would have been infeasible even 20 years ago, but not any more. The implications would be enormous. No more need for accounting reports, indexes or anything else that requires a judgement call by a corruptible human. The job of watching the banks would pass from the power hungry (or worse, sleepy) regulators to the public (you and me). Once upon a time I performed the risk mgmt. function for a portion of a large bank. We used a couple of servers running every night to track a few thousand positions. The system knew every detail of about 95% of the positions. Today a team of 50 could track the entire banking system--given the right feed. Make the same information I used public and open to competing teams of analysts and then risk becomes a known quantity. Of course, banks and regulators would be strongly opposed to this approach. They will howl about privacy, proprietary information etc. But the fact is when you ask a bank for a loan, they know all of your relevant financial information in order to judge your risk. It's only fair for the taxpayers to turn the tables and end our old-fashioned and broken system of disclosure. And if the risky part of banking is driven into a part of the industry that doesn't share information, then their investors should do without a safety net.

vegas 14y ago
But won't this level of transparency hurt profits?
- huragok 14y ago
  Adapt or die.
- vijayr 14y ago
  what if it is not real time, but delayed by a few days or weeks? Will it still hurt profits?
- T_S_ 14y ago
  It certainly would if only one bank did it. However such a rule would have to be evenly applied. My belief is that this would drive down volatility in markets since it would end the game of "Old Maid" in a crisis. Depending on how many institutions were under this rule, trading volumes may decrease, although I could argue this the other way as well.

T_S_ 14y ago

snorkel 14y ago

I always compare Wall St to Las Vegas, as both offer a very similar financial service, ie. gambling, except Wall St has two distinctions: 1. Wall St pretends it is not gambling when in fact it is. Actual return on investment for any stock or fund is completely non-deterministic, and therfore it is gambling. 2. Las Vegas casinos are more carefully regulated than Wall St banks. In Las Vegas the rules and the odds are clearly known, and standards are carefully enforced. Indeed casinos don't even need to cheat to be profitable, because the math of the already works in their favor. So Wall St and Las vegas are the same, except Las Vegas is honest.

eliasmacpherson 14y ago
I would add a third, being scale, when Wall St. panics the US government steps in.
- saraid216 14y ago
  It's not just scale, if I understand things correctly. One problem is that a lot of state and city treasurers think that it's smart to take some of their tax revenue and hand it over to banks for investment, making them as vulnerable as normal citizens. In theory, this is a good idea because that money gets loaned out to startups and homebuyers. In practice, well... crises and stuff. This is largely what I've gathered from my brief foray into understanding why a state bank is a good idea.
deleted 14y ago
[deleted]
- snorkel 14y ago
  Wall St brokerages pretend they are not in the gambling business by presenting their offerings as something every resposible adult should be pruchasing to secure their financial future, and then only making passing obligatory mention of the risks in way down the fine print. In fact the general public has bought into the whole notion that not giving your entire retirement savings over to Wall St to manage for you is irrepsonsible on your part, and letting money sit in the bank and do nothing is irresponsible.

d2vid 14y ago

> The notional size of the derivatives involved is on the order of $360 trillion. Total worldwide wealth is estimated at only $200 trillion. These derivatives are not serving their useful function as a hedge and are instead being widely used for speculation. http://www.zerohedge.com/article/detailed-look-global-wealth-distribution http://www.zerohedge.com/article/detailed-look-global-wealth...