Has Anything Changed?

http://online.wsj.com/article_email/SB124908601669298293-lMyQjAxMDI5NDA5MTAwODE2Wj.html

http://www.nytimes.com/2009/08/03/opinion/03krugman.html?emc=eta1

Paul Krugman's OP-ED on "Rewarding Bad Actors" (8/3/09: copy attached) addresses two recent news stories that caught his attention (and mine). The first is on "high-speed trading" and the second on Andrew J. Hall at Phibro (now a division of Citigroup). On high-speed trading, I've attached an excellent WSJ article that explains what it is and some of the terminology that's used in that business (high-frequency trading is defined as computer-driven, algorithm-based trading at computer speeds measured in millionths of a second): flash orders, naked access, etc.

As Krugman points out, "... crashing the economy and fleecing the taxpayers aren't Wall Street's only sins. Even before the crisis and the bailouts, many financial industry high fliers made fortunes thru activities that were worthless if not destructive from a social point of view."

With high-speed trading, some institutions, including Goldman Sachs, have been using super fast computers to get the jump on other investors, buying or selling stocks in a tiny fraction of a second before anyone else can react. Profits from high-frequency trading are one reason Goldman is earning record profits and likely to pay record bonuses.

Andrew Hall leads an arm of Citigroup that speculates in oil and other commodities. His operation has made a lot of money recently, and, according to his contract, Mr. Hall is owed $100 million. Seriously.

What do these stories have in common? The politically salient answer is that in both cases we are looking at huge payouts by firms that were major recipients of federal aid. Citi has received $45 billion from taxpayers; Goldman has payed back the $10 billion it recieved in direct aid, but it has benefited enormously from federal guarantees and from bailouts of other financial institutions. As Krugman points out, "What are taxpayers supposed to think when these welfare cases cut nine-figure paychecks?"

Now, financial speculation, Krugman continues, can serve a useful purpose - it's good, for example, that futures markets provide an incentive to stockpile heating oil before the weather gets cold and stockpile gasoline ahead of summer driving season. But, speculation based on information not available to the public at large is a different matter. Such speculation often combines "private profitability" with "social uselessness".

Read on in Krugman's article for the economics of how the activities of high-speed trading and Mr. Hall's trading in gas and oil (amongst other commodities) make us all "poorer". When you fill up your tank with gasoline, think about how the worlwide demand for oil has dropped 4 million barrels per day since the financial crisis began and that the refinery production of gasoline in the U.S. has been cut back consistent with that slack demand. But, prices at the "pump" are going up because of "speculation" that the economy is coming back (so, obviously, "demand" is coming back). So, who's doing the speculating? And, how large will Mr. Hall's bonus be?