Time to Throw the Traders Out the Temple (Part 1)

Every action that the US government is currently undertaking to supposedly "rescue" our economy has more theatrical effect than structural impact. The bailouts, the debt buyouts, the interest rate cuts, all appear designed to artificially prop up certain nosediving assets and mildly encourage a loosening of credit markets without substantially addressing or mitigating the immediate or eventual social costs of financial meltdown.

The corporate propagandists are out in force pitching the notion that those in power are doing everything they can, going to extraordinary lengths to buttress grassroots pocketbooks. Of course the corporate propagandists will never tell you the truth about Wall Street because they are an essential institutional component of the Wall Street racket. A ubiquitous media industry has been foisted upon public consciousness by the titans of finance in order to push the "free market" ideology of post-industrial corporatism, a manic 24/7 tickerfest of babbling chumps and lackeys, psychic interpreters of numbers, lines, and arrows, peddlers of purposefully-opaque jargon and tongue-twisting quadruple-speak.

The Wall Street racket is essentially a colossal debt pyramid which must continually convince or coerce people to feed it so that money keeps getting funneled upward while risk gets distributed downward. So manipulating perception is crucial because convincing people to pump their money into a debt pyramid requires winning their trust. That's why bankers wear pinstripes and conduct their business in stately marble buildings with imposing pillared facades: they need to create the impression of permanence and stability and trustworthiness because they actually have nothing to sell but numbers on paper and thin air.

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Financial pundits frequently talk about "investor panic" using the language of mass psychology to explain large movements in the stock market; yet in reality, a high percentage of market transactions are the result of algorithmic trading, which is to say, transactions initiated and conducted by software systems, which are not subject to emotion but simply follow instructions based on mathematical equations developed by quantitative analysts. The quaint impression that the market is affected when Ms. Lee on Post Road gets freaked out by TV news, calls her broker, places an order to sell, and that order makes its way onto the floor of the New York Stock Exchange where it converges with like-minded orders, is a myth. There are so many layers of abstraction and indirection built up in investment banking that I doubt any transactions of individual investors ever come within a hundred degrees of separation from a trading floor.

Most trades these days don't even involve stocks or bonds, but derivatives, which are contracts establishing conditions and rules for the buying and/or selling of stocks, bonds, or other derivatives. For example, a common derivative would be a stock option; which, say, gives me the right to buy GimongoCorp stock at $5 per share by a certain date; and if GimongoCorp stock hits $10 per share by that date, I get to double my money by executing the option. But here's where it starts getting funky: the option contract itself can be assigned a current dollar value according to market conditions (using a tricky little piece of calculus known as the Black-Scholes model) and traded on that basis. So for the most part, investment banks have ended up trading not merely stocks and bonds but derivatives of derivatives of derivatives of...and so on. The result is an impenetrable layer of multi-dimensional mathematical abstraction between the allocation of physical resources (i.e. actual societal investment) and the free-market mechanisms which steer that allocation, the proverbial invisible hand.

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The most tangible asset that a US citizen can "own" is a plot of land with a house on it. The single biggest historical driver in the accumulation of US wealth has been the theft, redistribution, and subsequent inheritance of real estate. From plantations to Indian reservations, from the Homestead Act to post-Civil War ethnic cleansings, from Jim Crow redlining to the covert racism of modern mortgage practices, the dominant culture has worked tirelessly to build multi-generational economic structures that enrich and advantage white communities while obstructing and disrupting the accumulation of wealth by communities of color. I don't have to explain to readers here how African Americans and Native Americans and other people of color have waged long and bloody battles to knock down many obstacles. The Fair Housing Act, the Home Mortgage Disclosure Act, the Equal Credit Opportunity Act, and the Community Reinvestment Act all marked legal victories in anti-racist struggle; yet we all know that it takes more than legislation to reform centuries of racist cultural practice. Nevertheless, over the years many people of color succeeded in beating the odds, managing to acquire and defend real estate holdings, building thriving families and communities in largely hostile environments.

Now a strange thing happened in the 1990s. Wall Street had fallen in love with PhD's in math and physics, quantitative analysts known as quants, who whipped up outlandish theoretical investment models which nobody could possibly understand but which seemed to work. The quants developed esoteric derivative schemes which made the craziest high-risk high-leverage speculative investments look quite reasonable according to probability charts. Wall Street blew off its late-80s blues and went buckwild in the Clinton-Greenspan era of dot-coms, options-funded startups, emerging markets, and so-called free-trade globalization. As US manufacturing got gutted, Wall Street cheered and cashed in on it. Wall Street stormed the IMF and World Bank with quants who could mathematically legitimize severe crackdowns on the global poor, using colonial debts to lean on nascent governments and impose structural readjustment programs designed to create economic subservience. Meanwhile CNBC and Bloomberg sprang out of the muck to blast non-stop propaganda about how 401K's made everyone an investor and what's good for the Dow Jones is good for you.

Of course, the trouble with pyramid schemes is that they're always either growing or imploding. The dot-com collapse and the Asian financial crisis brought the 90s to a close on a dour note; Wall Street needed another bubble to pump up and plunder. Real estate was there to do, a historically-solid anchor of US wealth which everyone wanted to get in on. The math nerds calculated that it would be profitable for banks to extend carefully-written loans to people who had previously been denied. This had nothing to do with affirmative action or the Community Reinvestment Act or any other attempt by communities of color to gain equal access to housing; this was bankers finding borrowers in order to inflate a capital bubble to be exploited by those bankers. The lending strategy was similar to credit card schemes: tempt consumers into deliberately-murky debt situations, then keep them on the hook for the rest of their days, sinking energy into paying unreasonable fines and interest rates. Mortgages were trickier than credit cards because they involved actual houses and land, but nothing is too concrete for Wall Street to render abstract; quants came up with derivative instruments which not only pooled loans and redistributed risk (i.e. securitization), but sliced up that risk into fine slivers and constructed new derivatives upon those (e.g. credit default swaps), and even more esoteric derivatives upon those, and so on. This was and is the teetering funhouse of subprime mortgages and mortgage-backed securities.

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[ To be continued - Part 2 ]

Comments

[nezua]

Pullin a Kai with the economy! Nice, bro. Lookin fwd to the rest.

[ZC]

I agree with Nez! A succinct, clear, and razor sharp analysis of the bamboozle that is our financial industry. No wonder I never understood it -- it's nothing but air...nothing but air.

[Kai]

Nez, ZC, thanks! I better get on part 2, things are moving quickly...

[Maegan la Mala]

Ay gracias for reminding me of those years lost on wall street and why I left!