Apparently HFT is going to bring on the next crash or something

I confess, I do find myself a little puzzled by the coverage of finance and banking over at The Guardian at times. Are their writers actually inhabiting this same universe that we are or are they phoning it in from some parallel one? Tke this example, worrying about the perils of high frequency trading (HFT):

Cynics may conclude that Goldman's damascene conversion is a PR exercise designed to counter some of the more incendiary material that Lewis is expected to disclose. But they would be wrong. After playing a heroic role in the sub-prime mortgage scandal and Greece's economic ruin, Goldman, like all the big banks, is surely now turning over a new leaf. This is just as well. The consequences of a repeat of the 2008 financial crash, conducted at warp speed, are too terrifying for us mortals to get our heads around. History repeats itself first as tragedy, second as farce, Marx observed. But then he didn't have fibreoptic broadband.

My first confusion is that of course it wasn't trading, at high frequencies or not, that actually caused the crash. The markets that do have high turnovers, at high speed, are things like foreign currency, options, derivatives, and now moving into equities. None of these causwed the slightest problem during the crash. That was all about housing finance, the securitisation of mortgages into bonds that were then sliced and diced. Abnd, notably, very rarely traded after they have been placed with investors.Almost all of these bonds were nearly entirely illiquid, no one trading in them at all a month after issuance. And that's what caused the problems given that some banks had held onto healthy slices of these issues. How we can comare the perils of HFT with something that was hardly traded at all I'm really not sure.

As to why Goldman Sachs might not like HFT, can we at least start with the idea that GS is a greedy, profits hungry, capitalistic firm? Good, thought we could get agreement there. So, what's the effect of HFT? It reduces trading margins: reduces the difference between the buy and sell price of any particular security. Who would be unhappy if this happened? The people who make markets, the people making those buy and sell prices of course. A large part of GS's business is in making markets in things. And if margins collapse as a result of more trading and greater liquidity then GS isn't going to be happy, is it?

But over in Guardian world things seem to be different….

Higher food prices reduce poverty

It's a general assumption that higher food prices are bad for the poor. Clearly, it must be: the poor, the truly poor that is, spend some 80% of their incomes on food, if the price rises then obviously they must be getting poorer. Thus all that nonsense from the World Development Movement, Oxfam et al, about how food speculation in 2008 drove up food prices, impoverished more and thus we must ban capitalism etc.

Except that's not actually true. Poverty declined in the wake of that 2008 rise in food prices. Which leads us to, via Dani Rodrik, this paper:

Standard microeconomic methods consistently suggest that, in the short run, higher food prices increase poverty in developing countries. In contrast, macroeconomic models that allow for an agricultural supply response and consequent wage adjustments suggest that the poor ultimately benefit from higher food prices. In this paper we use international data to systematically test the relationship between changes in domestic food prices and changes in poverty. We find robust evidence that in the long run (one to five years) higher food prices reduce poverty and inequality. The magnitudes of these effects vary across specifications and are not precisely estimated, but they are large enough to suggest that the recent increase in global food prices has significantly accelerated the rate of global poverty reduction. The policy implications of these findings are therefore nuanced: short-run social protection is justified in the face of high food price volatility, but passing on higher prices to producers in the long run is an important means of reducing poverty in the poorest countries.

The most important word there is that "producers" in that last sentence. The poor in developing countries are the peasant farmers. They're also food producers: thus a rise in food prices benefits them. The mistake being made by those who insist that higher food prices impoverishes further the very poor is to assume that they are net food consumers. But, being peasant farmers, they're not: a peasant household is a net food producer. So of course higher prices will benefit them.

The situation is quiite different for the urban poor, of course, for they are net consumers. But given that the urban poor are richer than those stuck in the idiocy or rural life higher food prices are still poverty and inequality reducing.

All of which leads to an interesting conclusion. Assume that WDM and Oxfam are correct about the effects of food speculation (they're not), also that they both truly desire to reduce poverty and inequality (your options on that are open) then both organisations should be campaigning for there to be more speculation in food commodity markets.

I look forward to the new campaigns.

A very important point about climate change

As you all know I'm boringly mainstream in my views over climate change. The scientists tell us that we've got to do something, the economists that that something is a carbon tax so I say, great, let's have a carbon tax. And then we get information that rather changes this so far sterile debate:

It puts the overall cost at less than 2% of GDP for a 2.5 degrees Centigrade (or 4.5 degrees Fahrenheit) temperature increase during this century. This is vastly less than the much heralded prediction of Lord Stern, who said climate change would cost 5%-20% of world GDP in his influential 2006 report for the British government.

Here's what Stern did to reach his figure, the one that leads to that $80 a tonne carbon tax. He took the worst possible economic forecast of the next century, the one leading to the highest emissions path. Then he made that worse with a couple of other assumptions. Then he invented (on this, possibly rightly) a new method of calculating net present values. And he assumed thatt here was high sensitivity of temperature to emissions.

However, the essential heart of his argument was correct. We don't want to undertake actions that are more costly now that the damage they save in the future. The limit to our attempts to prevent climate change, and yes he does lay this out, must be the scale of that future damage. To spend more now than that damage then would be nonsensical.

Which is where the new numbers coming from the IPCC come in. We now think that climate senstivity is lower than Stern assumed. Thus the actions that we should take to deter future costs must cost less now. That is, we should rationally be doing less now than we were before.

And the thing about this finding is that it is the boringly mainstream finding too. Which is interesting really, because there seem to be only a handful of people (Matt Ridley and myself being among them, he shouting it from a much taller soapbox of ourse) who even grasp this point, let alone actively promote it.

Can politicians act in an actively stupid manner?

An interesting question can politicians act, at times, in an actively stupid manner? No, not just be misinformed, a bit dim even, but can they end up enacting policies that are so far from their intended consequences that we can only describe them as having been actively stupid?

The answer, you won't be surprised to find out, is yes. As David Henderson points out here.

To recap the story: under Obamacare there are subsidies to the poor who cannot afford to purchase these new insurance plans. However, the law states that only those who buy their insurance through a State exchange can gain those subsidies. Those who buy through a Federally run exchange cannot get them. One can imagine why the law might have been written this way: let's make sure all the States set up exchanges. As we also know, things didn't turn out that way. Most States did not set up exchanges and most are now Federally run. Which means that most customers signing up at most exchanges are not eligible for those all important subsidies. At which point the IRS says this is absurd and allows customers of the Federally run exchanges to have the subsidies.

This is our first admission that yes, politicians collectively can be actively stupid. If even the people running the tax system tell us all that we've got to ignore what they've actually written into the law this is a difficult judgement to escape.

At which point enter a lawsuit. Various characters trying to insist that the IRS must obey the law as it is actually written and deny those subsidies to people on the Federal exchanges. The response to which is but that's insane: it will completely gut the law! Yes, it would: but this defence is our second admission that the politicians acted in a manner which is collectively stupid. The defence being that even Congress couldn't have been that stupid. But, obviously, they were: for the defence is that to obey the law as written would be stupid but it was Congress that wrote the law.

So, I take it that we've now conclusively proved that politiains, as a group, can act in a manner that is actively stupid. At which point we're back to our standard contention. That there are things that must be done, there are also things that can only be done by government. But we should limit the activities of government only to those things that both must be done and can only be done by government for, as we can prove, government is at times actively stupid.

A small linguistic note

One of the worrywart tribe has taken to the pages of The Guardian to tell us all that we have to talk about indeterminate masculine pronouns.

When I set about revising Plain Words, the guide to English usage by my great-grandfather, Ernest Gowers, I soon realised that applying the book's own principles to the job would require me to eliminate from its pages all uses of the indeterminate masculine pronoun. I was under orders to preserve the vintage charm of the original; but a writing guide must demonstrate what it is attempting to explain, and the most famous maxim in Plain Words is "be short, be simple, be human". In the 21st century, "he" used to mean "he or she" is annoying to so many people that it no longer qualifies as "human"– or charming.

I can't say that the use of "he" to mean "he or she" causes me any great anguish. But then as an ageing and privileged white guy I would say that, wouldn't I? However, I would point out that while people are whining about this the very same people are whining that we must move from gender speific job descriptions to indeterminate mascluine job descriptions. I have, for example, been seeing Scarlett Johansson being described as an actor. Which, to an ageing white guy like me seems a little unlikely given the curves she possesses. Similarly, we are urged to use police officer, or police something or other, rather than policeman or woman. The old distinction between chef and cook has gone, to be replaced with the indeterminately masculine chef as the description of one who knows how to season and cook remains as the verb.

Which leads me to my first observation, that some parts of society are schizophrenic (apologies, challenged in their mental stability) on certain matters. How can the same people be arguing that we must not use the indeterminate masculine at the same time as all job descriptions must become said indeterminate masculine?

As it happens I found out something about the Czech language last night (in the pub of course, one of the similarities with the English, and joys, of the Czech culture is that all of the interesting things happen in pubs). Which is that they have the same group of worrywarts over the use of the indeterminate masculine as we do. Except that their answer is entirely the other way around. In order to reduce, fight against, gender discrimination in language it is necessary to use fully masculine or fully feminine job descriptions. Thus Doktor and Doktorka, (leaving aside diacriticals etc), Ingenier and Igenierka, Economist and Economistka*, all the way through all job descriptions. Many of these distinctions are not in common use but the argument is that they ought to be. On the grounds that we can only fight gender discrimination by pointing out that women can indeed do any job in the economy and we should deliberately identify those who do so.

Which leads me to my second observation. This political correctness over gender in language is as with the methods of eating asparagus. It doesn't matter, in any real sense, how one eats asparagus, with knife and fork, with fingers, with catapults vaulting them into open mouths, it matters only that you understand the social class denoted by each method and approvingly sneer at all who do not use the method appropriate to your own. So it is with these worrywarts over the indeterminate masculine. Not only are they schizophrenic in our own language but that the same groups doing the worrying in other languages come to the diametrically opposed solution means that it's all just a method of identifying your tribe and doing so by what you express concern over.

In short we can continue to pay them no mind as I've been doing these past 50 years (umm, 51 by the time you read this).

 

*I don't claim that my Czech is good enough to have got those job descriptions correct, only that the "ka" denotes a women doing that job.