Pro Market vs Pro Business

This video has been making the rounds, and I’ve got to say the trader being interviewed does seem to be trying hard for a “first against the wall when the revolution comes” award.

I think one of the natural reactions many people have when seeing something like this is: How can you be pro-market when you see this is what markets are all about? This guy is gleeful at the idea of making money off a market crash that wipes out millions of people’s retirement savings!

The answer, I think, is in keeping in mind the difference between being pro-business and pro-market. Businesses are not necessarily pro-market, since markets only reward businesses so long as they are doing a better job at meeting customers’ needs than other businesses. Markets can, thus, both reward businesses and also chew them up and spit them out.

Watching some cocky trader bragging about how he’ll make money while everyone else is going broke tends to make people feel like what they need is a champion sitting behind a regulatory agency desk to rein his excesses. The problem is that we don’t really have any guarantee that the people in our legislative and regulatory bodies will be any nicer than this guy, or any less prone to think that they know more than they really do.

25 Responses to Pro Market vs Pro Business

  • Yeah, I don’t know that I’m necessarily “pro-market” as much as I am “anti-big-governement-know-it-all-trying-to-pick-winners-and-losers”.

  • Good distinction. In this time of bailouts, the very concept of capitalism, it seems, is being rewritten by Obama and his cohorts.

  • Are these twin evils really our only options?

    Must we put up with one to spite the other?

    Are we not letting those who tell us that one is necessary to avoid the other shape the narrative a bit too much?

  • “We don’t really have any guarantee that the people in our legislative and regulatory bodies will be any nicer than this guy, or any less prone to think that they know more than they really do. ”

    Well, I guess that’s what checks and balances and the three branches of government are for, why due process is such an important concept, and why democracy is the worst form of government except for all the others.

  • “We don’t really have any guarantee that the people in our legislative and regulatory bodies will be any nicer than this guy, or any less prone to think that they know more than they really do. ”

    Actually I think we have plenty of evidence that they would be worse, as the present administration has done its best to establish beyond question. I agree with Reagan that one of the most terrifying phrases in the English language is, “I’m from the government, and I’m here to help!”

  • Brett,

    Sorry, I’m a little confused. Which twin evils? Which narrative?

  • Elaine,

    Agreed, to an extent. I think the difficulty is that the more detailed the way in which our governmental agencies get in the way they try to guide or fine tune a particular industry, the harder it gets for checks and balances or due process to work in a transparent fashion, simply because it gets very hard for the rest of us to have any clear idea whether they’re doing a good job or not. All the parties able to tell us are involved and interested.

    I think this is why it’s so important (and so hard) to have have set up a simple and strong legal and cultural framework that allows “truck barter and exchange”. It’s something we’ve been the lucky inheritors of in the much of the West, and which has been surprisingly hard to build quickly and from scratch in the former Eastern Bloc, though obviously we’re making progress on that (it’s better than it was.)

  • “The governments don’t rule the world, Goldman Sachs rules the world.”

    I am only shocked about how out in the open he is. He is only telling the truth about his profession.

    My savings are going into a rototiller and canned food. This is only going to get worse for the non Goldman Sachs of the world

  • I am only shocked about how out in the open he is.

    He is not being open, he is being flippant. You will recall that just three years ago Goldman, Sachs was in need of a bridge loan to keep from sliding into bankruptcy. They have a book value of (IIRC) around $85 bn in an economy where publicly traded corporations have a market capitalization of $12,000 bn.

    Actually I think we have plenty of evidence that they would be worse,

    Politicians do not talk like this fellow, because they have to stand for election and they would be in more danger than they would care to be from newspapers and thus a section of the voting public. All of which is to say that the matrix in which politicians work has some antibodies to protect the whole against flagrantly predatory behavior. Rahm Emmanuel talks like this, but he is quite unusual. As for the civil service, which of the regulatory agencies, however officious, profits from the destruction of your retirement savings?

  • In my profession Art, I am quite familiar with empty bombastic talk, and I tend to be focused more in regard to actions. Current actions of the government in the retirement arena include saddling the nation with huge public employee pensions which simply cannot be paid. As for the ponzi scheme, as it is aptly termed by Governor Perry and a myriad of others, called social security, I no doubt will obtain some benefit from it due to my age, but for our readers 35 and under, that particular trust-me-I’m-from-the-government con will be as one with Nineveh, Tyre and Unicorns.

  • The twin evils you present: the wicked trader and the corrupt (and/or inept) regulator.

    The narrative being either that we must put up with the trader because the regulator is worse or, alternately, we need the regulator because of how wicked the trader is.

  • Your view of the pension situation is colored by your residence. Illinois is as bad as it gets.

    I agree that public employee compensation is a scandal, but there is an implementable repair: convert their retirement pensions into defined-contribution plans financed strictly by deductions from their stated wage and salary.

    The experience of the last two years strongly suggests that the public-employee unions are not impregnable as an interest group.

    With regard to Social Security, it is an income transfer program readily sustainable with some modest adjustments. It is not a Ponzi scheme and Republican politicians need to stop (right now) confusing matters by using misleading appellations.

  • I guess I’m not clear on what regulation would solve here. I suppose we could ban short-selling. That would be quite a paradigm shift, but even then, smart investors would find proxy investments (or even U.S. treasuries) that will enable them to bet against the financial solvency of the euro (which appears to be doomed in any case).

    There’s something sociopathic about rooting for Rome to burn because of the great investment opportunities it will lead to, no doubt, but I am not sure what regulation would solve here. Unless we plan to abandon allowing investing altogether we won’t be able to prevent jerks like this guy from hoping that his particular bets pay off. To me, the basic public policy lesson to be drawn from the video is that this guy is a tool. What am I missing?

  • With regard to Social Security, it is an income transfer program readily sustainable with some modest adjustments. It is not a Ponzi scheme and Republican politicians need to stop (right now) confusing matters by using misleading appellations.

    Completely agree. This is a straight income transfer of money between the working population and retirees of a certain age. The demographics are shifting and so we need to make adjustments to the transfer mechanism. Not to be pedantic, but here’s a definition of a Ponzi scheme:

    “a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation.”

    To me it’s clear that 1. Social security is a tax, not an investment; 2. it is not fraudulent; anyone with access to the intertubes can quickly understand how the transfer works; 3. No profit is supposed to be generated by the social security program.

  • Those with 401’s that do not permit shorting I would urge to start a Roth IRA and run it parallel to your 401 ( switch yearly to it after company matching reaches it’s yearly max.) In a Roth, you can short the entire market with one etf …SDS…which two times shorts the S&P). In the recent market downturn, I stayed floating above the mess and stayed even on my principal by buying SDS just as you would a stock and selling many stocks til I was twice the stock amount that I had in SDS. I floated at even for weeks. Avoid triple shorts unless you’re aware of their illiquidity.
    Susy Orman recommends the parallel Roth even without the shorting advantage.
    You cannot short stocks in an IRA but you can buy inverse etf’s which short the market or a sector for you automatically and are not nearly as risky as shorting a stock. Should the market suddenly turn prosperous, you can have all shares of the inverse etf sold by your computer when you’re not paying attention by issuing a trailing stop loss sell order at say 2% right after you buy it.
    What this system does is protect your pension by floating above the trouble during down
    turns. Traders on the other hand may be in inverse etf’s for days in a bad period to actually make profit as the market sinks. But you can use the same inverse etf’s just to prevent loss during bad weeks to your pension total or at least greatly reduce the loss depending on the proportion between your 401 and your Roth Ira totals

  • For those wondering about the essence of shorting so that they can parse it’s morality…here it is briefly:

    1. A man works in a mall and he notices that fewer and fewer people are going into Macy’s each day. He has a non ira account with a broker and he decides that Macy’s seems to be going downhill.
    2. He calls his broker and says he wants to borrow $10,000 worth of Macy’s stock (370 shares) and sell it immediately. NOTE….he has not spent any money yet but he has received $10,000 for selling the 370 shares right away.

    3. But now he owes to the broker 370 shares of Macy’s stock and the broker gives him two months to pay back the shares. Slowly the price of Macy’s stock goes down week after week because the whole economy and market is going down and now the mall worker buys 370 shares of Macy’s for $7000 because it’s price has fallen 30%. He then gives the broker the 370 shares.

    4. He….the mall worker….received 10k at the start but had to repay the shares and because Macy’s went down, he only had to return 7K’s worth of sharex because he is paying back share number not money. He made 3k by predicting Macy’s would go lower.
    5. Could he have lost? Yes…big time if suddenly world problems were solved suddenly and Macy’s went up 30% with everything else. Then he received 10k at the start but had to pay 13k to buy back the 370 shares and he would have lost 3k instead of making 3k.

  • Brett,

    I guess my narrative is a little different. I’m saying that because one is pro-market (an appellation I would accept) does not necessarily mean that one approves of this kind of conduct or that one is “pro-business” in the sense of thinking that we should applaud what businesses, businessmen or business interests do or want. To be pro-market is perhaps in part to recognize that characters like this are inevitable, but rather than saying “greed is good!” or some such nonesense my response would simply be that markets are (given the ordering elements of law and culture needed for a market to even function) generally a mechanism for channelling such mischievious instincts to the common good.

    Or as Smith put it: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

    By comparison, I think that command structures often rely too heavily on the presumption that the person exercising command will be both knowledgable and well meaning.

  • John Henry,

    I guess I’m not clear on what regulation would solve here. I suppose we could ban short-selling. That would be quite a paradigm shift, but even then, smart investors would find proxy investments (or even U.S. treasuries) that will enable them to bet against the financial solvency of the euro (which appears to be doomed in any case).

    Well, the facebook friend I originally got the YouTube clip from seemed to think that things such as abolishing corporate personhood, taxing the rich and having the government take over banks would “solve” this kind of problem — but I think that was mostly through a vague association of the clip with feelings of “business is BAD”.

    I’m with you: The main lesson to be learned from this is that the guy being interviewed is a tool.

  • From the annual report of the Social Security Board of Trustees for 2011:

    “Social Security

    Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow. After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.

    Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable wages will grow rapidly from 11-1/2 percent in 2007, the last pre-recession year, to roughly 17 percent in 2035, and will then dip slightly before commencing a slow upward march after 2050. Costs display a slightly different pattern when expressed as a share of GDP. Program costs equaled roughly 4.2 percent of GDP in 2007, and are projected to increase gradually to 6.2 percent of GDP in 2035 and then decline to about 6.0 percent of GDP by 2050 and remain at about that level.”

    Translation: you will pay a lot more for social security and get a lot less in benefits. Of course this is only true if the rosy economic projections on which this is based come to pass, and also assuming that young workers are content to have almost one in five of their dollars confiscated to pay for something they wisely assume they will probably not get. The ending of a Ponzi scheme is always an ugly sight to behold.

  • Rick Perry and I have a lot of company in viewing social security as a Ponzi scheme. A pity that unlike Ponzi schemes where people go to jail, participation was not on a voluntary basis.

    http://www.nationalreview.com/articles/print/276859

  • Bill,

    That’s one of the clearest explanations of shorting that I’ve ever seen — and I think does a good job of explaining why one can’t really stop people from “betting against the market”. Thanks.

  • Let’s not get off into arguing the merits of the “social security = ponzi scheme” thing right here. I’ll happily provide a post for that discussion if needed, as it strikes me that in this case both sides are right, though in different senses.

  • Darwin Catholic
    Your welcome. Ordinary pensioners though are going to have to learn to buy inverse etf’s in a Roth IRA….just to prevent their family’s losing principal in their 401’s where they can’t buy inverses. In a downturn, people get fooled into staying in the market because of the ensuing up days but they are not keeping track of the percents on the up days versus the percents on the down days. That’s why 2008-9 was disastrous for 401’s. People saw the ensuing up days but didn’t notice the next two down days bringing them further down than the up day did.
    Jim Cramer on TV never mentions the inverses for protection of your pension because his job depends on people being interested in stocks…not etf’s.

  • I will be posting on the subject tomorrow Darwin. My interest has been aroused!

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