Physics could help financial traders

Oh just great. The last big wave of physicists to move into finance became by and large a bunch of quants. Lots of good it did the world economy. Now here we go again, optimizing digital shuffling to the photon so those with the edge get richer WITHOUT HAVING TO GENERATE WEALTH to back up their gains. Way to go. What does it take for Americans to get it through their thick effing heads? (Some present company excluded, of course...S_H, Eth, etc. you know who you are.)

What does it take for Americans to get it through their thick effing heads?

Of all the trading markets around the world and all the millions of people in EVERY COUNTRY ON THE PLANET that trade stocks, and you put all the blame on AMERICANS?!?

I was completely with you up until that point.

Trading stocks for the sake of sneaking a profit without actually adding to the would's wealth has always bothered me, but I don't blame anyone. If the system exists for taking wealth and it's open to anyone, you can't blame anyone, especially not citizens of just ONE of the countries participating.

Of course. I was referring to the researchers. Look at where they're based. Sorry to offend you, but the the last global economic crises was American spawned (with a big helping from Great Britain), and here we have again, in the wake of this crises (which America is far from out of BTW) a couple of Americans who've just though up this oh wonderful EXPLOIT to move more money into a few hands with 0 wealth created. Does this again sound like one more item in the Rx for disaster to you?

I read stuff like this and it just floors and depresses me. Doesn't it make you just want to pick up your collective ACME mirror and ask "Just what the hell is WRONG with us?" Can't you (collectively) act with more foresight? The Great Depression was also spawned in America...certainly just the size of your economy magnifies the consequences of, lets call them errors. But there's more to it then that. Stuff like the above points to some kind of culturally induced blindness.

Sorry, I forgot; at this point most mirrors are made in China.

Who cares if they make undeserved money.
Its a zero sum game anyways.
I think its a good thing that somehow highly educated people find a way to monetize their intellect at the expense of all the posers playing on the stock market.

Who cares if they make undeserved money.
Its a zero sum game anyways.
I think its a good thing that somehow highly educated people find a way to monetize their intellect at the expense of all the posers playing on the stock market.

If only it were only just "posers". Thing is, the exploit here is hard physics. I.e., they're essentially proposing a way to make it possible, using automatic trading programs in combination with ultrafast switches and computers, to act on trading information before that info is even available to anyone further down the fibre. It's almost like insider trading without the insider. And the people whose savings would be siphoned off aren't just "posers" but folks with regular investments, RRSPs, etc. There's only something good in monetizing intellect in a zero sum game when "good" means "Only what's best for me." And there ya go. One more item in the Rx for the next economic disaster. Where're ya from Tony, if I may ask?

Folks, "trading stocks [and derivatives] for the sake of sneaking a profit without actually adding to the world's wealth" is the MECHANISM whereby risk is distributed through the financial markets to locations maximally prepared to tolerate it. Criticizing that process because you don't like what you perceive to be in the minds of the traders is a little like disdaining a beautiful automobile because it's greasy down inside the engine.

The efficient distribution of risk is one of the critical factors that ENABLES production on ever-larger scales... without it, many enormously productive enterprises would never be undertaken in the first place.

This study is a great illustration of that process. Speed-of-light imbalances are a bar to efficient risk distribution. These imbalances manifest as volatility in the markets, which hamper production but represent an opportunity for traders.
The desire to exploit this volatility drives traders to create systems that do so, which corrects the imbalances, which reduces volatility which drives production UP, creating more wealth to be enjoyed by more people around the world.

Traders who create these systems will enjoy windfall profits in the short term... but then the system achieves a new equilibrium, and their profits are reduced to a steady flow that reflects the value of the stabilization they continue to bring to the global financial system.

Folks, "trading stocks [and derivatives] for the sake of sneaking a profit without actually adding to the world's wealth" is the MECHANISM whereby risk is distributed through the financial markets to locations maximally prepared to tolerate it. Criticizing that process because you don't like what you perceive to be in the minds of the traders is a little like disdaining a beautiful automobile because it's greasy down inside the engine.

The efficient distribution of risk is one of the critical factors that ENABLES production on ever-larger scales... without it, many enormously productive enterprises would never be undertaken.

Yeah. Agreed...to an extent, as long as your talking RISK (whether it's reasonable risk or not is another problem given their dealing with other people's money based on a given agreement). But LOOK at this paper. This isn't about RISK anymore. It's a straightforward EXPLOIT.

This study is a great illustration of that process. Speed-of-light imbalances are a bar to efficient risk distribution. These imbalances manifest as volatility in the markets, which hamper production but represent an opportunity for traders.
The desire to exploit this volatility drives traders to create systems that do so, which corrects the imbalances, which reduces volatility, which drives production UP, creating more wealth to be enjoyed by ore people around the world.

Oh come on. The next step down is asking for quantum information teleportation to improve "risk distribution". This is about stacking the deck in you favour. And to so you have to set up a hub right between two major market points. The first to set this up has the advantage. So everyone else has to follow suit if they want to keep up. The next logical step to gain an advantage it to set up 2 trading hubs, each between the central hub and each of the markets. Rinse, then repeat. Does this sound like fun yet?

iscroft - while that is true for standard old school stock trading, I doubt the high frequency automated trading, with price fluctuations and resulting transactions almost completely unrelated to the value of the underlying hard assets is nothing more than gambling. The market success should depend on discovering good investments from the bad ones, not having faster computer or internet connection.

Risk distribution is all well and good when it's accompanied by equivalent benefits distribution as well. Our current market system, however, does not distribute benefits as effectively as it distributes risk. It certainly does well at distributing risk, as evidenced by the last financial collapse, where many Americans who managed to set up a retirement investment in some investment group saw their investments lose half their value in many cases, and much more in others because risk built up by others was distributed to all. On the other hand, that same mechanism helps to concentrate the benefits sometimes realized by taking risks, and greater efficiencies in the trading mechanism help accelerate that concentration.

Its a zero sum game anyways.

This is a common misconception. Trading stocks is NOT a zero sum game. Trading futures contracts IS a zero sum game (if you want an example of one) and so is plain old gambling.

By definition, a zero sum game means that once you add up all wins and losses, the net result is zero. In a zero sum game, money shifts hands, but the total amount of money doesn't change.

Stocks are not like that. In stock trading, wealth CAN and DOES get created. The price of a stock is not based solely on trades. They're based on perceived performance or perceived potential future profits of the company behind the stock. As a company produces and sells, say, better iPhones, for example, the company becomes more valuable and so does their stock (created wealth).

I'm not making any argument pro or con about stock trading in this post... just clarifying that stocks are NOT a zero sum game.

Further information:
http://www.invest...game.asp

Sorry to offend you, but the the last global economic crises was American spawned

True, but 2 problems with the statement in the context of this thread:
1. That doesn't have anything to do with "optimizing digital shuffling to the photon so those with the edge get richer WITHOUT HAVING TO GENERATE WEALTH to back up their gains."
2. The current financial disaster, though originating in America and also, true, that the people responsible were "American", it was not ALL Americans, nor was it MOST Americans, nor was it anything, generally, about how America is designed to work (generally, about free market capitalism, which is usually what anti-American statements in the context of money relate to). The crisis was caused by the housing collapse, which was caused by 4% of mortgage borrowers not paying their mortgages because they couldn't afford the mortgages they signed up for because the banks were urged by Fannie Mae and Freddie Mac to give loans to high risk
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If these things really are "nothing more than gambling," then why is it that some players consistently profit? There must be more to it.

What makes you suppose that what I have to say is any less true now than for "standard old school stock trading"? Someday what we do now will ALSO be "standard old school stock trading."

By the way, why do you suppose stock tickers were invented? Because the traders who had them gained an advantage over those who did not. Eventually everybody had them and the advantage went away... unless you DIDN'T have one. The result was that the ENTIRE market communicated more efficiently, which was good for everybody.

No termite knows nor cares about the shape of the mound... yet the structure gets built nevertheless. Traders look after their own interests in a FREE and OPEN market... and collectively stabilize a global economy.

People often fear what they do not understand, but some complex things are scary for a reason. The distinction is not obvious.

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to high risk borrowers (which banks are reluctant to do because of the known risk). Fannie Mae and Freddie Mac were pushing political agendas to get more people into owning than renting (a noble goal, but...). Fannie Mae and Freddie Mac promised the banks that they'd reimburse the banks for any losses, so the banks could give the loans, which they did (then got blamed).

Though, a noble intent, pushing through end results that mathematically can't work will end in unexpected consequences (well, unexpected only if they aren't interested in looking at how it's likely to play out, which they were warned about, repeatedly by the Bush administration (like him or hate him), but chose no ignore the warnings). The rest is the burden we live in now.

http://www.uscops...M%5D.cfm

http://www.uscops...s%5D.cfm

GSE = "Government Sponsored Enterprise", BTW

No termite knows nor cares about the shape of the mound... yet the structure gets built nevertheless. Traders look after their own interests in a FREE and OPEN market... and collectively stabilize a global economy.

People often fear what they do not understand, but some complex things are scary for a reason. The distinction is not obvious.

This is all true. I've done extensive mathematical and trends research into stocks and Forex trading (and have written analytical software that can perform actual trades). When I agreed, in principle with Gawad about traders not adding wealth, it was out of character for my very pro free market capitalism knowledge (I say "knowledge" rather than "belief"). I shouldn't have agreed in the context of stocks so much as futures, but even then, there's still legitimacy in futures trading. My mild agreement with Gawad's premise is narrow, relating to how "speculators" on oil prices drive the price up with no real benefit to us all, but much pain

Let me clarify what I mean, because, I'm very pro stock and futures markets. They serve a very important role in the world economies. I've been to the Chicago Mercantile Exchange and watched the opening bell and learned all about the purpose and history of it and fully support its concept.

When I say "speculators", I'm not talking about airlines or trucking companies that buy oil futures. These are companies that have a real stake in the commodity they're buying futures on and are recipients of the actual product. They're the ones that are SUPPOSED to be in the futures market and buying futures contracts. My narrow hesitation about "speculators" is in relation to moronic, home-based, trading schmucks (like myself, for instance) who perceive an opportunity to make some quick cash by buying a futures contract on say, oil, then selling it later at a higher price. My involvement caused the price of oil to go up and I contributed nothing. The poor schmuck that bought my contract lost.

Oh just great. The last big wave of physicists to move into finance became by and large a bunch of quants. Lots of good it did the world economy. Now here we go again, optimizing digital shuffling to the photon so those with the edge get richer WITHOUT HAVING TO GENERATE WEALTH to back up their gains. Way to go. What does it take for Americans to get it through their thick effing heads? (Some present company excluded, of course...S_H, Eth, etc. you know who you are.)

That's right, blame capitalism first. Just remember that without greed and the capital markets, companies would have had a much harder time financing their operation and growing. Hence we probably wouldn't have Apple, Intel, Star Bucks, etc.

Who cares if they make undeserved money.
Its a zero sum game anyways.
I think its a good thing that somehow highly educated people find a way to monetize their intellect at the expense of all the posers playing on the stock market.

Not all markets are 0 sum. In some, the profit is extracted indirectly from the populace.

From France. (now I dont know what you might infer from that)

Anyways, I think that most business activities revolve around taking advantage of some sort of dominant position (information, production, distribution etc.) at the expense of the consumers.

Who cares if they make undeserved money.
Its a zero sum game anyways.
I think its a good thing that somehow highly educated people find a way to monetize their intellect at the expense of all the posers playing on the stock market.

Not all markets are 0 sum. In some, the profit is extracted indirectly from the populace.

My apologies, that was an incorrect formulation. What i meant is that for every buyer there is a seller. Someone is going to be at the other end of the trade anyways.

Banks have been taking advantage of localization for years. This is just pushing it to the extreme.

Corporate robbery will always be present. Today i was charged 3.50$ for using an ATM that isnt from my bank.

bad bad idea. Physics and the gooey world of human affairs do not equate. Just because you can create a system and fool a lot of stupid bankers into believing in it, doesn't mean that its a good idea or even makes any sense. Financial "innovation" is what has made our economy so unstable and its largely a scam. This is a bastardization of physics and sullies the reputation of the science.

I think that most business activities revolve around taking advantage of some sort of dominant position (information, production, distribution etc.) at the expense of the consumers.

As a consumer, do you feel you are taken advantage of? If so, why do you buy their products?

I think that most business activities revolve around taking advantage of some sort of dominant position (information, production, distribution etc.) at the expense of the consumers.

As a consumer, do you feel you are taken advantage of? If so, why do you buy their products?

Economic gain comes from specialization so we have to rely on others for most of our needs. A firm will always try to maximize its profit at the expense of the consumer and the same goes for traders vs the market.

I'm not saying its a bad thing, I'm merely stating a fact.

The markets exhibit fractal behavior. In nature, fractal behavior always optimizes some variable. For example, leaf placement on trees to maximize sunlight exposure. Blood vessel growth in tissue to minimize length to any point in the tissue, etc. What is being optimized in the markets? I think it must be liquidity. This development would necessarily increase liquidity, and thus should be beneficial to the function of the markets.

Since 70% of trading is automatically, tiny shades of ping preference add up!

The world always is dynamic equilibrium of systems of organized lies and robbery. Governments are territorial gangsters. Behind them are the international banksters. Money is based on the power to rob, with the ultimate power to rob being the power to kill. Money and murder systems work together. The power of governments to force people to pay taxes in legal tender drives the fiat money system to become the state religion. The Neolithic social pyramid developed a human ecology with its "top carnivores" becoming the international banksters. We have a privatized fiat money-as-debt system that is almost inconceivably crazy and corrupt. That grew to astronomical size: a quadrillion dollars of global cybercasino fraud, backed by weapons of mass destruction. The problem is electronic money still depends on murder. The books balance with blood: electronic money, backed by atomic bombs, towards psychotic chaos!

Stock Market and money in general is a big stupidity !!
When they "In a world where buying low and selling high means all the difference" it means someone will loose money. So, instead of helping everyone we create schemes to remove more money from those people...

Oh just great. The last big wave of physicists to move into finance became by and large a bunch of quants. Lots of good it did the world economy. Now here we go again, optimizing digital shuffling to the photon so those with the edge get richer WITHOUT HAVING TO GENERATE WEALTH to back up their gains. Way to go. What does it take for Americans to get it through their thick effing heads?

That's right, blame capitalism first. Just remember that without greed and the capital markets, companies would have had a much harder time financing their operation and growing.

You just don't get it, do you? Thick as a brick. I'm not blaming capitalism at all. This has nothing to do with CAPITALism. CAPITALism is a market system through which persons and thereby society can become enriched by putting CAPITAL *to work*. Coming up with *schemes* to "SNEAK a profit" (wasn't that brilliantly put) a.k.a simply move money into your pocket without producing anything actually UNDERMINES that.

but the the last global economic crises was American spawned

True, but 2 problems with the statement in the context of this thread:
1. That doesn't have anything to do with "optimizing digital shuffling to the photon so those with the edge get richer WITHOUT HAVING TO GENERATE WEALTH to back up their gains."

Not directly, but the 2 fellows who've come up with the exploit (gimmick?) are from Harvard and MIT.

2. The current financial disaster, though originating in America and also, true, that the people responsible were "American", it was not ALL Americans, nor was it MOST Americans, nor was it anything, generally, about how America is designed to work...The crisis was caused by the housing collapse...

True, but also moot as my comment is not directed at that majority. It's like asking "what is it about Islam that most suicide bombers are Muslim?" The question can be perfectly valid even though only a fraction of 1% of Muslim will ever be suicide bombers and ...

@Gawad: Part of CAPITALism, as you say, is the putting of capital to work. But that's only part of the picture.

Another, equally essential piece of the puzzle is the CONVEYANCE of capital from where it currently sits--your pocket, say--to the location where it can be "put to work". This is the primary function of the markets. Capital propagates through the markets from hand to hand, bucket-brigade style, and innovations that enhance the efficiency of this process add real value to the equation.

Yet ANOTHER essential piece of the puzzle is the conveyance of RISK--read "exposure to harmful market dynamics"--from those who have it to those who SEEK it (because one man's risk is another man's opportunity). Derivatives not only convey risk but TRANSFORM it. As the transformed risk may find a buyer whereas the original risk may not, this transformation aids the distribution of risk.

Sober floor brokers trade on steady volatility, thus damping it. Seat-of-their-pants speculators trade on outlier volatility. They take huge risks, but in the process dampen LARGE volatility.

The notion that speculation increases volatility is just flat-out wrong... UNLESS all the speculators all line up in one direction. But in a free market, they never do, because OTHER speculators are always delighted to jump in and take advantage of the speculative trend, thus driving it back toward the mean.

To point out that volatility exists nonetheless is irrelevant. Volatility is a consequence of price movement... zero volatility can only exist in a "market" where prices do not move, which is no market at all.

Pointing to speculation in unstable markets as evidence that speculation destabilizes markets is like pointing to the employees in a failing business as evidence that coming to work will get you fired. Without speculation, there would BE no markets to experience instability.

...the vast majority non-violent.

So I actually disagree with you that "it [is not] anything, generally, about how America is designed to work". I mean, I'm really convinced that there's some kind of cultural quirk, some twist on the way you, on the average, are brought up to see the notions of work, money, profit, opportunity, property, value, boundaries, peers vs non-peers, etc., etc. that do contribute to developing a narrow, shortsighted mindset. Sorry, but this impresion isn't gleaned from watching American TV. I have family in Virginia and every time I go to the States it just hits like a ton of bricks. You can really be an awfully friendly bunch but there's this OBSESSION with "bling", brands, check out my plans for making $$, etc. and instead of being something substantial it's invariably some kind get rich quick gimmick. Like in this article. It's uncanny. C, it's an American (& now Chinese) thing. Nowhere else in the world do you find this. And it's bad for you and us.

Stock Market and money in general is a big stupidity !!
When they "In a world where buying low and selling high means all the difference" it means someone will loose money.

Only if they want to take a loss for offset gains for taxes.
No one is forced to sell, or buy, in free market.

Speculation only dampens volatility in theory, causing prices to seek a "natural" equilibrium at their optimum level, based on two flawed assumptions. The first is that the traders are rational actors who possess enough information to accurately judge the value of the trades they're making. The traders, however, are human beings, and prone to human flaws, like following the herd. Speculators have been known to keep prices above or hold prices below what other fundamentals suggest should be the commodity's price.

The second is that there's only one optimum, that is to say, rational price level for a given commodity. As a market moves towards monopolization, either in fact by having fewer and fewer trading houses to manage financial trade, or in practice by competing trading houses using ever more identical trading methods, the rational price becomes more greatly a function of the nature of the consumption side of the trade. (cont)

@jscroft: I don't know where you've been the last couple of years, but YOU BLEW IT. Your gimmicks, your so called risk management, lousy policies and incentives managed to just about bring the world economy *to its knees*. If you're looking for a pat on the back look elsewhere. If you can no longer tell what represents legitimate risk taking and distribution (and no, finding ways to SNEAK a profit doesn't qualify) to tell it apart from gimmicks then quite franckly you're part of the PROBLEM. (And this exploit is exactly that: it's about finding a way to put yourself at someones back so you can lift their wallet)

The big monopolistic companies have long known that the price of their commodity depends up who's purchasing it, as much as the costs associated with it's production or it's overall demand.

Consider, for instance, the pricing of a train ride from St, Louis to Chicago. Trains are natural monopolies because it's simply too cost inefficient to build parallel lines of competing track. And costs are fixed as well, it costs the same amount to transport 1 ton of coal as it does 1 ton of people and luggage as it does 1 ton of steel as it does 1 ton of factory parts. Inquire with the train company, however, and you'll find different prices quoted to you depending on what you wanted to transport. Why should this be the case? Simply because the different classes of purchasers have different abilities to purchase the good the train company proffers. (cont)

From France. (now I dont know what you might infer from that)

C'est just une question d'avoir un peu de contexte biloute ;^)

If the train companies allowed, say, steel manufacturers to compete directly with passengers for train space in order to set a single ticket price per ton, then many passengers wouldn't be able to afford a ticket. Let coal compete with steel, and you have the same problem again. If train companies want to maximize their profits over the long term, they need everybody who wants to buy a train ticket to be able to get one, they have to adjust their pricing depending on the consumer.

Insofar as financial markets are trending towards a natural monopoly, and reliance on infrastructure such as high speed connections and secret computer algorithms, together with the consolidation and dominance of trading firms, then the "ticket price" for risk needs to stop being a single price point, and start being more a function of the consumers of that risk.

Risk distribution is all well and good when it's accompanied by equivalent benefits distribution as well. Our current market system, however, does not distribute benefits as effectively as it distributes risk. It certainly does well at distributing risk, as evidenced by the last financial collapse, where many Americans who managed to set up a retirement investment in some investment group saw their investments lose half their value in many cases, and much more in others because risk built up by others was distributed to all. On the other hand, that same mechanism helps to concentrate the benefits sometimes realized by taking risks, and greater efficiencies in the trading mechanism help accelerate that concentration.

Now that was brilliantly put. Goes to show that I should probably stick to fields with which I'm more intimately familiar!

This is why physics and politics don't mix. If somebody wants to post this on some economics forum somewhere, fine by me. Physics should be entirely objective and NOT (to follow the caps lock trend I've been seeing) tied down with all of this garbage. I love these discussions, I really do. Just keep them out of my science news. I couldn't care less how you make your money, unless you're planning on funneling it into research funding.

...that do contribute to developing a narrow, shortsighted mindset.

And by the way, that's not meant to apply to every American, not by a long shot, but it does seem to apply to enough on average and to such an extent that it tips the balance towards decision making that at least from the outside strikes one as "what are/were they thinking!" This article does just that. At least to me. But I think I can echo the sentiments of Wulfgar when he writes "This is a bastardization of physics and sullies the reputation of the science."

This is why physics and politics don't mix. If somebody wants to post this on some economics forum somewhere, fine by me. Physics should be entirely objective and NOT (to follow the caps lock trend I've been seeing) tied down with all of this garbage. I love these discussions, I really do. Just keep them out of my science news. I couldn't care less how you make your money, unless you're planning on funneling it into research funding.

But Odie, this whole article's premise is *exactly* "how to use physics to move more cash (into a few pockets)."

@Gawad: Every recent negative effect you have identified did indeed happen IN the markets... in the same way that a bank robbery happens IN a bank. But it doesn't make any more sense these events on the FREE market than it does to blame the robbery on SECURE banks.

In the bank example, the fact that the robbery occurred stands as primary evidence that the bank in question was NOT secure. And the events you referred to stand equally as evidence that the markets in question were NOT free.

How so? Market actions that MIGHT have mitigated or prevented those circumstances were hamstrung by regulation... and, more importantly, the market actions that CAUSED those events--actions which would have been money-losers in a free market and would thus not have happened much--were artificially supported and protected by regulation!

This is the tragedy of over-regulation. It's the economic equivalent of a rapist blaming the victim because her dress was just too darned pretty.

Now, I'm no fool. I can see where you're coming from: you have ALREADY decided that all the things you don't like--capitalism, markets, unfairness, etc.--are responsible for all the ills in the world. Despite the fact that your own words demonstrate a manifest understanding of these things, you will persist in the religious fervor of your denouncements... and there is literally NOTHING I could say, NO facts I could bring to bear, that will change your mind in the slightest.

Fine. While you may need the globally efficient, generally self-regulated economy in a thousand ways you will never credit, the fact of the matter is that the economy does not need YOU in the slightest, and in fact would be considerably healthier if you and your fellow travelers just took up stamp collecting or ham radio or some equally innocuous pursuit.

Meanwhile, we'll be over here turning the crank and building a happier, more productive world, one trade at a time.

How can you say
"Meanwhile, we'll be over here turning the crank and building a happier, more productive world, one trade at a time."

when the national debt grows, poverty increases , crime raises, more people can't pay for their loans, everyday we hear crisis for a several years now....

Gawad's fundamental misunderstanding is one that, I think, pertains to all liberals in all places.

Gawad hears me describe the global market system--the movement of capital, risk, etc.--and tells me that "my" system failed. He can say that because, from his perspective, a "system" is something that is IMPOSED from the outside by a [hopefully] benevolent elite who knows better than everybody else.

In Gawad's world, people act as they do because they are FORCED to do so.

But that's not the world I was describing. The "global market system" is a thing that IS, as a consequence of the free, self-interested actions of millions of participants. Effects like the movement of risk and capital are not IMPOSED from the outside... they EMERGE from the collective efforts of those millions, few of whom give a damn (or even a thought!) to these emergent global effects.

The reason why physics CAN be connected to markets is that markets are what IS, not what some ivory elite thinks they SHOULD be.

Stock Market and money in general is a big stupidity !!
When they "In a world where buying low and selling high means all the difference" it means someone will loose money. So, instead of helping everyone we create schemes to remove more money from those people...

It does NOT mean "someone will loose [sic] money". Of course, people DO lose money, but not because of what you say. You're still thinking it's a "zero sum game", and it's not.

It seems there's a general theme amongst the anti-capitalists in this thread (and in general among anti-capitalists anywhere): That misunderstanding being that any system where people could lose investment is a bad system. On the contrary. Risk vs potential gains is needed in a system to optimize capital distribution (or "wealth distribution" for those of you that like to use that term in forced distribution in a non-capitalist system). If you think of the economy as a machine, and each gear and pully in that machine...
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and each gear and pulley in that machine as a company or person that performs some function, each part of the system veers toward optimization because there are rewards in optimizing. Reduce your costs for performing your function (use less oil) and you'll have more profit (or oil for your parts) to the point you can the start performing MORE functions for the whole system by making more parts that further increase the output of the machine. Additionally, there are competing parts that perform the same function. Those that cannot improve their efficiency get less oil (income from customers) and are weeded out and the whole machine becomes more efficient as a result. It's like evolution. The optimization is a natural side effect of the system.

Risk: In a free society, people have the freedom to spend their money as they so choose. They can buy basic needs and if they have enough, they can buy nice things for themselves or others (or even give it away).
continued..

JS, interesting analogy. You're *assuming* the bank is *secure*. That's a hugely unwarranted assumption. You emphasize the free in FREE market and refer to the "tragedy of over-regulation" (rather than say, the tragedy of deficient regulation), and throw all the blame on regulation (so government), rather than admitting the burden is a *shared* one. I.e., to be shared among regulators, those who incessantly lobbied for deregulation as far back as the Reagan administration, private companies who took undue advantage of that while insisting they should be the keepers of the market, hoards of individuals who took ridiculous risks for the sake of bigger bonuses, hoards of individuals who accepted loans they knew they could never pay back (and on and on). So, just to save me some time, am I dealing with another right-wing corporate anarchist here à la Mr. Swenson or someone more nuanced? (Cause you sure sound like you're way to the right of a run-of-the-mill conservative at this point.)

@rjsc2000: Fair questions. Now, ask yourself: is the rising national debt REALLY caused by some subtle effect generated by a conspiratorial market elite... or is it more likely that the primary cause is that politicians spend too damned much of YOUR money for THEIR political benefit?

Markets, like any other game, are subject to manipulation by the people who make the rules, and it is POLITICIANS who make the rules.

You also might consider revisiting your premises. How do you KNOW that poverty is increasing? Check your source and ask yourself if the calculation they have to run in order to produce that result might not be just a little TOO nuanced to satisfy the demands of common sense.

Anyway, I'm not here to talk religion.

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They can even sacrifice for a while by saving, then choose to take their savings and invest it somewhere, whether it's with their brother-in-laws startup (that's buying stock, BTW) or in a startup through the stock market, or in an existing company that looks like it may grow. That's THEIR decision and they make that investment with the full knowledge that there's risk that they may lose their investment. They're grown ups and they get to make that decision for themselves. Some of those investments will be partially or fully lost, some will grow. But, without the potential for gains, people won't invest. It would be nice if there were a system with no risks but did have gains, but it doesn't work out mathematically.

The desire to improve ones life style benefits MORE than just the individual attempting to achieve the greater life style. To achieve that, the individual must spend money either by purchasing "bling" or by investing into companies.
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So, just to save me some time, am I dealing with another right-wing corporate anarchist here à la Mr. Swenson or someone more nuanced?

I'm more like Scrooge McDuck. I spend my weekends in my giant money warehouse, dodging Richie-Rich sized giant emeralds whilst shifting piles of gold bullion from one side of the building to the other in my gold-plated front-end loader.

Moron.

But Odie, this whole article's premise is *exactly* "how to use physics to move more cash (into a few pockets)."

I agree, I just think this article should be moved elsewhere. It doesn't contribute to the study of physics in any manner. We know fairly well that the shortest route between any two points is a straight line (mostly...). Unless any physicists are thinking about setting up shop in Nova Scotia for a career change, I can't see how this will benefit them.

But I guess the readers are in charge of allotting merit to the reading material. If this is what readers want to see, I'll leave you in peace and look for physics research articles elsewhere.

When they purchase "bling", money moves from one person to others. That movement activates an economy. The company they bought it from how has more (there was no loss in that transaction, both parties are better off by their own judgement). The company has more income to give raises and/or hire more people and/or have more for the owners to improve their own lifestyles and/or invest more in the company to improve efficiency by buying more modern equipment, etc... Those dollars spent spark more of the economy. "wealth is spread". But it's spread naturally and freely as opposed to forced by a central, controlling czar that cannot comprehend the full ramifications of forced wealth distribution, which never ever works out to optimal distribution.

Risk is a necessary side-effect of freedom. Freedom brings innovation and efficiency. Capitalism is a side effect of freedom. Are there winners and losers? Yes, in EVERY system, including socialism and communism.
(continued...)

(continued)...
In socialism and communism, the losers are the majority of the populace. They lose multiple freedoms, including the freedom to pursue happiness. The winners are the tiny minority that get to decide where the capital goes (usually in their own pockets). And yes, the one positive side effect is the other tiny minority that would have been poor, even measured against the lower standard of "median" in a socialist and communist economy.

So, socialism and communism force the entire society to suffer so that the few who would have been poor in a capitalist system will not be "poor" (again, with a lowered measuring stick). Hooray! No homeless, but look at what it cost society... their freedom, their innovation, their hope for improving their own lives. In the long run, sure, you squashed a few of the fringe bugs of one system, but replaced them with major flaws in the entire system.

(continued...)

Gawad's fundamental misunderstanding is one that, I think, pertains to all liberals in all places.

Except I'm not a liberal. I'm actually usually considered right of centre on most issues financial. Except for those who are on the extreme right (apparently such as yourself) and for whom anyone on the left of them is, subjectively, a "liberal".

.[He] tells me that "my" system failed...because, from his perspective, a "system" is something that is IMPOSED from the outside by a [hopefully] benevolent elite who knows better than everybody else

Strawman. You pulled this out of your own a**. 1st, I can tell you that your system failed because, as it is practised in the States it DID. When you have private finance industry go CRAWLING to government to save their a** because they've let their greed completely get the better of them and the whole house (or bank as it were) risks going up in smoke, yes JS, that's a TOTAL FAIL.

I don't think anyone disputes the fact that risk and benefits distribution is an emergent feature of financial trading. The dispute is over whether what emerges is the optimal way to distribute liquidity. The free market theory, which claims that unregulated trading of bond notes, insurance policies on both ends, common ownership stock, real commodities, and currencies results in the emergence of optimal distribution, is only valid on the assumptions that humans are rational economic actors, that there is a single optimal profit-maximizing price point for a given commodity given the distribution of other goods, and that what naturally emerges is somehow better than what is engineered. All three assumptions are unsound.

Moreover, the reliance of the trading industry on individualizing means, such as the speed of communicating transactions or calculating profitable trading points using proprietary algorithms, increases inequality in the trading market, which is bad for freedom.

If people had enough money to be happy the politicians wouldn't need to borrow money to satisfy people.

I could buy your theory if there weren't people taking big risks because they can, because they are influenced by others, because their neighbor has more,etc.

If the money was enough for everyone, including the poor and the criminals (which probably wouldn't be criminals because they didn't have to steal). If everyone could have a house, a car and a job even if others had more,i.e, bill gates has loads of money but i don't care, i have my little things and i'm happy with them. If that happened then i wouldn't mind the free market or the stock market. But that is not what happens.

Profit and power are two things people want,mainly because we have always say to our children, you must earn money. And these two corrupts. You are right when you say money can be a good thing, if it's not corrupted by people, which is how we are now....

No system created by humans will ever be perfect. Free market capitalism is the closest thing to fairness so far. Again, it's NOT perfect, but it's much closer than the alternatives of Socialism, Communism, and now a new one introduced to the west... Sharia (dear Lord, please don't let that spread!).

To sum it up: Risk is an unstoppable component of investment. Investment is the hope of improving ones lifestyle. Purchases and investments move money. When money moves, activity picks up and jobs are created and innovation is increased to increase efficiency and to reduce waste. Everyone wants "more" regardless of what system they live under. Wanting more is not "greed". Wanting a better life drives almost everyone forward (if they're in a free society that allows them to take action on their desires to improve).

I'm more like Scrooge McDuck. I spend my weekends in my giant money warehouse, dodging Richie-Rich sized giant emeralds whilst shifting piles of gold bullion from one side of the building to the other in my gold-plated front-end loader.

Moron.

A simple yes would have sufficed. And I parried that ad homonym with my giant flower-power shield by the way.

@jscroft: I don't know where you've been the last couple of years, but YOU BLEW IT. Your gimmicks, your so called risk management, lousy policies and incentives managed to just about bring the world economy *to its knees*.

No, this is not what brought the world economies down. The world economies responded to the American economy which came down because of the housing collapse which was caused by 4% of borrowers not paying their mortgages because they signed up for loans they couldn't afford because of SOCIALIST agendas of our government (Fannie Mae & Freddie Mac) encourage government policies to get more people into home ownership, despite the fact they can't afford it. Fannie and Freddie promised banks that THEY'D take the risk and reimburse them for losses suffered from lending to high risk, which they reluctantly did and were unjustly blamed by the very people that told them to do it.

Please see my links above to videos showing the actual warnings to congress,

Strawman. You pulled this out of your own a**. 1st, I can tell you that your system failed because, as it is practised in the States it DID. When you have private finance industry go CRAWLING to government to save their a** because they've let their greed completely get the better of them and the whole house (or bank as it were) risks going up in smoke, yes JS, that's a TOTAL FAIL.

I don't know how many times I'll have to say it, but I'll say it as many times as it takes. It was NOT "greed" of free-market capitalist that caused this melt-down. It was SOCIALIST agendas encouraged by Fannie and Fredi to get low income (high risk) individuals into home ownership. Banks did NOT want to loan to them, but Fannie and Freddi promised the banks they'd reimburse them for any losses, so the banks RELUCTANTLY agreed. As a result, 4% of homeowners failed to pay their mortgages, causing the housing collapse, which triggered the rest of the economy to collapse. SOCIALISM caused it.

I don't think so, C. A 4% default rate would not threaten the economic collapse that ensued, nor cause over 10% unemployment, in reality, a 64% labor participation rate. What happened was banks were constructing loans that were designed to be initially affordable, with conditions that kicked in later that brought the value of the loan back up to what the bank's pricing algorithms thought the loans should be. This was so the bank could sell those loans almost immediately after it made them to other banks, who then bundled those loans with similar loans, got a AAA stamp on 'em from private ratings agencies, insured the bundles, sold the bundles and insurance to investment groups, which were mainly American's pension and retirement accounts. Banks ended up with cash, investors ended up with crap. Suddenly, they weren't worth lending to because their assets were worth a fraction of what they were before and they were saddled with enormous debt already.

If people had enough money to be happy the politicians wouldn't need to borrow money to satisfy people.

Haha, brilliant! Now compare your taxes against your income and ask yourself if a large piece of THAT amount might not do the trick.

Oh, Lord...

In Gawad's world, people act as they do because they are FORCED to do so

Another strawman, so once again irrelevant. Wherever you've pulled this assumption from, it certainly wasn't in any statement of mine. If anything, you're the one complaining about regulations forcing people to do this or that, hamstringing them and being responsible for their misdeeds. So what's up with that? And you avoided answering my questions.

It was NOT "greed" of free-market capitalist that caused this melt-down.

Well C, I've never claimed it was greed alone, but when the folks making loans make loans to people they KNOW are at very high risk of defaulting and do so for the sake of securing more cash for themselves (granted, because the private incentive system is set up that way) than greed is certainly a contributing factor -- along with fear of being outperformed and out of a job. So you may have to repeat that a few times more yet.

Banks did NOT want to loan to them, but Fannie and Freddi promised the banks they'd reimburse them for any losses, so the banks RELUCTANTLY agreed.

Aw come on, C. Are you serious? Have you ever met a bank manager who did something he didn't want to do? Granted, Fannie & Freddie may have been "enablers", and policies were in place to encourage loans to fulfill that age old American dream of owning your own home, but, but, but, seriously I've never know a bank manager who would loan 250 000$ to 500 000$ if they thought it was a bad idea. Besides, there's a who lot of literature concerning cash incentives fro making even questionable loans.

It was NOT "greed" of free-market capitalist that caused this melt-down.

Well C, I've never claimed it was greed alone, but when the folks making loans make loans to people they KNOW are at very high risk of defaulting and do so for the sake of securing more cash for themselves (granted, because the private incentive system is set up that way) than greed is certainly a contributing factor -- along with fear of being outperformed and out of a job. So you may have to repeat that a few times more yet.

Then I'll say it again. It was the government sticking their nose into the private market that messed everything up. This problem didn't exist until that happened. The banks were STRONGLY encouraged... just short of "forced". Government interference.

And the events you referred to stand equally as evidence that the markets in question were NOT free.

Of course the market is not free. At least in the sense that it is completely unfettered and that anything is game. And thank goodness. Markets should be no freer than human beings. That is, the freedom of the market should extend no further than to the point where it meets my human rights. You really DO sound like a right-wing anarchist, you know? Now, if you want to talk about what might constitute proper regulation that another question, but you *sound* like your advocate for *no regulation*. AFAIC, the latter would be ridiculous as "markets" are just made up of people, ergo, markets need regulation in the same way people need laws. (It would be nice if we didn't, but we do.)

Banks did NOT want to loan to them, but Fannie and Freddi promised the banks they'd reimburse them for any losses, so the banks RELUCTANTLY agreed.

Aw come on, C. Are you serious? Have you ever met a bank manager who did something he didn't want to do? Granted, Fannie & Freddie may have been "enablers", and policies were in place to encourage loans to fulfill that age old American dream of owning your own home, but, but, but, seriously I've never know a bank manager who would loan 250 000$ to 500 000$ if they thought it was a bad idea. Besides, there's a who lot of literature concerning cash incentives fro making even questionable loans.

Yes. I'm dead serious. If the banks wanted to loan to high risk people, why didn't they before? Because they don't want to lose money. They have whole floors of people analyzing risk all day. I worked for a fortune 500 insurance company for 1/2 a decade and wrote software for them. Risk analysis is a HUGE part of financial business.

Then I'll say it again. It was the government sticking their nose into the private market that messed everything up. This problem didn't exist until that happened. The banks were STRONGLY encouraged... just short of "forced". Government interference.

Ok C, fair enough: could you provide a reference to a (relatively) impartial source for this? This doesn't quit jibe with the literature I've seen on the topic so it could make for some interesting reading. I haven't yet had the chance to look up the links you posted yet, so if it's in those I should get to it this WE.

Yes. It's in the links. The links are to videos. I didn't read the blogger's articles surrounding the links so i make no claaims on his text. The videos are congressional hearings that are real eye openners.

Thanks G.

Yes. I'm dead serious. If the banks wanted to loan to high risk people, why didn't they before? Because they don't want to lose money. They have whole floors of people analyzing risk all day. I worked for a fortune 500 insurance company for 1/2 a decade and wrote software for them. Risk analysis is a HUGE part of financial business

Yeah, well, this could explain a BIG part of our disconnect. I've never personally dealt with American banks. And Canadian banks have a tradition of being far more conservative in their lending practices (i.e., far more risk adverse, and they are regulated accordingly). Canadian banks profits during "good" times are correspondingly smaller that their American counterparts, but on balance our system wasn't at risk of a meltdown during the crises. Please understand however, that from our perspective up here the practices of the American banking appeared simply outrageous.

Yep, our news media leans heavily against free market capitalism so most stories on it are heavily biased to make capitalism look bad and government look good when government is pursuing agendas they approve of, that is.

I changed my text above that you resppnded to, hoping to get the change in before you responded, but you're quick and I was too slow. Be sure to read my mod.

I think we're on the same page, more or less.

Humm. Still, Thrasymachus raises valid concerns. I don't think government incentives and regulation can absolve the responsibility members of the private sector have as far as shady loan practices and the the practice of repackaging debt in such a way that it was essentially "debt laundering".

Credit card companies do the same with promises of low initial rates, so it's not like there's anything unique about the practice Thrasymachus mentions, at least as far as enticing the consumer. And while I firmly believe in every individual's right to dig themselves into a hole (the lendees have their own part of responsibility as far as this mess), I don't have a problem with such practices being outlawed if they begin to put the system itself at risk.

I don't have a problem with such practices being outlawed if they begin to put the system itself at risk.

Ditto. But, again, we can't escape from the fact that this was triggered by government interference. There's plenty of blame to go around, but things were going fairly good until the government stuck their nose in it to make unnatural things happen (give loans to people that can't afford it).

Anyway, since my last post, I've just learned from my potentially new lender (I'm shopping to refi, BTW) that the government just took over the entire American banking industry and it takes effect next week. So, I've got to make a decision today on which lender to go with to get my refi started before any of that kicks in. I don't know what all it involves, but I do know that when government makes sweeping changes, it's usually more bad than good. We should probably all start to worry (as if we weren't already).

Fannie & Freddie should be dealt with first. :(

repackaging debt in such a way that it was essentially "debt laundering".

This debt was purchased by the US govt (Freddie and Fannie).

""The securitization of these affordable mortgages allows us to redeploy capital back into our communities and to expand our ability to provide credit to low and moderate income individuals," said Jane Henderson, managing director of First Union's Community Reinvestment and Fair Lending Programs. "
"The $384.6 million in senior certificates are guaranteed by Freddie Mac and have an implied "AAA" rating. First Union Capital Markets Corp. is the investment banking subsidiary of First Union Corporation."
https://www.wacho...1872RCRD

"debt laundering" -- what a great expression!

"debt laundering" -- what a great expression!

All with the express approval and assistance of the US government.

The efficient distribution of risk is one of the critical factors that ENABLES production on ever-larger scales... without it, many enormously productive enterprises would never be undertaken in the first place.

And how would you define "productive"? You seem to place a lot of importance on expanding production, becoming more productive, but is this really all we should be striving for?

Also, why is spreading risk by creating financial markets OK in the "free" market. Shouldn't risky enterprises be allowed to fail because they were too risky? Why should we throw good money after bad? I take few risks with my money because I can't afford it, but these financial markets, as you explain, distribute risk so that my low risk way of life has become extremely hazardous because of OTHER PEOPLE'S EXCESSIVE RISK TAKING! Spreading risk (to those who didn't ask for it) is a BAD thing, not a good thing as you seem to think.

Then I'll say it again. It was the government sticking their nose into the private market that messed everything up. This problem didn't exist until that happened.

I agree. Let's end government interference in the private markets. Let's start first with corporations. Corporations are granted their existence by the government, so the first thing we'll have to do is get rid of corporations. Then everyone will be able to compete on a fair playing field. Let's see how the system works without government.

p.s. you'll probably want to be locking up all your possessions and stock up on ammo, a truly free and private market can get rather nasty without the meddlesome government...

Corporations are granted their existence by the government, s

No, they are granted their existence by the first amendment right of association.

The spreading of risk via insurance was how the Dutch could afford to take risky sea voyages to the Spice Islands. That's how Lloyds was started, to spread the risk.

The purpose of the govt is to protect the property rights of all on an equal basis.
However, there is no absolute requirement to have a govt perform this function.
Somehow, without a formal govt, businesses function in Somalia. Business functions better when all agree to a govt with limited authority to protect everyones' property rights.

locking up all your possessions and stock up on ammo,

People are doing that now WITH govt 'protections'.

a truly free and private market can get rather nasty without the meddlesome government...

Interesting how people tend to WANT to misinterpret the desire for LIMITED government as the desire NO government, when no such claim or desire exists from those of us professing LIMITED government. CLEARLY Government's interference in trying to force high risk people to get a loan they can't afford worked out great, didn't it?

We NEED government to protect our basic rights. We need LIMITED government, not ZERO government. If you've ever thought that those of us that want LIMITED government would actually want ZERO government, then you're completely misreading everything about us, or you're trying to falsely lump us into the wacko anarchist groups (who share nothing in common with the limited gov crowd...) Limited government constitutionalists do NOT associate with that crowd and feel absolutely no relationship with them whatsoever, so you can stop with that nonsense forth right.

We NEED government to protect our basic rights.

I guess that depends upon your definition of government.
I would be quite pleased if the USA returned to limited govt.

I would define ZERO govt is a society in which people do not govern themselves.
The 80% solution is a limited, constitutional govt. Once that is achieved, I would continue to support more limits upon the state until the individual is sovereign and governs himself. Of course this may be an asymptotic goal, but it is a worthwhile goal as compared to the alternative of the 'progressive'.