I think your description of the Democratic Party is spot on. I'm a millennial from the purple rust belt- I would guess the blue collar vote that went for Trump would have been split if it had been Trump/Bernie. Working people are less concerned about politically correct social dogmas (the focus of the Democratic Party at times) than they are about jobs and paying their bills. These are the people contributing measly amounts every paycheck to retirement investment accounts not knowing if they will ever see it, the people who are now pretty angry that some unemployment in 2020 has easily rivaled their union wages. One pro-Trump friend recently complained to me that instead of sending people $600 to do nothing, why not pay teachers more so schools are better and nurses more so their jobs are more meaningful- not a typical Republican stance.
IMHO the solution to the Cantillon problem is to do money creation at the level of the mass population, instead of through centralized channels.
Step 1: Create postal banking. Every citizen just automatically has a bank account, which they can access through any post office.
Step 2: Implement UBI, by way of having the Fed just deposit money in everyone's postal bank account every month. The question of exactly how much depends on your location (index annually to county median wage income), and on the status of the economy -- when neutral indicators like the Sahm Rule say we're in trouble, the UBI goes up. When the economy is booming, it goes down.
Step 3: Now that we're controlling the money supply by way of pumping money _directly_ to the people, gradually raise the fractional reserve requirements on banks, to rein in the speculative behavior they've engaged in since the '70s (the entire last half-century has been repeated cycles of the Savings and Loan crisis, at ever-larger scale). And bring back _extremely_ strict rules against consumer banks engaging in speculative investments themselves -- consumer banks should ONLY be doing "maturity transformation", not mixing up that business with the stock and bond markets. Make Banking Boring Again!
(Also, fun side benefit -- now that everyone is banked, we can convert the progressive income tax into a progressive consumption tax, trivially, by making income that is left in your postal savings account, or any other savings through an institution that qualifies with the IRS, tax-deductible.)
I'm debating writing a long response explaining why everything but step 1 is based on faulty information and/or would be the kind of reform I would expect on a billionaires wish list. Are you the kind of person who is open to the possibility that you are wrong? Or would I be wasting my time?
I'm wondering how democratizing the money supply and reining in excesses in the financial sector would wind up on a billionaire's wish list, particularly given that the world's financial system is currently structured to the best benefit of the billionaires.
I'm always open to the possibility I'm wrong, with the caveat that it's not like I haven't heard some of the arguments against already. (And of course, the politics of are complicated and it's not like I expect a UBI to get implemented any time this decade, though I'm glad it's become something that's within the window of possibilities people are open to taking seriously.)
I think the argument for _some_ kind of automatic stabilizer on fiscal policy is extremely strong, and a UBI that moves independently from taxes, based on how hot or cold the economy seems to be running, is an easy, minimally distortionary channel for that. (Though I also am a fan of the "infrastructure bank" concept, where you have a mechanism to speed up or slow down spending on planned infrastructure, so you borrow and spend on that when borrowing is cheap and there's slack capacity to put to work.)
"What is really happening is not that we’ve run out of problems to solve, but that the economy has become a giant “kill zone,” which is a term venture capitalists use to describe areas they can’t invest for fear that a monopolist will crush their company." Or when they do decide to make investments, they are outsized, weaponized big money bets like SoftBank's investments in Uber or WeWork that are, in part, meant to deter competitive investments.
I'm surprised Matt is so down on this moment. He rightfully rails against the modern progressive movement for being too focused on "the humanities," and seemingly allergic to the gritty details of business and power structures. Now we have a wave of normal people who are beginning to learn about short sells, clearing houses, and other intricacies of the financial sector. The best way to learn is by participating.
Analogous to learning about bank security by robbing them.
Being able to rebuild a car engine has in no way improved my life. It's a car. A tool I use to travel to stores, work, or to pick up my granddaughter from her friend's house. I don't need to know how it works. I just need to know where to take it when it needs repair.
As long as people continue to believe that finance is more important than working, building, creating, that long will the system continue as is.
Not sure I get your car analogy, but if its representative of our economy than yes, you should know how it works. Simply saying "the 99% need the car fixed NOW!" is the type of platitude that I thought Matt Stoller was against. The real solution is being able to identify an ethical mechanic.
I understand that everyone can't be policy or financial wonks, but there's something to be said for a moment where people are actively trying to learn how powerful people retain generational wealth.
Correction on Robinhood: The trading restrictions they instituted on GME and other stocks were for all traders. I do not have a margin account or borrow money to trade stock, and yet I was prevented from opening new positions of GME and still am to an extent. So the argument that Robinhood acted because the banks were limiting its borrowing capacity is not completely right. Why was I restricted from trading when I had 100% cash in my account to fund the trade or option?
It has to do with the financial plumbing. In any trade where someone sells shares to someone else, the shares have to travel. They travel through a process called 'clearing', and it takes about two to three days for all the shares to transfer to the right accounts from the right accounts. These journeys happen in large clearinghouses. During that time, Robinhood has to hold the shares, which is risky, so it has to keep capital on hand to manage that risk. It's not usually a big deal but with volatile stocks a broker needs more capital.
Margin is a bigger problem and it's easier to explain, so I left out the plumbing problem.
Also, Robinhood could be engaged in collusion, but I doubt it.
Take my perspective, that of a retail customer not buying on margin. If I place an order to buy 100 shares of Risky Company Deluxe, my broker is not going to let me withdraw the funds for that trade until it's settled.
I'm not trading GME, but it nevertheless made me feel good when I logged onto Schwab and saw a message assuring me I could trade anything I wanted.
It's also not *just* robinhood. A wide variety of brokerages (even well capitalized ones like IB) limited access to the buy side of the trade. Effectively killing demand. And screwing over the little guy. Such as me. This is a great take btw. Asset price inflation in housing is also another reason. The guy that turned 53k into 13 million+ rents his house.
The decision was made to protect "the market", someone was exposed to liquidation risk due to margin calls of the "formerly" losing short side of the trade.
But personally, I’m done arguing on the basis of common sense and reality. For example, I can explain to some cryptocurrency religious believers why it’s not really decentralized or democratic (those who pay the highest fees will have their transactions processed first; those who are most well-funded will have dominant mining power) but it doesn’t matter because the believers who don’t know the first thing about how cryptocurrency really works can still make tons of money “investing” in crypto. Believers can still make money buying Tesla shares even when Tesla’s market cap is higher than the top six automakers combined, while having less than 1% of worldwide sales. Who says it’s overvalued? At the end of the day, the one who made money is in the right. (And when they lose their shirt, they don’t talk about it and we aren’t cruel enough to tell them “See? I told you so!”)
Although structural deficiencies can be a factor in the scenarios you reference, it is an over reach that simply lacks sufficient foundation, in an attempt to dismiss far more nefarious realities. This article also overlooks the fact that Google deleted thousands of negative reviews of Robinhood and that Robinhood, is largely back by a host of hedge funds. JP Morgan Chase (5 omitted counts of felony) backstops many hedge funds & was primary to Melvin. They literally held long positions in GameStop & less in puts. Allowing them to trade both sides & exploit inflated stock. Apparently, a strong likelihood they had direct insight into trading data through hedge funds like Melvin or others like Citadel (Cohen) and the Robinhood platform. Thus, your dismissing the possibility of there being any collusion, particularly when referring to the casino-like modus operandi of Wall St in the same article, is unpersuasive. I’ve found your initial “plumbing” explanations relative to CARES Act valid and compelling but not in this instance. If all we own is a hammer, everything looks like a nail. Perhaps the same can be said of plumbing. You might do well to expand your tool kit. I enjoy your work but you seem to cherry pick key info to omit and dance gingerly around Occums Razor.
"Robinhood has a risky and somewhat sleazy business model; the brokerage encourages its customers to speculate wildly, automatically setting them up in “margin” accounts"
It doesn't. You have to be approved to use margin and it's only up to the amount you have in your account. You can't just borrow infinite money.
"Roughly half of its clients are now in GameStop, and many of them have bought the stock with borrowed money"
How did you arrive at the conclusion that "many" bought on margin?
"or with a riskier derivative bet known as an option. "
Depending on how you use it call options are less of a risk than using margin because you know the exact amount you're risking when purchased.
The difference between now and the 1920s/1930s is that the Federal Reserve back then wasn't as creative in keeping the party going.
So when you have a party going like we do now, well past it's due date, this is what you get. Is it fraud? Is it corruption? Or is it everybody dancing because the music is still paying?
“none of whom have much of a relationship to the anger and frustration of a broad swath of young men who have no way to live meaningful commercial lives” and women? Or na? Very insightful article, but it often felt like you were speaking to men in a man’s market.
Another good comparison for the everything bubble is Dawson City during the Klondike Gold Rush. Tons of gold dust and not a lot of anything else: prices were super inflated for everything. Tons of cheap money with nowhere to go.
We have had a huge, state-supported (or worse) upward transfer of wealth since the 1980s. And all that loose cash has to go somewhere. And since there's more money in speculation, that's where it goes. So we're getting a lost generation of kids graduating college with a lifetime of debt or worker class people whose full time jobs aren't actually full time and refuse to pay a living wage (forget benefits) -- not that professions are so great either. Anyway, a lot of mitigation can be financed by a transaction tax on the speculating but the powers that be, not surprisingly, hate giving up the fraction of a penny.
As for the reader's note about CVS and the vaccine rollout: West Virginia's (alleged) success is based (allegedly) on the lack of chain pharmacy. The local pharmacy is closer, more nimble, etc.
I think your description of the Democratic Party is spot on. I'm a millennial from the purple rust belt- I would guess the blue collar vote that went for Trump would have been split if it had been Trump/Bernie. Working people are less concerned about politically correct social dogmas (the focus of the Democratic Party at times) than they are about jobs and paying their bills. These are the people contributing measly amounts every paycheck to retirement investment accounts not knowing if they will ever see it, the people who are now pretty angry that some unemployment in 2020 has easily rivaled their union wages. One pro-Trump friend recently complained to me that instead of sending people $600 to do nothing, why not pay teachers more so schools are better and nurses more so their jobs are more meaningful- not a typical Republican stance.
IMHO the solution to the Cantillon problem is to do money creation at the level of the mass population, instead of through centralized channels.
Step 1: Create postal banking. Every citizen just automatically has a bank account, which they can access through any post office.
Step 2: Implement UBI, by way of having the Fed just deposit money in everyone's postal bank account every month. The question of exactly how much depends on your location (index annually to county median wage income), and on the status of the economy -- when neutral indicators like the Sahm Rule say we're in trouble, the UBI goes up. When the economy is booming, it goes down.
Step 3: Now that we're controlling the money supply by way of pumping money _directly_ to the people, gradually raise the fractional reserve requirements on banks, to rein in the speculative behavior they've engaged in since the '70s (the entire last half-century has been repeated cycles of the Savings and Loan crisis, at ever-larger scale). And bring back _extremely_ strict rules against consumer banks engaging in speculative investments themselves -- consumer banks should ONLY be doing "maturity transformation", not mixing up that business with the stock and bond markets. Make Banking Boring Again!
(Also, fun side benefit -- now that everyone is banked, we can convert the progressive income tax into a progressive consumption tax, trivially, by making income that is left in your postal savings account, or any other savings through an institution that qualifies with the IRS, tax-deductible.)
I'm debating writing a long response explaining why everything but step 1 is based on faulty information and/or would be the kind of reform I would expect on a billionaires wish list. Are you the kind of person who is open to the possibility that you are wrong? Or would I be wasting my time?
I'm wondering how democratizing the money supply and reining in excesses in the financial sector would wind up on a billionaire's wish list, particularly given that the world's financial system is currently structured to the best benefit of the billionaires.
I'm always open to the possibility I'm wrong, with the caveat that it's not like I haven't heard some of the arguments against already. (And of course, the politics of are complicated and it's not like I expect a UBI to get implemented any time this decade, though I'm glad it's become something that's within the window of possibilities people are open to taking seriously.)
I think the argument for _some_ kind of automatic stabilizer on fiscal policy is extremely strong, and a UBI that moves independently from taxes, based on how hot or cold the economy seems to be running, is an easy, minimally distortionary channel for that. (Though I also am a fan of the "infrastructure bank" concept, where you have a mechanism to speed up or slow down spending on planned infrastructure, so you borrow and spend on that when borrowing is cheap and there's slack capacity to put to work.)
"What is really happening is not that we’ve run out of problems to solve, but that the economy has become a giant “kill zone,” which is a term venture capitalists use to describe areas they can’t invest for fear that a monopolist will crush their company." Or when they do decide to make investments, they are outsized, weaponized big money bets like SoftBank's investments in Uber or WeWork that are, in part, meant to deter competitive investments.
Yup
I'm surprised Matt is so down on this moment. He rightfully rails against the modern progressive movement for being too focused on "the humanities," and seemingly allergic to the gritty details of business and power structures. Now we have a wave of normal people who are beginning to learn about short sells, clearing houses, and other intricacies of the financial sector. The best way to learn is by participating.
Analogous to learning about bank security by robbing them.
Being able to rebuild a car engine has in no way improved my life. It's a car. A tool I use to travel to stores, work, or to pick up my granddaughter from her friend's house. I don't need to know how it works. I just need to know where to take it when it needs repair.
As long as people continue to believe that finance is more important than working, building, creating, that long will the system continue as is.
Not sure I get your car analogy, but if its representative of our economy than yes, you should know how it works. Simply saying "the 99% need the car fixed NOW!" is the type of platitude that I thought Matt Stoller was against. The real solution is being able to identify an ethical mechanic.
"Now we have a wave of normal people who are beginning to learn about short sells, clearing houses, and other intricacies of the financial sector."
How many who play at the casino learns about the mathematics of each game they play and the casino business' intricacies?
I understand that everyone can't be policy or financial wonks, but there's something to be said for a moment where people are actively trying to learn how powerful people retain generational wealth.
Correction on Robinhood: The trading restrictions they instituted on GME and other stocks were for all traders. I do not have a margin account or borrow money to trade stock, and yet I was prevented from opening new positions of GME and still am to an extent. So the argument that Robinhood acted because the banks were limiting its borrowing capacity is not completely right. Why was I restricted from trading when I had 100% cash in my account to fund the trade or option?
Thanks for posting! I've had that question for a few days (whether or not restrictions applied just to margin traders) and you answered it.
It has to do with the financial plumbing. In any trade where someone sells shares to someone else, the shares have to travel. They travel through a process called 'clearing', and it takes about two to three days for all the shares to transfer to the right accounts from the right accounts. These journeys happen in large clearinghouses. During that time, Robinhood has to hold the shares, which is risky, so it has to keep capital on hand to manage that risk. It's not usually a big deal but with volatile stocks a broker needs more capital.
Margin is a bigger problem and it's easier to explain, so I left out the plumbing problem.
Also, Robinhood could be engaged in collusion, but I doubt it.
Take my perspective, that of a retail customer not buying on margin. If I place an order to buy 100 shares of Risky Company Deluxe, my broker is not going to let me withdraw the funds for that trade until it's settled.
I'm not trading GME, but it nevertheless made me feel good when I logged onto Schwab and saw a message assuring me I could trade anything I wanted.
It's also not *just* robinhood. A wide variety of brokerages (even well capitalized ones like IB) limited access to the buy side of the trade. Effectively killing demand. And screwing over the little guy. Such as me. This is a great take btw. Asset price inflation in housing is also another reason. The guy that turned 53k into 13 million+ rents his house.
And just to be clear, the options trades are strictly cash only.
Yes. I had a minor quibble, and I knew what Matt meant, but I consider options as safer than buying on margin.
The decision was made to protect "the market", someone was exposed to liquidation risk due to margin calls of the "formerly" losing short side of the trade.
Great read, as always, but Trump, Jr. is not a member of Congress.
Good read.
But personally, I’m done arguing on the basis of common sense and reality. For example, I can explain to some cryptocurrency religious believers why it’s not really decentralized or democratic (those who pay the highest fees will have their transactions processed first; those who are most well-funded will have dominant mining power) but it doesn’t matter because the believers who don’t know the first thing about how cryptocurrency really works can still make tons of money “investing” in crypto. Believers can still make money buying Tesla shares even when Tesla’s market cap is higher than the top six automakers combined, while having less than 1% of worldwide sales. Who says it’s overvalued? At the end of the day, the one who made money is in the right. (And when they lose their shirt, they don’t talk about it and we aren’t cruel enough to tell them “See? I told you so!”)
Although structural deficiencies can be a factor in the scenarios you reference, it is an over reach that simply lacks sufficient foundation, in an attempt to dismiss far more nefarious realities. This article also overlooks the fact that Google deleted thousands of negative reviews of Robinhood and that Robinhood, is largely back by a host of hedge funds. JP Morgan Chase (5 omitted counts of felony) backstops many hedge funds & was primary to Melvin. They literally held long positions in GameStop & less in puts. Allowing them to trade both sides & exploit inflated stock. Apparently, a strong likelihood they had direct insight into trading data through hedge funds like Melvin or others like Citadel (Cohen) and the Robinhood platform. Thus, your dismissing the possibility of there being any collusion, particularly when referring to the casino-like modus operandi of Wall St in the same article, is unpersuasive. I’ve found your initial “plumbing” explanations relative to CARES Act valid and compelling but not in this instance. If all we own is a hammer, everything looks like a nail. Perhaps the same can be said of plumbing. You might do well to expand your tool kit. I enjoy your work but you seem to cherry pick key info to omit and dance gingerly around Occums Razor.
THIS! I agree 100. You nailed it across the board.
"Robinhood has a risky and somewhat sleazy business model; the brokerage encourages its customers to speculate wildly, automatically setting them up in “margin” accounts"
It doesn't. You have to be approved to use margin and it's only up to the amount you have in your account. You can't just borrow infinite money.
"Roughly half of its clients are now in GameStop, and many of them have bought the stock with borrowed money"
How did you arrive at the conclusion that "many" bought on margin?
"or with a riskier derivative bet known as an option. "
Depending on how you use it call options are less of a risk than using margin because you know the exact amount you're risking when purchased.
Ordering the book now!
The difference between now and the 1920s/1930s is that the Federal Reserve back then wasn't as creative in keeping the party going.
So when you have a party going like we do now, well past it's due date, this is what you get. Is it fraud? Is it corruption? Or is it everybody dancing because the music is still paying?
“none of whom have much of a relationship to the anger and frustration of a broad swath of young men who have no way to live meaningful commercial lives” and women? Or na? Very insightful article, but it often felt like you were speaking to men in a man’s market.
https://www.irishtimes.com/business/economy/who-was-richard-cantillon-1.2751707
Another good comparison for the everything bubble is Dawson City during the Klondike Gold Rush. Tons of gold dust and not a lot of anything else: prices were super inflated for everything. Tons of cheap money with nowhere to go.
Go on Good Ol Boyz, please https://twitter.com/GoodOlBoysPod
Great piece, Matt, a few points:
We have had a huge, state-supported (or worse) upward transfer of wealth since the 1980s. And all that loose cash has to go somewhere. And since there's more money in speculation, that's where it goes. So we're getting a lost generation of kids graduating college with a lifetime of debt or worker class people whose full time jobs aren't actually full time and refuse to pay a living wage (forget benefits) -- not that professions are so great either. Anyway, a lot of mitigation can be financed by a transaction tax on the speculating but the powers that be, not surprisingly, hate giving up the fraction of a penny.
As for the reader's note about CVS and the vaccine rollout: West Virginia's (alleged) success is based (allegedly) on the lack of chain pharmacy. The local pharmacy is closer, more nimble, etc.
Yikes, now I remember you wrote about WV's successful rollout. Gotta dotard am I :(