Sunday, May 9, 2010

Robert X. Cringely Analyzes the Stock Market Meltdown

If I stepped back just over 10 years ago I thought the world mostly made sense and things were on an even keel. We had just started a new millennium and avoided the predicted Y2K meltdown. Things looked good. Or so I thought.

But in 2000 the crash took down NASDAQ, the US fell into a recession, Sept 11 happened, Bush started a "war of choice", Katrina demonstrated that Bush's government was incompetent, the housing bubble burst, and now we have a debt crisis in Europe and a mini-meltdown in the US stock market. This is not the world I would have expected in January 2000.

Here is a bit from a post by Robert X. Cringely on the Adam Smith's Money World web site:
Yesterday something happened to drop the Dow 900 points in six minutes. We don’t yet know exactly what was the igniter for that market implosion, but it likely was a computer glitch -- a $1 trillion computer glitch.

Whatever the glitch was, it happened and trading programs, trying to sell out from under what they perceived to be a market crash, dutifully began to liquidate. Before any human even knew it the market was crashing, though for no good reason.

From a technical standpoint this event reminds me of when the Strategic Air Command first fired-up the DEW Line radar network in 1958 to find a huge wave of Russian bombers apparently flying over the horizon. Those bombers turned out to be the rising Moon -- something SAC programmers had failed to tell their command and control computers even existed. Then, too, calmer heads -- human heads -- prevailed, calling back a U.S. response that was already in the air, headed for Moscow.

Yesterday’s market event comes down to a differentiation between being clever and being smart. The program trades are clever -- they respond almost instantly -- but they aren’t very smart. A trader on his or her first day of work would be smart enough to know something was wrong when Accenture appeared to be selling for a penny. But computers are dumb.

Yesterday stands as a metaphor for the market as a whole in the last decade, when clever substitutes for smart and size trumps sense. When too big to fail means too big to even care, something has to give.
I added the bold to the last paragraph. It is the take home message. The US government is now almost two years from the meltdown of Sept 2008 and nothing has been fixed. In fact, the crash on Thursday May 6th proves that there are even more problems that are lurking out there. Instead of government rushing to fix the problem bequeathed by the Bush years, the US Congress has engaged in interminable debate. The Republicans stymie things by calling for all proposed bills to be tabled and to "start over" on the legislative process. That's it. No real progress. Pitiful.


thomas said...

I like Cringely's post about this and that last statement is really good and says a lot about our investment attitude in todays money making markets.

I have this feeling or sense that trading instantly with computers is wrong and bad for our nation's economic health. A lot of the housing bubble was the short sale or speculation side of the housing markets. I think this Wall Street thing is why it is so separated from Main Street and not really an accurate indicator of the economy any more. Any thing for a quick buck and who cares what it does to the rest of the people.. I am not sure if I am expressing my thought very well, but hopefully you get the gist of what I'm thinking.

RYviewpoint said...

Thomas: I think the US could learn something from Canada. We didn't have the bank collapse you did because our banks are more conservative. When Canadian banks sell mortagages they hold on to them. They don't bundle them up, slap a AAA rating on them, and sell them off to some sucker.


Jim Flaherty, the finance minister, attributes Canada’s strong performance to its “boring” financial system. Prodded by tight regulation, the banks were much more conservative in their lending than their American counterparts. Those that did dabble in subprime loans were able to withdraw quickly. This prudence kept a lid on house prices while those in America were soaring, but it paid off when the bust hit. The volume and value of home sales in Canada are now at record highs.

And I can add: We just added 109,000 new jobs last month. That's equivalent to the US adding over one million jobs in one month. That is the benefit of having a sound financial system.

The Wall Street "financial innovations" of the past 20 years keep demonstrating that these new tricks have added risk and cost to the economy. While financial services grew from 8% of the total US economy to 25%, the average worker's wage stagnated. Money flowed into the hands of financial manipulators. But in doing that, they have strangled Main Street and the average worker.

The "flash trading", front-running, and other tricks used by Wall Street to milk the market are destroying the US economy. The US Congress needs to rein in Wall Street. Real financial regulation is needed. Sadly, Obama has not shown the stomach to do it.

thomas said...


You have to have a strong financial system and the only way to have that is with government regulation or some authority that keeps it inline.

Manufacturing has to have a market and house building is manufacturing and I believe the bubble was built, in part, in an effort to keep the workers working so times appeared to be good. If your business model is built on mass production then you need a mass customer base. How do you hold onto that demand if you produce too much? By continually upgrading or building bigger or some other marketing scheme (smaller in the case of cell phones or laptops). We have a builder here that was producing hundreds of homes and had many crews running. How long can that kind of demand last? How many new cars are being displayed to customers in this country every day and every year? Cars are almost understandable since the car wears out every 5 to 10 years, but I drive one that is 24 years old... What would the demand have been if only the top wage earners could buy a car in say, their lifetime?

I found the whole house selling and buying thing troubling and sometimes the personal car thing is troubling, too, but I remind myself that many unfathomable numbers of workers and businesses depend on those cars being produced and sold and to a lesser extent the housing industry did too. So many would be unemployed if production was at the level it really should be, if in the housing business, it was an investment into a HOME and not a money making opportunity.. Cars almost could be looked at as a one time purchase if they were built right and society held them in a different light. Cars could be rebuilt and maintained throughout the owners lifetime and could be even now. Older car rebuilding could actually be a very huge business. They could be retrofitted and totally rebuilt and even parts manufacturers could make parts that are not made for slightly older cars right now, but it is a vanity thing to own a new car and for many years it was a very big part of the economy as I have pointed out, and it was made possible with easy credit and a somewhat stable financial system (if only temporarily so).

It is good that Canada did not fall prey to the unrestrained greed that other countries fell to. One more nation down could have been one too many for this poor world.

RYviewpoint said...

Thomas: I don't have the answer.

My gut instinct is that you can never "produce too much". I've never met a person who said "please, no more! I've got everything I want or could ever want". The problem isn't supply, it is demand. People don't have the dollars to buy the goods that could be made to meet their demand.

Why this shortage of dollars? Because wages didn't keep up with the growth in the GDP. The "excess" dollars kept going to the very, very rich.

But my argument falls apart at this point. The rich, like everybody else, should have infinite demands, so they should be able to keep the economy going by buying ever bigger yachts and add to their 8 homes scattered around the world by buying 2 or 3 more and fill them with high priced antiques and expensive art objects.

So... while my gut instinct is that the rich having "won all the marbles" from the game is the root cause, I don't know enough economics to make a coherent or complete explanation.

As for your solution to build things that last and keep people busy repairing them, that was the original logic of Henry Ford, but he lost market share to General Motors. GM decided to market cars as status symbols with the idea that each "season" you would offer a newer, better, more stylish version to generate demand. That worked, and it crushed Henry Ford until he retooled and joined the modern consumerist society with annual "model changes".

So people have voted with their feet. They want new things. They want "style" and ever changing goods on offer.

I don't have an answer for how to make the economy work. It is pretty obvious that government officials have no idea. And the "leaders of industry" sure don't know because they wouldn't choose recessions if they could avoid them.

I think the "business cycle" is just a fact of life in a dynamic economy. You can't get rid of it without getting rid of "animal spirits" and the freedom to choose.

So the real task is to find ways to moderate the pain of bubbles bursting and recessions. The government can play a role by having a social safety net. But again, this is tricky. You want a safety net that avoids unnecessary pain, but you don't want too comfy a safety net that would tempt too many people to just relax on the safety net and let others pay their way through life.

Like most real problems, this one has no obvious solution and opinions vary. The "right" answer changes with the times.