[FRIAM] Strawman/Steelman

[David Eric Smith]

Thanks for this, Glen,

Your points below bring in a topic that I don’t understand well, which is the role of oligopoly in the traditional sense (few, institutionally coordinated actors) and power acting through market mechanisms.  There was an article in Forbes or somewhere on the whole GameStop thing, which had the usual journalist offhand flavor that power is what all of this is about, and of course everybody understands this, so they will speak in short-hand and jargon and we’re all in on the joke.  I do believe that people who do this for a living probably understand it at some level, but most of us tourists probably don’t.  But to sort out my own thoughts, let me further pile on following what you have below.

1. On what the market is: I have tended to start with the naive understanding that stock issues are a kind of fire-and-forget.  Unless you are buying directly from the company in an IPO, you aren’t actually lending money to them (the grounding function of the whole market); rather you are buying and selling with other actors in a secondary market.  Since the company has no obligation to you to pay dividends, or any legal liability unless they are liquidated, you have very little direct control over them (or service to them) with your act of buying or selling.

2. Then what channels are there for secondary stock-market participants to actually affect the company?  I guess I can see four: 
  i) If they intend to make later stock issues, your effect on their price can prospectively determine what they can get for selling certain limited rights (called contingent claims) in the future; 
  ii) in ordinary cases, shareholders who don’t like what they are making can sue the company in class-action lawsuits.  These are strange for companies that don’t pay dividends, since most value-investing texts claim that present value is anchored in “expectations” of future profits paid as dividends.  I don’t think anybody really believes this for half the companies in the economy, but if it were true it would mean shareholders are class-action suing the company for not managing the expectations of other shareholders they want to sell to; 
  iii) if sellers drive prices low enough, they can expose a company to hostile takeovers by those who would liquidate it and sell off the parts, which is a direct influence.  That could happen honestly by actors trying to correctly assess a value, or illegitimately as a power play; 
  iv) traders on the open market can affect the prices of shares that are held in majority by company insiders, and thus put pressure on them.  
Maybe there is a fifth: if stocks are somehow used as collateral for loans that the company needs to fund operating expenses, one could impact their ability to get credit by affecting stock prices.  I don’t know whether stocks are ever used in that way as collateral by the companies themselves.

3. If those are the mechanisms, then one asks how they enable either legitimate or illegitimate functions of secondary markets.  I agree with you that the legitimate function is for those who work from sale of wage labor, and who don’t need large chunks of money, to lend to those who need to use lots of money to build something, and are willing to pay for the loan by sharing the profits from whatever they built.  This form of resource-cycling fits so well within any good theory of lifecycles, continuing what the traditional family already did but in more realms, and the risk-sharing function fits so well within our concept of insurance, that I view well-run securities markets as a major and good innovation of societies with private-property systems.  So I strongly disagree with the enthusiasm to “burn it all down”, which I think is throwing away a very good and valuable baby with some dirty bathwater.  The thing is that setting the “correct” valuation at which money should be paid to the company in exchange for limited contingent claims should generally be a hard problem, and this is where the delocalized cloud of secondary traders come in as a a perception and information-sharing system.  Yada yada all the usual story.  In principle it’s a good service.  It should make a few market makers and various other categories of specialists an honest living wage.  The fact that they can make a killing (literally) seems to be about the classical problem of rent-seeking that we saw from Marx and the age leading up to him.  Even in the best case, though, how the “discovery” of correct prices through time should filter upstream to set the IPO valuation at a sensible value is all mysterious, and obviously is mostly guesswork and randomness.  (It is meta to this discussion, but precisely from the lifecycle point of view, I don’t see lending through markets as in any sense akin to “usury”, and also not connected to either indefinite economic growth or inflation in any necessary way.  So various evils for which the existence of market lending is often blamed do not make sense to me.  I have thought about writing out economic models to check that this can all be done explicitly, but again nobody cares so I likely will never do it.) 

Then on the other side, and back to Steve’s pickup on oligopoly, here we can see how small numbers of big actors can, by massive and coordinated short-selling, intentionally drive a stock’s price down to expose it to hostile takeover and liquidation.  The Forbes article said something about “driving GameStop to bankruptcy”, but I don’t know how that would work except if it somehow affects the company’s ability to get credit to fund operating expenses.  Anyway, if that is the market function we are talking about (the abusive use of power), then it makes sense of the “Robin Hood” name for the trading platform, and the virtuous mob that the day traders imagine themselves to be.


In a separate direction, on Warren, AOC, politicians etc.  

I have so often in these emails wished I had an excuse to say what a high and specific opinion I have of Warren.  I view her as a designer, of institutions, regulatory paradigms, etc.  It is only in certain concrete areas where a long career has built a highly specialized expertise, but it is enough that it is perfect she was the one to design the CFPB.  It is a sense of what those designs mean, and how to judge what kind of people are good at making them, that I thought she would uniquely have brought to the presidency.  To the extent that legislators would be more designers, if they didn’t have to overcome the wholesale brokenness of US politics, I think we could see more of this from them instead of the absurd power soliciting.

AOC is in a different group.  As I have mentioned to others in different threads, I view her as being a serious and hard worker, who respects the country, her office, and herself, and she shares with many of the young an appreciation of the urgency of structural change.  Over time she could become a skilled designer, but she doesn’t now have enough years of life left, to catch up to what a hard-charging focused career has done to build a professional expertise for Warren.  So her design role is likely to be in other areas, more generalist in spirit.  For now, though, she is still young.  I think most of the young we see lack the proper terror at the ubiquity of unintended consequences and the humility that should come with it.  That is why they are able to get things done, so I don’t blanket-criticize it.  But I do think that part of what happens in a career well-aged is a greater humility before unintended consequences.  Behind the always-cryptic mask of people like Pelosi or Leahy or Hoyer, I think this is one of the things that is actually at work.  For now in her young phase, AOC’s main identity is the one you flag as the politician’s role: public persuasion aimed at concentrating support into the power to act.  Warren is a generation behind in that, and so for her it isn’t an inborn skill.

There should be some kind of partnership that can be built from this, incorporating more of the Katy Porters (at the young end), Barney-Frank types (of whom I guess Henry Waxman is now the exemplar), Sheldon Whitehouses, and people like that.  Maybe the damed movie makers who want to make endless Marvel Comic adaptations could do a version of that for the Democratic Party.

Anyway, sorry for the excessively long harangue.  

Eric

Also, acronyms: 

CFPB = Consumer Financial Protection Bureau
IPO = Initial Public Offering



> On Feb 1, 2021, at 3:44 PM, uǝlƃ ↙↙↙ <gepropella at gmail.com> wrote:
> 
> Whew! What a firehose. I do think there's a couple of fundamentals that are missed in your summary. It's touched on later in SteveS', Marcus', Roger's, and your own replies. But it isn't highlighted. So, I'd like to do that.
> 
> What *I* care about, here, is the thing Robinhood (even if backed by the hyper-elite Citadel) explicitly targets, access (and insight in-) to the playing field by the populace. This episode demonstrates that social media (for all the issues we have with it like American Insurrection and QAnon) is a participant. It's trivial for a moron like me to toss some extra cash into my Roth and play around with it. What's not so trivial is grokking the various technologies involved. If nothing else, this episode cracks open relatively mysterious things like the DTCC. (Or any of the details laid out in the thread.)
> 
> I think it's a bit hyperbolic to assert that rhetoric from people like AOC and EW is limited to "culture war". Sure, they rely on tribal identity. But they, literally, cannot speak and act like objective scientists. Its not what we pay them to do. That's not where their skills lie. (Maybe Warren a little more, but she's still a politician... is paid as a politician... was hired as a politician.) As politicians, they're coming at it, as they should.
> 
> Interpersonally, the whole thread (except maybe for the later part about opting out of NIH research and competitive collectives) seems to *assume* the only reason someone would purchase stock is to make a profit. And that's interesting, to me, because I've never bought stock to make a profit. I view it as loaning the company (my) money. The companies I think are doing good things get my money. The ones that aren't do not. [⛧] I'm privileged to do this because I don't have enough money for it to matter, at all. I briefly entertained buying GME, fully knowing I would be throwing that cash in the trash. But I don't care enough about the company and what it does.
> 
> Those 2 things seem to be missing from the thread, which is probably dead now, anyway. But the 1st is more important. Robinhood, especially by limiting trades and the Melvin bailout by Citadel, has shed a little light on the bureaucratic machinery involved. And that's a good thing, no matter which perspective you take. Those boils need some popping.
> 
> 
> [⛧] Well, I also loan money to Evil corps so that they mail me their annual reports and I can attend their shareholder meetings. But, again, it's not an investment.
> 
> On 1/30/21 3:19 AM, David Eric Smith wrote:
>> So is the above roughly correct?  Or do I misunderstand the structure badly enough that I am drawing the wrong macro-conclusion?
> 
> -- 
> ↙↙↙ uǝlƃ
> 
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