[FRIAM] Strawman/Steelman

[David Eric Smith]

Thanks Glen,

Ha!  Funny and characteristic that I would have forgotten that shareholders have voting rights.  That’s the first point on which every professor of finance would also have corrected me (before turning away in disgust).  Very good.

I take your other point, too, that social media platforms do provide potentially another channel to convert information to a control signal, so one should not pass over the question of what gaps it might fill, even if it might also do many other things that aren’t filling gaps.

I always have in mind something that I have been told but not worked to understand: that “market makers” are in some way a licensed category of actors, and that in operating legally they take on certain obligations to "maintain orderly markets”, which translates in operation into being required to provide sufficient liquidity on both sides of trades.  Hard to understand how one defines that obligation under broad circumstances, or litigates it.

Another theme that has underlain my various runs at this windmill is a sense that most “market efficiency” results assume sufficiently random and diverse action on both sides of trades.  They are all large-numbers arguments of one or another kind.  The things called “market failures”, like the 2007 collapse of markets in overnight repurchase agreements (over night), or bank runs, etc., tend to have in common that that diversity is lost: that “all the people of a certain country step on the same foot at the same time”.  That is what makes oligopoly outcomes different from the standard Arrow-Debreu efficient market outcomes, though the differences are not something I have studied.  Of course, a control signal is also sent only by means of some degree of correlation by actors, though maybe it works best when it is soft correlation with a lot of asynchrony preserved.  

Many thanks,

Eric



> On Feb 2, 2021, at 12:59 PM, uǝlƃ ↙↙↙ <gepropella at gmail.com> wrote:
> 
> EricS' post is very thorough, as always. And Marcus hits directly on my point I think.
> 
> Re (1) -- Maybe I'm naive. But through owning even the smallest share, I can vote and attend meetings. Traditionally, this is negligible, trivial control. And, like the social media point, such control is indirect. However, it takes seriously the "public" in "public company". The more our information economy intrudes on the smoky back rooms, the more such sunlight affects the way finance works. And that's a good thing ... even if it is populism (and arguably faulty phenomena like r/WallStreetBets propagate). If I understand correctly, there's a trend in fewer IPOs and staying private, in part caused by such sunlight. None of that changes the truth of your gist, of course. But I think it *implies* a possible new mechanics if our social media world continues on its path.
> 
> And I *hope* this segues nicely into your (2), with which I agree almost completely. I've tried to value (verb) my own companies, not for IPO but other things, and failed every time. The trick that you didn't address explicitly is the interplay between the private vs the public players. Ideally, if the market were a full expression of the underlying mechanics (including the private players), then we could make some sort of convexity argument, no spooky hidden states to make the observable transitions mysterious. But I don't think that's the case, as my rhetoric surrounding (1) should make clear. It's more severe than the claim that markets are not efficient. They're a overwhelmingly lossy projection of a much larger mechanism.
> 
> And it's here that I think the ethical discussion can help, the discussions -- even if accusations -- that are entertained by not only Warren, Sanders, AOC, etc, but also by libertarians and (true) conservatives, as well. Here, markets are like democracy, terrible governors, but the best we have. Consciousness-breaking episodes like the GameStop thing provide us with an opportunity to talk about your (3) -- what is a market -- *and* further, what is it for, do we still want it, what might we replace it with, how to augment it, etc. Bottlenecks like the DTCC or liquidity limits biasing "upward" would need to be better understood by the normie for the normie to have a faithful opinion (and delegate their designing to someone like Warren as representative of those opinions). A normie can't know what their delegate knows. But she can, in a limited way, *assess* the character and ethical trajectory of their delegate.
> 
> I'll end with a personal story. I hired a socialist friend of mine to do some hardware hacking awhile back. In our beer-soaked after work discussions, he confessed that he thought private, for-profit corporations are the *best* way to *e*ffect social change, precisely because the forces of market freedom, regulatory machinery, and public perception were debilitating to anyone with a "manifesto". Non-profits wear their religion on their sleeves. Public companies are *actually* for profit, whereas "for-profts" are more about the vision(s) of their constituents. Etc. This is why he agreed to join a company run by an erstwhile libertarian like me, because our missions lined up, particularly the ethical dimensions of those missions.
> 
> The GameStop episode captures this problem nicely, I think. And it's waaay less fraught with nonsense like QAnon or white supremacy than the *legitimate* gripes of your everyday Trump supporter. It's less fraught because finance is (can be) concrete. If we can address the social media problem w.r.t. finance, then *maybe* we can address it in more abstract domains.
> 
> 
> 
> On 2/2/21 9:25 AM, Marcus Daniels wrote:
>> It is hard to take discussions about mechanisms and paradigms very seriously looking at a country that significantly just wants to burn everything down.   The larger culture war is about whether we will have the possibility of design and experiment.   Like in any experiment, unanticipated consequences can occur. Beliefs may be falsified along the way.  Coherent design can't occur if every citizen  claims to be an expert designer and expects their representatives not to plan or negotiate, but merely reactively repeat their raw frustrations and urges at louder and louder volume.  That is in effect an anti-design value system.
> 
> 
>> 
>> On 2/2/21 8:08 AM, David Eric Smith wrote:
>>> 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
> 
> 
> -- 
> ↙↙↙ uǝlƃ
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