[FRIAM] Strawman/Steelman

[Eric Charles]

[image: image.png]

On Wed, Feb 3, 2021 at 5:29 AM David Eric Smith <desmith at santafe.edu> wrote:

> 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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