[FRIAM] Strawman/Steelman

Sun Jan 31 08:29:38 EST 2021

Merle, 

Are you or any others on this list receiving missives from John Komlos?  And if so, what do you think?  I think there is a new online textbook that Sam Bowles is somehow involved with, but I am forgetting details.  I think Komlos advocates for that one, though he is more a peer of Sam’s group than a member.  There is a similarity in their style of argument about what economics has been willfully ignoring, and should start to incorporate.

Best,

Eric

> On Jan 30, 2021, at 1:36 PM, Merle Lefkoff <merlelefkoff at gmail.com> wrote:
> 
> Thank you Steve, and especially Eric.  As I study new economic models for the real economy, such as the "circular economy" and the "doughnut economy", I am also paying more attention to the financial economy and especially the wild and wooly stock market.  I know it's unsustainable, but my hopes are constantly dashed every time I think it's going to crash and it demonstrates its robustness once more.
> 
> On Sat, Jan 30, 2021 at 10:56 AM Steve Smith <sasmyth at swcp.com <mailto:sasmyth at swcp.com>> wrote:
> Eric -
> 
> You lay this out so well.  
> 
> Some random observations.
> 
> Minsky's Ratchet is very compelling as an explanation.  As we know I'm a sucker for understanding by analogy with mechanical technology as a common source domain.  I *think* Minsky's Ratchet is a correlate of what you later call game-of-chicken gambling?   It was the first applied (discrete) math problem I remember being offered at college...   that among the myriad "rich-get-richer" mechanisms, the "empty pockets ratchet" is a big one...  a fair game generates a random walk which ultimately ends when one players pockets are empty... the smaller pockets (esp. by orders of magnitude) almost always go empty first.  "It's ratchets, levers, wheels, and connecting rods all the way down?"   
> I was caught off guard by your coining "an oligopoly of little fish", my usual binding of oligopoly to "a small number", but your point of course, and the crux of the event, is that the "little fish" schooled effectively, as if an apex predator-shark wandered too far up the Amazon and encountered a school of pirahna.  The culture-war story, of course is a combination of the "underdog" and the caution of the potential of "collective action"...   as you point out, this one encounter may indicate that a few sharks may yet get stripped of flesh by schools of tiny fish, but there is no indication that they will lose their niche in the oceans and reefs to such.
> Your tentative analysis of EW and AOC also really struck me as I (contingently) hold them both up as culture-war heroes to the underdogs I regularly cheer for.  I don't feel I have my own dog in either of their fights, but the larger culture I want to live within (with various forms of assertive equality and equanimity) is the one I try to support as best I can.  I am more implicated as a cause of their causes than a victim.  Understanding EW and AOC more better seems to me to be important in pursuing my aspirations to undermine my own undue advantages.   I suppose I "expect more" of EW as a veteran, as a scholar, as a senior statesperson, and I accept AOC's decision to play to her strengths (emotional appeals in the culture war) but also appreciate her having a little deeper intellectual stake (BA in Econ?) than her affect/appearance suggests.   I understand (but do not sympathize with) the olde guarde in congress being acutely skeered of getting double teamed by AOC and Katy Porter.   I look forward to more of those "wild kingdom" takedowns on CSPAN.   I don't think badly of EW's role/position, just disappointed that she might not be achieving her full potential?
> Your practical description of the "pyramid scheme" and "exhaustion" are a very good thumbnail for where I think this is going myself.   I suppose there IS a chance that a new species of oligopolist will emerge in the form of swarms (school, flock, pack, ...), but I don't think we are at the edge of a phase change yet.  I'm not sure if all significant radiation events are paired with extinction events?   
> Someone made a slightly different correlation than the COVID stay-at-home free-time-to-conspire on Reddit with a COVID stimulus-check-in-hand free energy(cash) one.   Anecdotal at best I'd guess.
> 'nuff for now,
> 
>  -Steve
> 
> On 1/30/21 4:19 AM, David Eric Smith wrote:
>> So I have been watching this, and it looks just like one more wealth-concentrator on the long term, with smaller shifts in the short term that people get caught up looking at because they involve personality conflicts.
>> 
>> Will somebody tell me where I am wrong in the following?
>> 
>> 1. We start with the usual state of affairs, in which hedge funds of various sizes take short positions; in what and how much depends on the capital they hold to cover the short, relative to their other options.  They are “big” actors, in the sense that decisions of individual firms can involve moderately large amounts of money.  They assume they are the full landscape of big actors, and although they act with cognizance of each other, since they are all using similar research, they do much the same thing.
>> 
>> 2. A new “oligopolistic actor” comes in that changes the landscape of participants, which is a group of Reddit-coordinated little fish.  They can put a short squeeze on the hedge funds.  Those that took too large a position either with too little capital to cover the squeeze until it bursts, or with too little interest in this stock to be willing to take much of a loss on it, will sell off at a loss, and the various little fish will make a little money each, but it will look like a decent chunk when you take them together.  The smaller or medium-sized hedge funds that can’t wait this out could be forced into low enough overall returns that their clients will want to withdraw from them, putting them in further trouble, perhaps driving some of them out of business.
>> 
>> 3. Meanwhile: the oligopoly move is an ordinary pyramid scheme, and it only works as long as the pool of new buyers remains large enough to pay off the earlier buyers surfing the bubble.  Considering that relief and unemployment checks amounted to many hundreds of billions of dollars, if even a modest amount of this is in the hands of the young men who were gamers and are now stuck at home, it can look as if that bubble can continue to inflate for a while.  We might even be able to estimate, however, from the overall amount of free money spent into the system, and the part of the public that this young-male demographic accounts for, what the potential size of total gambling capital is for this thing.
>> 
>> 4. While attention is on the oligopoly of small fish, and the unprepared mid-sized or small hedge funds that might go bankrupt, there are always larger actors who are well capitalized and can wait out bubbles.  They may not have taken positions in this before, when it wasn’t all that interesting, but now seeing that there is a bubble afoot, they had a reason to get in and go short early.  They can outlast the short squeeze, and have a reason to do so because of point 5 (next):
>> 
>> 5. The pyramid will end when the new buyers are exhausted, and that will be the end of any power for the little-fish oligopoly.  At that point everybody who is leveraged will be underwater.  Because a lot of this money was in options, the unwinding will be very fast, much faster than if it were just driven by a sell-off of the underlying.  The last wave of buyers in will lose essentially whatever they spent.  Whichever little fish happened to get out of the bubble before that will collect some of the money from that last wave, and the larger hedge funds who were waiting out the short squeeze will then collect the rest.
>> 
>> 
>> So, when the dust settles, the net effect?  Some money will have changed hands in a quasi-random way, from many small fish who gambled the rent and couldn’t afford to lose it, to a smaller number of other small fish who will collect at varying multiples, but still not enough to meaningfully alter their life trajectories.  The Reddit board-makers might collect enough to happily go on to the next scam, but they will not be breaking into any Forbes lists.  However, in the net, there will have been a flow of money out of both the oligopoly of small fish and the small or mid-sized hedge funds that didn’t see it coming, and into the wealth of the large funds.  In addition to the direct winnings of the large players, because their returns to their clients will go up, they will collect new clients that jumped ship from the hedge funds that bought back out of the short squeeze at a loss.  
>> 
>> So the macro-thing that will happen is the macro-thing that happens through every other mechanism: whoever has the most capital can wait out the largest spectrum of risks, and will on average gain more capital.  This is the ratchet that works through everything.  It is not a Fama-French efficient market mechanism, because it works through differential action of constraints, not through Arrow-Debreu “complete” price systems.  It is not quite the same, but still related to, the bubble-bailout cycles that I have termed Minsky’s Ratchet, from the arguments made by Hyman Minsky in Stabilizing an Unstable Economy.
>> https://www.amazon.com/Stabilizing-Unstable-Economy-Hyman-Minsky/dp/0071592997 <https://www.amazon.com/Stabilizing-Unstable-Economy-Hyman-Minsky/dp/0071592997>
>> 
>> 
>> For AOC to be seeking media attention, when there was an early trading freeze, to criticize the hedge funds for looking for protection against the oligopoly doesn’t surprise me, because this is a culture-war thing and responding in the moment to that is what she does.  But for Warren (Elizabeth, not Buffett) to allow that to be her caught-on-camera moment surprises me, and seems regrettable.  Yes, EW is as motivated as AOC to criticize the use of access by the hedge funds to seek protection when they get beat at their own game, and both are right to mock them and welcome them to go under.  But EW’s career has been about how the ratchet of unequal capital constraints moves capital from the small to the large, and if what I said above is correct, I would assume this would be the biggest picture in her view.  In the long term, the people who will get hurt mainly are just the people she has made a profession of trying to protect.  I would think she would want her on-camera moment to be about not getting distracted from that, and worrying that, yes, market regulations and taxation that encourage game-of-chicken gambling are The Urgent — and structural — Problem.  Whether some gambling hedge funds get caught and go under is a sideshow.  AOC, too, of course is plenty smart to understand all this (if what I have said above is not wrong), and I expect she probably does.  (She was an econ major in college, right?). But her media incentives are a bit different, so for her to mostly emphasize the culture-war thing doesn’t seem strange.
>> 
>> So is the above roughly correct?  Or do I misunderstand the structure badly enough that I am drawing the wrong macro-conclusion?
>> 
>> Eric
>> 
>> 
>>> On Jan 29, 2021, at 6:45 PM, uǝlƃ ↙↙↙ <gepropella at gmail.com> <mailto:gepropella at gmail.com> wrote:
>>> 
>>> Yep. I've logged into my TD Ameritrade account several times to see if they've limited purchases of GME. Supposedly Robinhood did limit purchases. It looked like I could always buy on TDA... but I'm not sure. I would never actually buy GME, *except* to screw The Man. 8^D
>>> 
>>> On 1/29/21 3:41 PM, Merle Lefkoff wrote:
>>>> Has anyone been watching what's happening in the stock market with GameStop?
>>> -- 
>>> ↙↙↙ uǝlƃ
>>> 
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> -- 
> Merle Lefkoff, Ph.D.
> Center for Emergent Diplomacy
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