Gambling With Our Future

When I lived in Hong Kong back in the ‘90s, I was surrounded by gamblers. Everyone, from wealthy bankers to stuggling street vendors, bet on everything from the horses to the stock market–and they were all well aware that there was not much difference between the two. Horse-racing was a guessing game for the masses, and a rigged deal for those in the know. But so was the stock market, with the prices of key stocks controlled by oligarchs who could pass inside information to key associates, and, increasingly, by Chinese government authorities who could make decisions that would pump up the shares of Chinese firms listed on the Hong Kong Stock Exchange–the so-called “Red Chips.”

Americans are learning that our vaunted  financial markets are no different.

Look at what happened on May 6, when the equities markets plunged by 10 percent in minutes, and some big companies, including Procter & Gamble, one of the companies in the 30-stock Dow Industrials Index, fell by over 30 percent briefly.

The reason for this “flash crash,” as it is now being called on Wall Street, is not some keyboard mistake by a fat-fingered or coke-addled trader, but the automated computerized trading that has come to dominate the industry. That, and quite possibly a deliberate scheme to trigger that automated trading

(See Pam Martens, a Wall Street veteran who, writing in Counterpunch says, “Over my 21 years on Wall Street, I never saw anything as remotely so suspicious as the trading activity on May 6 or as nonresponsive as the SEC’s investigation to date.” )

You see, the average day-trading schmuck sitting in his underwear at a keyboard linked to TD Ameritrade, or the working stiff who has her retirement savings entrusted to some financial adviser at her local credit union, doesn’t have a chance. It’s not just that the big investment houses are all betting on horses that they know are going to win (or lose), which has always been the case. The big brokerages and investment banks and hedge funds are also all now using supercomputers to front-run all the investments that we make or that our brokers are making on our behalf.

And even if the government wanted to put a stop to this kind of inside advantage and to the potential for manipulating the market (which it doesn’t), it couldn’t.

You can’t undo the technology that has been introduced into the system. Two-thirds of the trades on financial markets aren’t even done on exchanges anymore. They’re done electronically, off the exchanges, and out of site of regulators.

You can bet that some people, and some companies, made an absolute killing on last week’s “crash.”  When shares in P&G, which earned a net profit of $13 billion on $79 billion in sales last year, fell from $60 to less than $40 in minutes, you know there were computers at Goldman Sachs, Morgan Stanley and Citibank that were scarfing them up down there at the bottom and riding them back up before most people could even type in the stock’s two-letter stock symbol.

Meanwhile, the equity portion of the $16 trillion that Americans have invested in their retirement accounts–probably over $10 trillion in assets–fell by $1 trillion. Put simply, one trillion dollars in retirement money simply vanished in minutes, without a trace! Well not all of it disappeared–the guys who were shorting during the crash were raking it in. But it vanished from retirement accounts.

A trillion dollars gone. Ponder that thought for a moment.

Of course, two-thirds of that money reappeared minutes later, as the “flash crash” ended, or subsided, so now those retirement funds are down “only” by some $350 billion, or a little more than $1000 for each man, woman and child in America. That, however, didn’t help the many conservative investors who put “stop loss” orders on their holdings, a safety move designed to protect retirement portfolios by triggering an automatic sale if a stock falls by a certain amount–usually 7 percent. Thanks to such supposed “security” measures, a lot of people surely lost a big hunk of their savings during this brief event.

A rigged casinoA rigged casino

            It could have been worse, though. What if the flash crash had been slower moving? If the fall had taken place over the course of a whole day or two, instead of in minutes, how many panicked people, thinking it was a repeat of October 2008, would have rushed to the phone and demanded that their brokers sell their holdings and move everything to cash? Had they done so, they would have locked in their losses and been doomed to impoverished retirements.

What this tells us is that old age in the US is becoming a nightmare.  The illusion that we could all ride the American economic engine into a secure old age, our stock portfolios growing faster than we could spend the assets down, is now exposed for what it is: an cruel hoax. That leaves us with Social Security, which for most people means perhaps $15,000 or $20,000 a year in benefits.

Even that is at risk, however. First of all, Wall Street and the politicians in both political parties want to cut Social Security and Medicare, claiming that we can’t afford to pay the promised benefits. And secondly, even if the public stops them from doing that, we know the ongoing destruction of the US economy caused by policies that shift production overseas and that undermine the dollar as more and more borrowed money is shoveled into the coffers of the big Wall Street banks is ensuring a Greece-like crisis at some point. Eventually, foreign creditors will lose confidence in the hollowed out US economy and in the dollar, and will demand that we slash our government expenditures on social services, just as they are now demanding of Greece. 

Hard times are coming, especially for retirees. 

You can bet on that.