After Goldman Sachs announced its record setting profits (and bonuses), the reaction was mixed: some people thought Goldman was scum and others thought it was a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Probably the truth lies in the middle: Goldman is a money vampire, but they are also pretty scummy about it.
The list of Goldman’s offenses is astounding: juicing IPO prices that cost average Amercans billons of dollars, selling garbage sub-prime backed morgage securities while betting they would fail, heavily trading oil futures leading to over $4 a gallon gas and receiving billions of dollars from tax payers (at the behest of former Goldman employees like Hank Paulson) and then only paying 1% in taxes (a total of $14 million) by shifting all of their money abroad. Understand, these things aren’t in dispute. Goldman settled out of court for millions of dollars for unfair IPO and subprime mortgage practices, though it did so without admitting wrongdoing and all of the other things are in the public record. This is just how the bank works, they figure out a way to exploit the system and then they pay a token afterward to make any questions go away.
Now the latest Goldman Sachs get richer quick scheme is high frequency trading, or using super computers and complicated algorithms to respond to market changes in milliseconds. Unfortunately, in practice this works out to front running the market, which is the only explanation Harry Markopolos could give for Berne Madoffs success (other than the Ponzi scheme it was). By examining billions of trades at once, and responding in milliseconds, high frequency traders are able to capture millions of dollars in value a day just by getting there first. Thus a two tier system emerges, where ordinary day traders are paying a “Goldman Tax” on every trade by losing tiny amounts of value because they don’t have the resources to compete.
This isn’t to say that Goldman is the only one doing high frequency trading, but of course they are among those doing it. Goldman is the biggest and best at what they do and they are unparalleled at figuring these things out. Thousands of the smartest people in the country, the sort of people who could win Nobel Prizes or earn PhD’s in astrophysics are instead working on Wall Street coming up with these zany ways to make money. All that human capital doing work that at best contributes nothing to humanity, and at its worst actually makes everyone’s life a little more expensive.
If “The Gathering of the Juggalos” is the funny side to free market capitalism, Goldman Sachs is the horrifying inevitability: making money for the sake of making money, contributing nothing but involved in everything, too big to fail and capable of writing off the penalties of their malfeacance as just part of the big score. Then its on to the next scam.
Ezra Klein has a great post up about a financial transactions tax that would amount to a government capture of the value stolen by high frequency trading. It would also raise 100 billion dollars and change the incentives for the better. Sounds promising.