The three 2010 Nobel Prize Winners in Economics won on the basis of work that shows friction in labor markets which leads to increased job vacancies do not necessarily lead to decreased unemployment ( Two things to note: 1) Their work was directly applied to a British program called “A New Deal for Young People”, getting people between 18 and 24 employed after long periods of unemployment, and 2) Obama had appointed one (Peter Diamond, a former professor of Ben Bernacke) to the Federal Reserve board, but republicans have dragged their feet on confirmation, arguing that Diamond doesn’t have enough experience for them. These two observations illustrate that: 1) the government has a vital role to play in greasing the gears of the economic engine (mostly by reducing transaction costs), and 2) the Republicans are increasingly obstinately wedded to ignorance, eschewing the implementation of good ideas and the utilization of those who have them in favor of the rabid promotion of their own blind ideological false certainties. The Republican rejection of one of the creators of the current model of how markets work is an eloquent testimony to the nature of the ideological contest we are in: Those who want to apply the best analyses to address the challenges we face, against those who want to cling to shallow platitudes that serve their own interests and the interests of those they identify with.

Nelson Mandela had given a team of archivists with the job of distilling from the plethora of notes, letters, and recorded conversations he had produced over the course of his lifetime, charging them not to consult him or protect his reputation in doing so (;;cbsCarousel). An amazing man thus leaves two amazing legacies, a political one, and a biographical one.

Computer algorithm driven “High Frequency Trading” now may account for as much as 70% of current trading on the New York Stock Exchange (most of which no longer occurs atthe New York Stock Exchange). These high-speed computers deploy programs that are designed to sort through and analyze virtually all quantifiable data regarding virtually all corporations trading on the NYSE, making split-second decisions to buy and sell in order to make fraction-of-a-penny gains millions of times a day. This creates a combination of benefits, problems, and dangers for the market. The primary benefit is increased liquidity: Their massive, rapid buying-and-selling function means that other traders always have a seller to buy from and a buyer to sell to.

The primary problem is market-distortion: These massive, high velocity trades, dominating the market, have nothing to do with the long-term value of the stocks, or the long-term prospects of the enterprises. Thus, they confuse the market signals being sent by flooding them with information that is only of split-second relevance. A secondary problem is the loss of transparency: No one knows, and few understand, the algorithms being utilized, and what impact they have on the fairness and functionality of trading. And yet another problem is a sort of de facto inside trading, obtaining, processing, and utilizing information before all others not engaged in high frequency trading, an advantage so sensitive to even split second differences that proximity to the server from which such information is obtained creates an advantage.

And the primary danger is that the algorithms they implement can sometimes go awry, which was exactly what happened in the case of the sudden 600 point market freefall several months ago, that shook market confidence and cost traders billions of dollars. The lesson of High Frequency Trading is that in a complex, high tech modern economy, we need to have a government regulatory structure that can keep up with it. I’ve often referred to “information asymmetries” as one of the primary reasons why the elaborate and expensive federal regulatory regime we’ve created is an absolute necessity, and, in fact, probably still too small for the task it must meet. High Frequency Trading is a perfect, almost archetypical, example of what is meant by “information asymmetries”: Those who are more centrally located to the flow and processing of relevant information have the opportunity to manipulate markets to their advantage, and to the public detriment.

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