As Obama kicks off his liberated second term in office and pursues an unabashedly "progressive" (whatever this means) agenda, the United States is more polarized than ever and unbeknownst to many, including New York Times columnist David Brooks, its economic underpinnings are crumbling as financial markets are manipulated as never before.
In his latest Times op-ed entitled "The Collective Turn" (http://www.nytimes.com/2013/01/22/opinion/brooks-the-collective-turn.html?_r=0), Brooks reflects on Obama's inaugural address and pays the president a backhanded compliment:
"Reinvigorating a mature nation means using government to give people the tools to compete, but then opening up a wide field so they do so raucously and creatively. It means spending more here but deregulating more there. It means facing the fact that we do have to choose between the current benefits to seniors and investments in our future, and that to pretend we don’t face that choice, as Obama did, is effectively to sacrifice the future to the past.
Obama made his case beautifully. He came across as a prudent, nonpopulist progressive. But I’m not sure he rescrambled the debate. We still have one party that talks the language of government and one that talks the language of the market. We have no party that is comfortable with civil society, no party that understands the ways government and the market can both crush and nurture community, no party with new ideas about how these things might blend together.
But at least the debate is started. Maybe that new wind will come."
A "new wind" on the way? Yeah, right. Not when America's debt has become unsustainable. Not when the vitality of the American economy is being mauled by algorithmic trading. With the repeal of the Uptick Rule, US stock markets were effectively "deregulated" and converted into a shark pool, and the Obama administration, like its predecessors, has done nothing to undo this error.
The Uptick Rule went into effect in 1938 in response to market abuses that threatened the health of the US economy and prohibited short sales of securities except on an "uptick." As summarized by the SEC:
"Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions."
The Uptick Rule was cancelled in 2007, thereby enabling hedge funds to short shares, i.e. sell shares they did not own, in almost unlimited, immediate quantities, and permitting them to benefit from resultant investor panic in almost any given traded company.
Example: Micro-cap company "X" has designed and patented a revolutionary widget. Recently, the achievements of "X" have made their way into the news, and its shares have risen. Farmer Joe, who attends night school and reads the financial news, decides to buy 1,000 shares of "X". However, Farmer Joe is unaware that Slick Eddy at Hedge Fund "Z", who couldn't care less about the merits of company "X"'s widgets, has also noticed the rise in the share price of "X". With almost unlimited resources behind him, Eddy borrows "X" shares from various financial institutions and begins to sell vast quantities into the market, causing a precipitous decline in the market price of "X". Eddy then blocks any rally in the share price by activating a computerized program to immediately sell shares at the bid after any purchase. Worried by the huge downswing in the price of "X," and also concerned that at the end of each trading day "X" always goes down (Eddy often sells into the market during the last seconds of trading), Farmer Joe dumps his shares at an enormous loss ("Someone must know that something is wrong at 'X'"). Having succeeded in panicking Farmer Joe and other small investors in "X", Eddy buys back the shares at a significantly lower average price than that at which he sold them, resulting in enormous profits for Hedge Fund "Z". Eddy's bosses note his "fine" work and reward him with bonuses as the shares of "X" tumble.
Of course, there are those who will say that ultimately the stock market is "efficient", and the price of "X" will recover to an appropriate level. However, in the process we have witnessed the flow of wealth from Farmer Joe and other small investors to Hedge Fund "Z" and Slick Eddy.
Also, consider the damage to company "X", which, owing to doubt raised by the run on its shares, is suddenly unable to raise additional funds to finance expanded production of a new line of widgets, declares bankruptcy and fires its staff.
Sure, there are instances when the scientific and/or commercial progress of a company shorted by Hedge Fund "Z" is so great that Hedge Fund "Z" must buy back the shares at a higher price, but these losses are more than covered by its programmed downward manipulation of the shares of many other companies.
It is widely thought that the elimination of the Uptick Rule significantly contributed to the 2008 financial crisis from which America has yet to recover. Why has the Uptick Rule not been reinstated? Obviously, there are powerful lobbyists from the financial industry opposed to its reenactment, which would kill this cash cow.
Brooks wants to reinvigorate a "mature nation." Reinstatement of the Uptick Rule is even more important than re-enactment of Glass-Steagall to achieve this goal.
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