Category Economic Policy

I Know You Have More Information Than Me

Danny Vinik 1 Comment

Matt Levine wrote a terrific piece at Bloomberg yesterday on New York Attorney General Eric Schneiderman’s attempts to crack down on high frequency traders getting information milliseconds before the rest of the market. This happened a couple of times over the past couple of months and Schneiderman is concerned about the “dumb money” on the other sides of those trades who are being ripped off. Levine doesn’t argue against that notion, but comments that it isn’t small investors who are the ones being ripped off. It’s the other high-frequency traders who aren’t receiving the market moving data milliseconds ahead of time. Levine’s main point is that ordinary investors should never try to compete with high-frequency traders, whether or not they get the data milliseconds in advance. Instead, they should look to compete on a longer time horizon.

That’s entirely good advice and Levine is right that it’s other high-frequency traders who are hurt by the ones getting the market moving data in advance. But I want to push back on one thing he said earlier in his post:

One way you can tell it’s bunk is umm there are markets and they are not essentially equal. This is a true story: Many banks employ analysts who write detailed research reports that include recommendations on whether you should Buy or Sell a stock, and they give those research reports to their paying clients and not to anyone else. Those clients are paying for an unfair advantage!** But it’s not just banks. The Wall Street Journal employs journalists who find news and then make that news available only to paying subscribers. Bloomberg employs journalists who find news and then make that news available to anyone on the Internet, shortly after making it available only to paying Bloomberg terminal users.

The “essential equity of the markets” is bunk because the essence of the markets is inequity. You trade because you have, or think you have, better information than someone else. If everyone had the same information, and believed that they had the same information, there would be no markets.

That’s true as well. But the difference is that small-time investors know that they don’t have the same information as banks and the clients of those banks. They are aware of the information asymmetry and believe they can beat the market anyways.

But when traders gain market moving data ahead of time, investors don’t know that they are playing on a tilted playing field. They believe they all are receiving the same information as everyone else at exactly the same time. They know they are competing against high-speed supercomputers and are at a disadvantage there. They don’t know that those supercomputers have a head start on them. As Levin notes, this doesn’t really make a difference for those investors because they can’t compete with the supercomputers anyways. It’s other supercomputer that aren’t privy to advance copies of the data who are the “dumb money.”

But just because there information asymmetries, that doesn’t mean that markets are unfair, in an equitable sense of the word (not a market failure sense). As long as you know that you face an uphill battle against investors with lots more resources and lots more information than you, you’re welcome to try to beat the market anyways. It’s when you don’t know that you’re facing an uphill battle that things really become problematic.

An Easy Solution to D.C.’s Rapid Rehousing Program

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A story in the Washington City Paper caught my eye yesterday not, because of the complexities involved in it, but because of the obvious solution. As part of the 2009 stimulus, D.C. implemented a new program called rapid rehousing that puts people up in apartments for very short periods of time (around fourth months) so that they feel a sense of urgency to find work and become self-sufficient. If you tell someone they can have housing indefinitely, that incentivizes people to delay looking for a job or cheap housing. The rapid rehousing program tries to fix that problem. If a person cannot afford the apartment in those four months, the program generally extends the program up to a year. But the people in the program often don’t about that so the pressure is still on to find work.

In 2011, when the stimulus funds ran out, D.C. continued running the program itself, but it has run into a new problem: apartments in D.C. are too expensive. From the story:

But the problem, as Wright notes, is that housing has gotten very expensive in D.C. That’s meant a double whammy for the city: more homeless people who can’t afford to pay the skyrocketing rents, but also fewer affordable units for the city to place them in through rapid rehousing.

“We don’t have apartments,” Berns says, agreeing with the residents who have struggled to find housing. “They’re right. This has been my biggest frustration, that we can’t put them in an apartment that costs thousands of dollars per month, with the thought that at the end of four months or a year or even two years, after rapid rehousing ends, that they’d put up that rent.”

Placing the participants in more expensive apartments, says Berns, would be “setting them up for failure,” since they’d have trouble paying the rent once they’re on their own and could end up back in the shelters or hotels.

“D.C. has failed to adapt its rapid rehousing program to the realities of an expensive housing market and a highly competitive population of renters,” saysAmber Harding, an attorney with the Washington Legal Clinic for the Homeless. “Homeless families, many with poor credit and low incomes, are competing with renters with good rental and credit histories and much higher income.”

As a result, there’s a tremendous backlog. Berns says his agency has plenty of funds to place more families into rapid rehousing but simply can’t find enough affordable units.

The problem here isn’t D.C.’s rapid rehousing program, as Harding suggests. It’s that D.C. is too expensive!  You know what would be a great way to make D.C. less expensive? Reducing the height restrictions on buildings here. Right now, supply is constrained by the 1910 Height Act as buildings are capped at 90 feet on residential streets and 130 feet on commercial ones. It’s a draconian law that artificially limits the number of housing units available in the city and keeps prices high. The city is finally ready to revise the law, although it is in the hands of Congress in the end.

Last week, D.C. Mayor Vincent Gray submitted his recommendations to Representative Darrell Issa (R-CA) calling for new height regulations that would allow buildings to be 1.25 times the width of streets inside “L’Enfant City”. This would allow buildings to reach 200 feet in the air on streets 160 feet wide. It would be a big increase, but it still doesn’t go far enough. Abolishing the height act entirely and allowing skyscrapers into downtown D.C. would allow residents to take full advantage of D.C.’s infrastructure while providing a larger customer base for nearby stores and increasing economic activity (meaning more tax revenue as well). In addition, it would help programs like rapid rehousing by decreasing rents and allowing a sector of affordable housing to flourish. Sounds like a no brainer to me.

Rand Paul is Willing To Breach the Debt Ceiling

Danny Vinik 1 Comment

Republican Senator Rand Paul (R-KY) has been a rising star in the GOP the past couple of months, particularly after his drone filibuster. He’s been the leading libertarian voice, following in his father’s footsteps, but with a more populist tone that could give him a legitimate shot at the Republican nomination in 2016. However, he is very, very confused about how harmful breaching the debt ceiling would be. Here’s what Paul said on Glenn Beck’s radio show this afternoon:

With the debt ceiling, I’ve always been willing to go through the deadline. I’m willing to go a month, two months, three months, as long as it takes. And I think we could use that leverage to bring the Democrats to the negotiating table.

AHHHHHHH. I honestly don’t understand how Paul can think this. By all accounts, he’s a smart, hard-working guy who believes in what he says. But he can’t possibly think that breaching the debt ceiling for three months would be acceptable? That would be a disaster of unheard of proportions. Our interest rates would rise significantly, increasing the cost of our debt by trillions of dollars in the long-term. Vital government services that keep the country going would stop. Three months of that could lead to anarchy.

And this was all after Paul said that he doesn’t want a government shutdown, because it would be bad for the Republican Party. Undoubtedly, Paul understands that a government shutdown would be bad for the country as well. But does he really think that breaching the debt ceiling for 90 days is more acceptable than a government shutdown?

Maybe Paul is bluffing here so that Republicans will be in a better position to extort the President.  Maybe he is trying to shore up support from the base. I don’t know. But the casualness with which Paul speaks about breaching the debt ceiling and causing an international financial crisis is alarming. I truly hope he doesn’t believe what he’s saying.