Last Thursday afternoon at around 2:35 pm, the US stock market plummeted in a sudden panic that has yet to be fully explained. The Dow Jones fell by almost 1000 points, and shares of some stocks fell to just one penny. Within minutes, the market surged, recovering most of the immediate loss, nonetheless ending the day substantially in the red.
The event has been popularly blamed on a "fat-fingered" trader who supposedly mis-entered a trade, perhaps substituting a billion shares for a million. While a trading error may have caused the selloff, no responsible party has yet been identified.
Today in The Financial Oligarchy Reigns: Democracy’s Death Spiral From Greece to the United States, David DeGraw and Max Keiser allege that big banks engineered the meltdown to coincide with debate on the financial reform amendment seeking to break up the "too big to fail" banks.
This is from the article:
If you recall, back in September ‘08, as Congress was voting down the first bailout, the big banks made the market plunge a record 778 points in one day. Fear and panic then led Congress to pass the bailout. Trillions of our tax dollars, the money that we desperately need to keep our society functioning over the long run, then went out the window and into the pockets of the very people who caused the crash.
What happened on September 29, 2008 will go down in history as one of the greatest acts of terrorism ever.
9/29/08 proved that when you have so much power concentrated in the hands of a few, you can manipulate a computer algorithm and make the market and economy go whichever way you want it to go. So on 5/6/10, just as the power of the big banks was again threatened on the floor of the Senate and a deal on auditing the Federal Reserve was being negotiated, in came a sudden and unprecedented ten-minute 700 point market drop, a precision-guided High Frequency Trading (HFT) attack to show Congress who’s boss.
If you think the massive sudden drop happened because one lowly trader hit one wrong button, if you actually believe that the entire stock market can plunge because of one mistaken key stroke by a low-level trader, you are stunningly naïve. I hate to burst your bubble, but this was a direct attack.
The charge is sensational. And to be clear, the selloff may have simply been a series of errors and malfunctions within the high-frequency trading system, which is troublesome enough in itself.
But even if an act of market sabotage did not occur, DeGraw and Kaiser make some important points about concentration of power, and the systematic fleecing of the public by the oligarchs. They quote President Lincoln:
I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my Country. Corporations have been enthroned, an era of corruption in high places will follow, and the money power of the Country will endeavor to prolong its reign by working upon the prejudices of the People, until the wealth is aggregated in a few hands, and the Republic is destroyed
Incidentally, yesterday this was reported:
Goldman Sachs, which makes more money from trading than any other Wall Street firm, also disclosed that its traders generated $100 million or more on 35 days during the first quarter and lost money on no days. The firm set a record when it made $100 million or more on 46 days in the second quarter.
Karl Denninger responds:
No losing days in the entire quarter?
You are free to believe that this is solely due to "superior skill." I, on the other hand, do not believe that on a statistical probability basis the record this firm has put together over the last two years in terms of the number of winning .vs. losing days is possible simply due to superior skill - that is, without cheating in some form or fashion.
Coming back to DeGraw and Keiser, their main point comes down to this:
From the Founding Fathers on, we have known that you cannot have a concentration of vast wealth and Democracy at the same time - and we currently have the greatest concentration of wealth in the history of the United States. As former Supreme Court Justice Louis Brandeis once said, “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.”
They go on to mention that just six banks control over 60% of GDP. We only need to shift our gaze southward to see another behemoth, BP, which has effectively ruined the ecology of an entire region in a single act of negligence. Fortunately for them, beyond cleanup, their liabilities are capped at $75 million. And how is this liability cap in the public interest? Got me.
Keep writing your elected representatives. Financial reform is a work in process, and they need your input.
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5/11 afternoon update: SEC's Shapiro on Market Disruption: "unable to point to a single event" as cause