Three very expensive milliseconds

Original author: Paul Krugman
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Four years ago, Chris Christie, the governor of New Jersey, suddenly canceled one of America’s largest and perhaps most important infrastructure projects — the construction of a new railway tunnel under the Hudson River. You can rank me among those who believe that his desire to take the presidency is to blame for everything, and this gesture is dictated by the desire to rub oneself in the government - and its main component, the party of Republicans who hate public transport issues.

Despite the fact that the construction of one tunnel was canceled, the construction of another, one way or another, was nearing completionsince Spread Networks has finished laying it through the Allegany Mountains in Pennsylvania. The Spread Networks tunnel was not designed to carry passengers or at least freight; it was designed for laying fiber-optic cable, which would reduce by three milliseconds - by three thousandths of a second - the connection time between the futures exchanges in Chicago and the stock exchanges in New York. The fact that this tunnel was laid while the railway tunnel was not built, says a lot - about what is wrong with modern America.

Who cares about three milliseconds? The answer is to high-frequency traders who earn by buying or selling stocks for the smallest fraction of a second faster than other players on the exchange. Unsurprisingly, writer Michael Lewis begins his best-selling book, Flash Boys, a controversy against high-frequency trading, from the history of Spread Networks' tunnel. But the true moral of the story around this tunnel exists regardless of the controversy of Michael Lewis.

Think about it. You can agree or disagree with Mr. Lewis’s thesis that the representatives of the high-frequency trading world are villains, and those who try to prevent them are heroes. (As for me, there are no good guys in this story at all.) But in any case, spending hundreds of millions of dollars to save some three milliseconds seems like a huge waste. And this is only a fragment of a much more complete picture in which society is called upon to continuously supply financial fraud with its resources, receiving in return only a small part or nothing at all.

But what size waste is it? In his study, Thomas Philippon of New York University suggests that the amount is several hundred billion dollars a year.

Mr. Philippon begins with the familiar observation that the financial sector has developed much more rapidly than the economy as a whole. In particular, the share of GDP attributable to banks and trading companies and similar organizations has almost doubled since 1980, when the dismantling of the financial regulation system created in response to the Great Depression began.

What do we get in exchange for all this money? A little how general this can be determined. Mr. Philippon shows that the financial sector has expanded much faster than this or that stream of savings that it directs or deposits; They like to say that it provides a huge service to the economy by distributing capital in the most efficient way, but this argument is difficult to support after a decade in which Wall Street's main achievement was investing hundreds of billions of dollars in subprime mortgages.

Also, Wall Street supporters usually insist that the rapid growth of complex financial instruments reduced risk and increased system stability, so the financial crisis is a thing of the past. This is actually not the case.

But if our overgrown financial sector does not provide us with security and higher productivity, then what does it do? On the one hand, he holds small investors for fools, forcing them to spend huge sums in futile attempts to outwit the market. But do not take my word for it - this is what the president of the American Financial Association said in 2008. On the other hand, huge amounts of money are spent on speculative activity, which is profitable privately, but in a social sense, unproductive.

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