Every time Paul Krugman writes a column about something other than finance, I wholeheartedly agree with him, like I always have. But his columns about finance are downright uninformed and naïve. Unfortunately, today's column is about finance. Krugman claims that both Andrew Hall, the head of Citi's coveted commodities trading operation, and high frequency trading (HFT), are "bad for America." Why? Because, according to Krugman, "speculation based on information not available to the public at large" is socially useless, and could even be destructive. Where to start? First of all, Krugman confuses HFT with "flash orders," which is when an exchange or ECN shows an order to certain algorithmic traders about 30 milliseconds before showing it to everyone else. Flash orders allow trading based on private information, and should legitimately be banned. But HFT isn't the same thing as trading based on flash orders. High-frequency algorithmic trading that isn't based on flash orders (the vast majority of HFT) isn't trading "based on information not available to the public at large." The information has indisputably been released to the public at large. (The fact that algo traders can react to the information faster than Joe Retail Investor doesn't make the information any less public.) The Jack Hirshleifer paper he cites to support his argument is therefore completely inapplicable. Krugman clearly didn't fully understand the concept of "high frequency trading" when he wrote the column. Yet just six days ago, in a post criticizing Martin Feldstein for writing plainly inaccurate op-eds on health care, Krugman said, "Yes, I write about subjects on which I’m not an expert — but I do my homework first." Umm, not this time. Krugman's argument against Andrew Hall is just plain illogical. He starts out by saying:
Just to be clear: financial speculation can serve a useful purpose. It’s good, for example, that futures markets provide an incentive to stockpile heating oil before the weather gets cold and stockpile gasoline ahead of the summer driving season.But then he claims that Hall's job is "bad for America" because—I kid you not—he makes his money as a speculator:
The Times report suggests that [Hall] makes money mainly by outsmarting other investors, rather than by directing resources to where they’re needed. Again, it’s hard to see the social value of what he does.It's not possible to reconcile these two statements. It's simply inconceivable that Krugman—one of the best economists of his generation—actually believes his argument against Hall. I'm sorry, but Krugman's columns about finance are just as irresponsible as Feldstein's op-eds about health care.