What moves the markets? Part I

It's a key assertion of the Efficient Markets Hypothesis that markets move because of news and information. When new information becomes available, investors quickly respond by buying and selling to register their views on the implications of that information. This is obviously partially true -- new information, or what seems like information, does impact markets.

Yesterday, for example, US Treasury Secretary Timothy Geithner said publicly that, despite the ominous economic and financial climate, there is “absolutely” no chance that another United States financial institution will fail. (At least that's what the New York Times says he said; they don't give a link to the speech.) That was around 10 a.m. Pretty much immediately (see the figure below) the value of Morgan Stanley stock jumped upwards by about 4% as, presumably, investors piled into this stock, now believing that the government would step in the prevent any possible Morgan Stanley collapse in the near future. A clear case of information driving the market:

Of course, this just one example and one can find further examples, hundreds every day. Information moves markets. Academics in finance have made careers by documenting this fact in so-called "event studies" -- looking at the consequences for stock prices of mergers, for example.

But I'm not sure how widely it is appreciated that the Efficient Markets Hypothesis doesn't only say that information moves markets. It also requires that markets should ONLY move when new information becomes available. If rational investors have already taken all available information into account and settled on their portfolios, then there's no reason to change in the absence of new information. Is this true? The evidence -- and there is quite a lot of it -- suggests very strongly that it is not. Markets move all the time, and sometimes quite violently, even in the total absence of any new information.

This is important because it suggests that markets have rich internal dynamics -- they move on their own without any need for external shocks. Theories which have been developed to model such dynamics give markets with realistic statistical fluctuations, including abrupt rallies or crashes. I'm going to explore some of these models in detail at some point, but I wanted first to explore a little of evidence which really does nail the case against the EMH as an adequate picture of markets "in efficient equilibrium."

Anyone watching markets might guess that they fluctuate rather more strongly than any news or information could possibly explain. But research has made this case in quantitative terms as well, beginning with a famous paper by Robert Shiller back in 1981. If you believe the efficient markets idea, then the value of a stock ought to remain roughly equal to the present value of all the future dividends a stock owner can anticipate getting from it. Or, a little more technically, real stock prices should, in Shiller's words, "equal the present value of rationally expected or optimally forecasted future real dividends discounted by a constant real discount rate." Data he studied suggest this isn't close to being true.

For example, the two figures below from his paper plot the real price P of the S&P Index (with the upward growth trend removed) and of the Dow Jones Index versus the actual discounted value P* of dividends those stocks later paid out. The solid lines for the real prices bounce up and down quite wildly while the "rational" prices based on dividends stay fairly smooth (dividends don't fluctuate so strongly, and calculating P* involves taking a moving average over many years, smoothing fluctuations even further).

These figures show what has come to be known as "excess volatility" -- excess movement in markets over and above what you should expect on the basis of markets moving on information alone.

Further evidence that it's more than information driving markets comes from studies specifically looking for correlations between new events and market movements. On Monday, October 19, 1987, the Dow Jones Industrial Average fell by more than 22% in one day. Given a conspicuous lack of any major news on that day, economists David Cutler, James Poterba and Larry Summers (yes, that Larry Summers) were moved soon after to wonder if this was a one-off weird event or if violent movements in the absence of any plausible news might have been common in history. They found that they are. Their study from 1989 looked at news and price movements in a variety of ways, but the most interesting results concern news on the days of the 50 largest singe day movements since the Second World War. A section of their table below shows the date of the event, how much the market moved, and the principle reasons given in the press for why it moved so much:

Within this list, you find some events that seem to fit the EMH idea of information as the driving force. The market fell 6.62 percent on the day in 1955 on which Eisenhower had a heart attack. The outbreak of the Korean War knocked 5.38% off the market. But for many of the events the press struggled mightily to find any plausible causal news. When markets fell 6.73% on September 3, 1946, the press even admitted that there was "No basic reason for the assault on prices."

[Curiously, I seem to have found what looks like a tiny error in this table. It lists the outbreak of the Korean War (25 June, 1950) as explaining the big movement one day later on June 26, 1950. But then it lists "Korean war continues" as an explanation for a movement on June 19, 1950, five days before the war even started!]

Cutler and colleagues ultimately concluded that the arrival of news or information could only explain about one half of the actual observed variation in stock prices. In other words, the EMH leaves out of the picture something which is roughly of equal importance as investors' response to new information.

More recently in 2000, economist Ray Fair of Yale University undertook a similar study which found quite similar conclusions. His abstract explains what he found quite succinctly:

Tick data on the S&P 500 futures contract and newswire searches are used to match events to large five minute stock price changes. 58 events that led to large stock price changes are identified between 1982 and 1999, 41 of which are directly or indirectly related to monetary policy. Many large five minute stock price changes have no events associated with them.

 All in all, not a lot of evidence supporting the EMH view on the exclusive role of information in driving markets. Admittedly, these studies all have a semi-qualitative character based on history, linear regressions and other fairly crude techniques. Still, they make a fairly convincing case.

In the past few years, some physicists have taken this all a bit further using modern news feeds. More on that in the second part of this post. The conclusion doesn't change, however -- the markets appear to have a rich world of internal dynamics even in the absence of any new information arriving from outside.

Hokey Pokey Plan

The Fed announced its upcoming schedule for “Operation Twist.” The Fed plans to buy approximately $44 billion long-term treasuries funded by its sale of approximately $44 billion short-term bonds in October. While this program was named after the dance craze of the early 60’s, a more appropriate name might be “Operation Hokey Pokey,” since it is a simple program of exchanging short bonds for long bonds, or in other words “you put your short bonds in, you pull your long bonds out, you put your short bonds in and you shake them all about.”

One of the purported beneficiaries of the Fed’s policy is the housing market because “Operation Twist” is expected to push interest rates down for home mortgages, which will (hopefully) put more money in homeowners’ pockets, and ultimately the economy at large.

The housing market can use the help. A recent survey of economists, analysts and real estate professionals concluded that the “housing market remains shaky and is unlikely to deliver significant growth in prices over the next five years.” On the other hand, many question the wisdom of the Fed’s intervention. Robert Shiller, cofounder of MacroMarkets, opined “markets and government institutions are visibly struggling to respond consistently to an unprecedented rash of crises and conflicts. These struggles diminish confidence, which compounds the underlying economic stresses and lowers expectations.” (Five more years of housing problems, with some stability in local markets)

Paul Craig Roberts questioned the potential efficacy of the Fed’s Hokey Pokey program. In Saving the Rich, Losing the Economy, he wrote, “The Federal Reserve announced that the bank would purchase $400 billion of long-term Treasury bonds over the next nine months in an effort to drive long-term US interest rates even further below the rate of inflation, thus maximizing the negative rate of return on the purchase of long-term Treasury bonds. The Federal Reserve officials say that this will lower mortgage rates by a few basis points and renew the housing market.

“The officials say that QE 3, unlike its predecessors, will not result in the Federal Reserve printing more dollars in order to monetize US debt. Instead, the central bank will raise money for the bond purchases by selling holdings of short-term debt. Apparently, the Federal Reserve believes it can do this without raising short-term interest rates, because back during the recent debt-ceiling-government-shutdown-crisis, the Federal Reserve promised banks that it would keep the short-term interest rate (essentially zero) constant for two years.

“The Fed’s new policy will do far more harm than good. Interest rates are already negative. To make them more so will have no positive effect. People aren’t buying houses because interest rates are too high, but because they are either unemployed or worried about their jobs and do not see a recovering economy.

“Already insurance companies can make no money on their investments. Consequently, they are unable to build their reserves against claims. Their only alternative is to raise their premiums. The cost of a homeowner’s policy will go up by more than the cost of a mortgage will decline. The cost of health insurance will go up. The cost of car insurance will rise. The Federal Reserve’s newly announced policy will impose more costs on the economy than it will reduce.

“In addition, in America today savings earn nothing. Indeed, they produce an ongoing loss as the interest rate is below the inflation rate. The Federal Reserve has interest rates so low that only professionals who are playing arbitrage with algorithm-programmed computer models can make money. The typical saver and investor can get nothing on bank CDs, money market funds, municipal and government bonds. Only high risk debt, such as Greek and Spanish bonds, pay an interest rate that is higher than inflation.

“For four years interest rates, when properly measured, have been negative. Americans are getting by, maintaining living standards, by consuming their capital. Even those with a cushion are eating their seed corn. The path that the US economy is on means that the number of Americans without resources to sustain them will be rising.”

Lee Adler of the Wall Street Examiner reported on unusual activity in the Treasuries markets recently. He wrote,“Foreign central bank dumping of Treasuries and Agencies reached record levels this week, far beyond anything seen in the 9 years since I started tracking this data. The last time anything remotely similar happened was at the top of the bull market in the summer of 2007, and those levels pale by comparison with what is going on today. Furthermore, this is no flash in the pan. This has been going on for 4 weeks, and has been growing for the past 3. Over the past 9 years, there has never been a time when FCBs were sellers of their Treasury and Agency debt for 4 weeks in a row. I do not believe that the bull market in bonds can survive under these conditions, regardless of what the Fed does. If the runs on European banks, bank paper, and sovereign debt subside, by even a little, it’s over.

“Furthermore, this withdrawal of FCB liquidity from the US market, combined with no net new liquidity from the Fed, should keep stock prices under pressure. For months falling stock prices have gone hand in hand with rising bond prices and falling yields. Any reversal in the trend of bond yields may not be accompanied by a similar reversal in stock prices, or at least not to the same degree. We need to be alert for any signs of a shift in these correlations in the weeks ahead.” (Foreign Central Banks Massively Dump Treasuries)

We will also be keeping an eye on the U.S. Dollar, which had been running in a channel between 73 and 76 from April through early September. More recently, it broke higher into the 76 to 79 range. Phil wrote, “We anticipate the rising Dollar to adversely effect the earnings of companies that earn a lot of revenues overseas. Clearly in this environment, it is very difficult to push through price increases and, if revenues are the same in Euros, then they will be lower when the company reports them in Dollars – a simple enough premise.”

The big question of the day is, are we going to see a strengthening economy, or are we going to backslide into recession? Many are thinking the latter. EconMatters sees multiple reasons that the economy is already contracting, including the falling prices of oil, cotton, copper and the S&P 500.(4 Market Signs Signaling a Recession)

And what about the stock market? Phil wrote, “Keep in mind, we are still around 2/3 cash in our (virtual) allocations. That keeps us flexible but it’s no reason to be careless. Our main job, as we retest the bottom of our range for the forth time since early August, is to decide if "this time is different." Is this case the same as 2008 when the Global Economy is going off a cliff and we can just throw VALUE out the window as panicked traders sell their stocks at any PRICE? Or is this another opportunity for us to be greedy when others are fearful, and pick up some great VALUES at low PRICES?

“With 500-point weekly swings and 1,000 point monthly swings since July – it’s a fantastic market to trade in but you have to have that balance and, if we do begin to fail our major supports – we also have to have restraint because what looks like a bargain today may not seem like one after Greece defaults or a major bank fails or AAPL misses earnings or some other kind of major catastrophe.” (Weekend Update - Are We Bear Yet?)

As always, determining the difference between “price” and “value” is critical for making good trading decisions in the markets. For now, we’re not quite bearish yet, and since our current strategy of “cashy and cautious” has been working for us, we’ll continue to stick with it until it makes sense to change our stance.

HFT -- details

An Op-Ed I wrote for Bloomberg on high-frequency trading finally appeared today after a short delay due to a Bloomberg backlog. I meant for there to be a link in the article to further discussion here of some of the details of Andrew Haldane's argument, but that link is not yet in place at Bloomberg because of a mix up. It should be fixed later today. Meanwhile, for anyone visiting here from Bloomberg the further discussion I've given on Haldane's work can be found here.

Sorry for the confusion!

Why game theory is often useless...

Economic theory relies very heavily on the notion of equilibrium. This is true in any model for competitive equilibrium -- exploring how exchange can in principle lead to an optimal allocation of resources -- or more generally in the context of game theory, which explores stable Nash equilibria in strategic games.

One thing physicists find wholly unsatisfying about equilibrium in either case is economists' near total neglect of the crucial problem of whether the agents in such models might ever plausibly find an equilibrium. You can assume perfectly rational agents and prove the existence of an equilibrium, but this may be an irrelevant mathematical exercise. Realistic agents with finite reasoning powers might never be able to learn their way to such a solution.

More likely, at least in many cases, is that less-than-perfectly rational agents, even if they're quite clever at learning, may never find their way to a neat Nash equilibrium solution, but instead go on changing and adapting and responding to one another in a way that leads to ongoing chaos. Naively, this would seem especially likely in any situation -- think financial markets, or any economy as a whole -- in which the number of possible strategies is enormous and it is simply impossible to "solve the problem" of what to do through perfect rational reflection (no one plays chess by working out the Nash equilibrium).

A brilliant illustration of this insight comes in a new paper by Tobias Galla and Doyne Farmer. This is the first study I've seen (though there may well be others) which addresses this matter of the relevance of equilibrium in complex, high-dimensional games in a  generic way. The conclusion is as important as it is intuitively reasonable:

Here we show that if the players use a standard approach to learning, for complicated games there is a large parameter regime in which one should expect complex dynamics. By this we mean that the players never converge to a fixed strategy. Instead their strategies continually vary as each player responds to past conditions and attempts to do better than the other players. The trajectories in the strategy space display high-dimensional chaos, suggesting that for most intents and purposes the behavior is essentially random, and the future evolution is inherently unpredictable.

In other words, in games of sufficient complexity, the insights coming from equilibrium analyses just don't tell you much. If the agents learn in a plausible way, they never find any equilibrium at all, and the evolution of strategic behaviours simply carries on indefinitely. The system remains out of equilibrium.

A little more detail. Their basic approach is to consider general two player games between, say, Alice and Bob. Let each of the two players have N possible strategies to choose from. The payoff matrices for any such game are NxN matrice (one for each player) giving the payoffs they get for each pair of strategies being played. The cute idea in this analysis is to choose the game randomly by selecting the elements of the payoff matrices for both Alice and Bob from a normal distribution centered on zero. The authors simply choose a game and simulate play as the two players learn through experience -- playing strategies from their repertoire of N possibilities more frequently if those strategies give good results.

With N = 50, the results show clearly that many games do not ever settle into any kind of stable behaviour. Rather, no equilibrium is ever found. The typical dynamics is reflected in the figure below, which shows the difference in payoffs to the two players (Alice's - Bob's) over time. Even though the two agents work hard to learn the optimal strategies, the complexity of the game prevents their success, and the game shows no signs whatsoever of settling down:

As the authors note, this kind of rich, complex, ongoing dynamics looks quite similar to what one sees in real systems such as financial markets (the time series above exhibits clustered volatility, as do market fluctuations). There are periods of relative calm punctured by bouts of extreme volatility. Yet there's nothing intervening here -- no "shocks" to the system -- which would create these changes. It all comes from perfectly natural internal dynamics. And this is in a game with N = 50 strategies. It seems likely things will only grow more chaotic and less likely to settle down if N is larger than 50, as in the real world, or if the number of players grows beyond two.

Hence, I see this as a rather profound demonstration of the likely irrelevance of equilibrium analyses coming from game theory to complex real world settings. Dynamics really matters and cannot be theorized out of existence, however hard economists may try. As the paper concludes:

Our results suggest that under many circumstances it is more useful to abandon the tools of classic game theory in favor of those of dynamical systems. It also suggests that many behaviors that have attracted considerable interest, such as clustered volatility in nancial markets, may simply be specific examples of a highly generic phenomenon, and should be expected to occur in a wide variety of different situations.

Apple Sell-Off Next.

Several Mutual Funds and Hedge Funds are in negative territory for the month of September. And most have gone negative YTD.  The redemption calls came in fast and furious and forced the funds to liquidate their profitable positions first. Thus we saw gold being sold off and gold bugs a bit shaken. I think the sell-off of precious metals is not over yet.

The situation in Euro land is not stable yet for any sustainable rally in the world stock markets. The TBTF banks will use this weakness to create further panic in the US stock markets to force the Feds hand with QE3.  

I expect that the stock markets will continue to show high volatility in October and S&P may well go below the August lows. Which means the fund will sell their most profitable positions to keep up the illusion of profitability and meet the redemption calls. We can expect precious metals to go below the current level. Silver in range of $20s and gold somewhere in the range of $ 1400 or below is well within the realm of possibilities.

One of the next sell-off will be the stock most widely held by the hedge funds. That one stock is Apple. Notwithstanding the new high, it is logical to expect that Apple, the darling of the stock markets, will see a huge drop in price in the coming weeks. That will be induced by technical selling and redemption calls. From the enclosed table of GS, you can see that Apple has the highest return YTD and it will be the next on the sell list to generate cash and show profit.

I have written about “Balance Sheet” contraction and many readers have difficulty understanding it.  Basically the current and impending deflation is and will be caused by credit contraction and destruction of the asset value. The TBTF banks have assets in their balance sheet which are worth much less than being shown. At best they are worth 50% of the book value and at worst 10%. This is the sole reason of the QE1 and QE2 and incessant speculation by these banks to generate profit from other sources to cover the losses.  The banks have sat on trillions of dollars of reserves and are either unable or unwilling to give loans and advances to business. Some banks are charging fees for accepting deposits.  Thus there is credit contraction in one hand and asset value erosion on the other hand.  There is no growth in real income of the consumers and the businesses are not investing either.  US products are not globally competitive and the next export by USA is negative as a result. So the only part of GDP that is growing is the government spending and that is coming through borrowing.

The whole equation is unsustainable both mathematically and fundamentally and it has to burst to balance the equation. TPTB are trying their best to keep the Goldilocks economy going for ever by injecting more and more liquidity but their ability to get results is getting reduced with every crisis. We are seeing social unrest developing now close to home with people protesting in Wall St.

It is sure going to be an interesting time. In the mean time, let us see if my bold call of Apple sell-off materialize in October. 

No Man's Land

On 26^th September morning I wrote that SPX will have trouble going past 1150. But when on 27^th September, it closed above 1190 readers questioned my calls and there were talks of 1200 or bust. Sure enough we closed the week and 3^rd quarter at 1131. So I can say that I have been vindicated.  

My theme has been consistent in this respect. That we shall be seeing continued weakness in the stock markets well in October and we might re-visit the lows of August. But at the same time, the bottom is not going to fall off yet.  I also expect weakness to continue in precious metals, at least till October. Those who are short on gold and silver might want to get out and close their position in the next two weeks or so.

Things are kind of messy all around and it is not a market for investors. On one hand ECRI is taking of imminent recession and there is enough doom and gloom to sink a battle ship. On the other hand, all the Central Bankers and governments of the western world are trying their best to re-inflate the stock markets. I think in the short term, the CBs and TPTB will win and they would be able to paint the rosy picture. But not before we have tested the lows of August and a new round of liquidity is injected in the stock markets.

I have been travelling and have reached India. Every time I come here, I cannot but marvel at the perfect example of chaos theory in operation. The roads are crowded as ever. The airports are teeming with travelers, things are noisy and chaotic. How anything works is anybody’s guess. But they work and India is making good progress despite the odds.

I plan to write a comparative analysis between India China and Brazil in the coming days. I think for the coming decade India offers the best growth opportunity and Investors would be wise to realize the potential of growth of Indian stock markets.

For now, let me try to shake off the jet lag with some more sleep. 

The limitations of markets

Economists aren't often as vocal as they should be about the limitations of markets -- especially the extreme assumptions required for them to deliver superior outcomes and some kind of "efficiency." I've documented here before some of the exuberant cheer-leading for the wonders of modern markets that was the norm before the financial crisis of 2008. No self doubt or balanced criticism about the dangers of markets there.

Now, only a few years after the crisis -- and with a global economic crisis just looming up before us -- the old hysteria is again getting underway with calls (especially from US politicians) for more privatization to get the damned inefficient government out of everything. For an intelligent, fact-based perspective, I'm simply going to quote the following extended discussion from economist Mark Thoma. He deserves a medal for saying what most other economists ought to be saying every day to everyone they meet:

To listen to some commentators is to believe that markets are the solution to all of our problems. Health care not working? Bring in the private sector. Need to rebuild a war-torn country? Send in the private contractors. Emergency relief after earthquakes, hurricanes, and tornadoes? Wal-Mart with a contract is the answer.

Whatever the problem, the private sector - markets and their magic - beats government every time. Or so we are told. But this is misplaced faith in markets. There is nothing special about markets per se - they can perform very badly in some circumstances. It is competitive markets that are magic, though even then we have to remember that markets have no concern whatsoever with equity, only efficiency, and sometimes equity can be an overriding concern.

In order to work their magical efficiency, markets need very special conditions to be present. There must be full information available to all participants. Product quality, locations and prices of alternative suppliers, every relevant piece of information must be known. Not quite sure if the wine is good or not? That's an information problem. Not sure if the used car has problems? Don't know where any gas stations are except the ones beside the freeway in a strange town? No way to monitor the quality of the building built in Iraq with U.S. aid? No way to be sure if consultants are worth the amount they are being paid? Information problems are common and they can cause substantial departures from the perfectly competitive, ideal outcome.

There also must be numerous buyers and sellers, enough so that no single buyer or seller's decisions can affect the market price. For example, if a firm can affect the market price by threatening to limit supply, the market does not satisfy this condition. If, as some claim, CEOs are in such short supply that they can individually negotiate their compensation, then the market is not producing an efficient outcome. Whenever there are a small number of participants on either side of the market - suppliers or demanders - this is potentially problematic.

In order for markets to work their magic, the product must be homogeneous. That is, the product or input to production sold by all firms in the market must be perfectly substitutable so that as far as the buyer is concerned, one is as good as the other. If some buyers favor one brand over another, if CEOs are perceived to have different and unique talents, this condition does not hold. In many cases the variety may be worth the inefficiency, not many of us would want just one style and color of shirt to be available in stores, but the inefficiency is there nonetheless.

In order for markets to work their magic there must be free entry and exit. Most people understand free entry, but free exit is sometimes less evident, so let me try to give an example. Starting a blog on Blogger or TypePad is easy. Entry is a snap and you can be up and running in no time at all. It's easy to join the competition and start supplying posts. But suppose that later you decide you want to switch to, say, TypePad from Blogger (or the other way around). That is not so easy. There is no way, at least no simple and convenient way, to export all of your old posts from Blogger and import them into TypePad, a significant barrier to exit if a large number of posts must be moved. Whenever barriers exist in markets that prevent free movement into and out of the marketplace or between firms within a market (on either side - there are sometimes barriers to purchasing as well), markets will underperform.

The list goes on and on. In order for markets to work their magic, there can be no externalities, no public goods, no false market signals, no moral hazard, no principle agent problems, and, importantly, property rights must be well-defined (and I probably missed a few). In general, the incentives that the market provides must be consistent with perfect competition, or nearly so in practical applications. When the incentives present in the marketplace are inconsistent with a competitive outcome, there is no reason to expect the private sector to be efficient.

Markets don't work just because we get out of the way. When government contracts are moved to the private sector without ensuring the proper incentives are in place, there will be problems - waste, inefficiency, higher prices than needed, etc. There is nothing special about markets that guarantees that managers or owners of companies will have an incentive to use public funds in a way that maximizes the public rather than their own personal interests. It is only when market incentives direct choices to coincide with the public interest that the two sets of interests are aligned.

If there is no competition, or insufficient competition in the provision of government services by private sector firms, there is no reason to expect the market to deliver an efficient outcome, an outcome free of waste and inefficiency. Why would we think that giving a private sector firm a monopoly in the provision of a public service would yield an efficient outcome? If the projects are of sufficient scale, or require specialized knowledge so that only one or a few private sector firms are large enough or specialized enough to do the job, why would we expect an ideal outcome just because the private sector is involved? If cronyism limits the participants in the marketplace, why would we expect an outcome that maximizes the public interest?

There is nothing inherent in markets that guarantees a desirable outcome. A market can be a monopoly, a market can be perfectly competitive, a market can be lots of things. Markets with bad incentives produce bad outcomes, markets with good incentives do better.

I believe in markets as much as anyone. But the expression free markets is often misinterpreted to mean that unregulated markets are all that is required for markets to work their wonders and achieve efficient outcomes. But unregulated is not enough, there are many, many other conditions that must be present. Deregulation or privatization may even move the outcome further from the ideal competitive benchmark rather than closer to it, it depends upon the characteristics of the market in question.

For government goods and services, when incentives consistent with a competitive outcome are present, we should get government out of the way and privatize, and there are lots of circumstances where this will be appropriate. There is no reason at all for the government to produce its own pencils and pens, buying them from the private sector is more efficient so long as the bids are competitive.

When competitive conditions are not met but can be regulated, the regulations should be put in place and the private sector left to do its thing (e.g.  mandating that sellers disclose problems with a house to prevent asymmetric information or mandating that government funded projects be subject to competitive bidding and monitoring to ensure contract terms are met). There's no reason for government to do anything except ensure that the incentives to motivate competitive behavior are in place and enforced.

But rampant privatization based upon some misguided notion that markets are always best, privatization that does not proceed by first ensuring that market incentives are consistent with the public interest, doesn't do us any good. There are lots of free market advocates out there and I am with them so long as we understand that free does not mean the absence of government intervention, regulation, or oversight, even libertarians agree that governments must intervene to ensure basics like private property rights. Free means that the conditions for perfect competition are approximated as much as possible and sometimes that means the presence - rather than the absence - of government is required.