Short selling: panicked pols ban proof of failure
- Ivo Vegter
- 16 Aug 2011 06:49 (South Africa)
Blame anyone. Blame bankers. Blame derivatives traders. Blame short sellers. No, blame “naked” short sellers!
The one thing politicians will never do from their bully pulpit is blame themselves.
Which is why you should never, ever, believe a politician when they're explaining to you why the global economy is in such a colossal mess, despite all the science and technology the market has brought to bear on the productivity of hard-working individuals.
Politicians claim the right to be in charge of the economy, mostly as a consequence of the fact that companies and investors who made bad decisions were getting hurt.
They claim the authority to set the price of credit and to determine the value of money. They claim to be able to write the regulations by which the economic effort of ordinary people is restricted and redirected to serve the government's public policy ends. They claim the power to tax and spend if those policy ends are not met, and to print money when even those taxes are not enough to satisfy their favourite corporate interests.
Once again, politicians find themselves embarrassed, because the real world proved how arrogant they were to believe their own press about how cleverly they can manipulate vast economies and pump them full of the elixir of eternal growth.
Magic potions don't exist, of course. Politicians can no more spend beyond their means than you and I can. And when they buy up boatloads of toxic debt in the hope that doing so will save crony capitalists who are “too big to fail”, they can no more detoxify that debt than had you or I bought it.
Now they're in trouble. And they can't afford to let on, because then everyone would head for the exits.
So first they blame bankers, for responding to their laws and monetary policy exactly as the textbooks said they would. They call them “reckless” for doing exactly what the politicians said they wanted: increase risky lending to marginal businesses and consumers. Then they blame the insurance companies and hedge funds and derivatives traders who bought the risk from mortgage banks, secure in the knowledge that they could offload it onto government-sponsored financial giants. If all else failed, they could intimidate the government's lender-of-last-resort (the central bank) to bail them out.
All this duly happened as scripted. Trillions were spent on demand stimulus and bailing out bankrupt banks. All this failed. Your mother could have told you that retail therapy is probably not the smartest solution to a debt problem, but the government's finest economists didn't see this coming.
So they need people to blame, and it's easy to blame the financiers. They move billions using complex financial instruments. They have been caricatured over the centuries in ominous and often racist terms. They're easy to hate. Most of us don't understand the arcane concepts of high finance.
Even better for the politicians: it is the business of financiers to move capital to where it can best be used for production, so their profits depend on whether they choose correctly, not on whether markets go up or down. They can make money on the swings and on the roundabouts.
It's easy to claim, for example, that short selling is evil when those are the traders who profit when shares go down. And while CNBC's Janet Whitman notes an extraordinary admission by Christopher Cox, the former chairman of the US Securities and Exchange Commission – who said the biggest mistake of his term was to issue a three-week ban on short-selling bank stocks at the height of the financial crisis in 2008 – half of Europe has now done exactly the same, for exactly the same misguided reasons.
Let's establish a matter of principle, first. If it is not illegal in the normal course of events, short selling is clearly not held to be wrong. It is just as legitimate to sell cash for shares (buying shares) as it is to sell shares for cash (selling shares). If you don't have the cash on hand, it is perfectly legitimate to borrow it. Likewise, borrowing shares to trade is simply a private credit contract.
It is no more wrong or puzzling than a farmer who obtains a loan for working capital, on the strength of a futures contract for maize that he hasn't yet grown, but promises to deliver at harvest-time.
Now consider the real problem: major currencies – including the world's reserve currency – are collapsing, because the issuing governments are drowning in debt.
Because of deliberate easy money policies, nobody had an incentive to save to build up capital, and everyone had a reason to spend, spend, and spend. Consumers loaded credit cards, homeowners refinanced homes to pay for holidays, businesses loaded their balance sheets to finance expansions and takeovers, and governments issued cheap bonds to fund bread and circuses.
When the house of cards came crashing down, the bureaucrats played their trump card. They simply had the governments print money to buy up all the toxic debt that was floating about. This stuff was worthless to start with, of course, which is why banks were foreclosing non-paying debtors as fast as investors were fleeing from banks.
Now national governments are sitting with this junk, and account for it all at face value. Worse, central banks bought this debt at face value from national treasuries, plonked it under “assets” on their balance sheets, and happily issued more credit to flood the market – a process known as “printing money”. If anyone in private business had done that, they could expect to spend a decade or two in prison for fraud.
Needless to say, owners of government bonds are not entirely convinced that the politicians just magicked all the garbage away. They don't believe that the assets column of the central banks justify the amount of currency in the liabilities column.
This crisis – and it is a crisis, of which the dot com and housing crashes were mere preludes – has been a very long time brewing. It is not a short-term problem that can be papered over just by tweaking a few of the controls the economic czars have at their disposal. Just lowering the interest rate or pumping some fiscal stimulus into the market will not repay the debt. In fact, as we can all see, it makes it worse.
But worse is yet to come. Waiting in the wings is inflation. If you believe the government's official inflation numbers, you clearly haven't kept track of the price of food, industrial materials, fuel, and most of what ordinary people and companies spend their money on.
Which raises the question: why are they lying? Politicians are brazenly claiming not to be worried about inflation, but in reality they're in a flat spin, pressing every button they can think of, before the awful truth hits home: citizens will be paying off the government's debt with plummeting currency values and declining standards of living. They sneer when you mention the Weimar Republic, or Yugoslavia, or Zimbabwe, because it couldn't possibly happen to the United States of America or the European Union, could it?
Perhaps they'd care to explain why they're immune to the laws of economics. And if they think they're “too big to fail”, perhaps they'd care to explain who they expect will be bailing them out. China? It also doesn't particularly like dollars any more, if its international hard asset buying spree is any indication.
So politicians have painted themselves into a very tight corner. And they won't blame themselves, because that would mean voters have to throw the bums out. They can't even blame the opposition, because in most countries, including the US, this crisis has been building no matter who was at the helm. It is state-control of the financial system itself that is at fault, not the partisan slogans of any particular politician.
So they blame everyone else. Bankers. Foreigners. Merchants. The wealthy. Speculators. Money-changers. Short-sellers. All the usual suspects vilified by demagogues from time immemorial, to deflect the mob's anger at their own larceny.
Take the recently-banned short sellers, for example. They are merely market-watchers who notice when companies are overpriced. They believe that the capital these companies have been given by investors can be more profitably employed elsewhere. By acting quickly on their opinion, they alert the rest of the market. If they're wrong, and the market disagrees, they stand to lose real money. If the market agrees, they've done the economy a service by more rapidly correcting the price of the mispriced shares.
Much like the crowd-sourced content of Wikipedia, or the customer ratings on Amazon.com, all traders, long and short, determine the appropriate price for a stock or a bond. In this way, the allocation of available investment capital depends on the combination of all their knowledge, experience and expectations. There is no single trader who cannot be challenged by other traders betting against him.
Without short sellers, a share would still reach its true value, but it would take far longer. Instead of shorting a stock, they might have to buy something else they believe will be inversely correlated with that stock's performance, such as the shares of a competitor, or a position in commodities. This will ultimately have the same effect – correcting the price of the overvalued share – but it will just take longer.
A market with short sellers is more transparent and efficient, because it permits expert analysts to circle the market looking not only for shares that are too cheap, but also shares that are too expensive. These dispassionate observers can assess whether shareholders are making the right decisions, simply by taking a bet with them.
Without short sellers, holders of shares tend to be deceived by positive spin from company directors, the optimism of other shareholders, and their own inertia and confirmation bias. That's how bubbles form. In the same way that brave bargain-hunters do the market a service when the market crashes and shares are oversold, short sellers do the market a service by trying to spot and prick bubbles sooner rather than later. Bargain-hunters and short sellers both thrive in volatile markets, but far from causing the price to rise or fall, in tandem they react to reduce volatility. They protect other investors from mispriced assets and protect the economy from misallocated capital.
The only difference with the even more-maligned “naked” short sellers is that they short a stock without even borrowing the shares first. They trade on the strength of a contract that says they have to buy them if they lose the bet. They survive entirely on their credit reputation.
Think of them as “naked” because their brass balls are exposed and vulnerable. If short sellers are wrong, the naked ones get hurt the most.
That kind of risk-taking increases the amount of information in the market, making sure unjustified valuations are corrected more quickly, and capital gets more efficiently deployed. That information benefits the entire market.
Why would anyone want to ban information, except a politician whose money-printing failures are being exposed? DM
- Chernodeal: Shopping for discount nukes
- Star Trek, 50 years on: A study in sexism
- Let me mansplain statistics to you
- Free the hippies! Don’t ban their drugs!
- Which principle: precaution or progress?
- How to kill a baby, naturally!
- Miserere mei, the Ebocalypse is here!
- Advanced technology or magic?
- Tourism: Still doing okay? Let’s fix that!
- Green-left messiah desperately seeking spin-doctor
- The gun genie and its bottle
- On energy, environment, and regulatory independence
- South Africa’s schools of witchcraft and wizardry
- Grab shale gas opportunity, but avoid opportunism
- It’s about who you don’t vote for
- Free markets as a moderate position
- Voting: there’s still time to change your mind
- Green tech is cool, but not because it’s green
- How Mmusi Maimane swindled a vote out of me
- The case to elect Malema to Parliament
- The intellectual gnome, Chomsky
- If Malema isn’t Pol Pot, is he still dangerous?
- Do Malema's followers understand ‘agrarian reform’?
- Look ma, I'm defending Shell's record in Nigeria!
- Any weather is evidence for global warming
- U-turn prof finds his fracking fears are avoidable
- Ramphele et al: The world according to angry feminists
- On HIV/Aids and scary-big numbers
- Cherry-picking ‘grey literature’ on rhino horn
- 350,000 reasons to kill a black rhino
- Eight myths about libertarians
- New Year’s resolutions for other people
- All I want for Christmas is a fire pool
- In defence of Donald Trump
- My old South African flag
- Fearful Fukushima fiction fatigue
- Do we tolerate private sector corruption?
- In defence of a lion killer
- Save the rare wine and endangered craft beer
- Forever blowing bubbles: shale gas economics
- Promotion and Protection of Investment Bill: When “certainty” means “wait and see”
- This land is my land: a revolution
- The launch of SA's Libertarian Party: herding cats in time for 2014
- The African case against the ICC
- The fossil fuel subsidy myth
- Think of the little fishies!
- The hilariously misunderstood libertarian
- The sickly history of sweeteners
- Pants on fire, but they’re not mine
- The obstructionism of shale gas activists
- How mind-numbing numbers whip up fear
- Why pick on Khanyi Dhlomo?
- Half-measures will fail the rhino
- Malema’s righteous anger... and naïve confusion
- Lottery licence to go to one lucky winner
- Vaccinations: when the state stabs the people
- Do reusable shopping bags kill people?
- The long walk to serfdom
- The Karoo desperately needs development
- The trials of Samson Shuttleworth
- The girl who kicked the hornet’s nest
- Raping the discourse about rape
- Who is the reasonable man?
- Fracking: Debating a big deal
- Who needs the Queen’s English?
- Electric cars: Taking from the poor to give to the rich
- Business Licensing Bill: An indefensible defence
- Red-tape tourism
- The Big Business Bribery Bill
- On Thatcher and society, Vavi and the market
- Extinction: Let’s make up numbers and panic!
- Feeding the world is getting easier
- Stop talking shit: Build your own toilet
- Climate change is pseudo-science
- Anti-competitive competition law
- The Department of Less Government
- An open letter to President Zuma
- In defence of Kim Kardashian
- The world’s weirdest wildlife sanctuary
- Boycott calls are simple-minded
- In defence of vegans
- The population explosion implodes
- Environmental backpedalling picks up pace
- How Mangaung can help and hinder entrepreneurs
- The elusive libertarian enclave
- The Gathering: Ivo Vegter
- The hidden overemployment crisis
- The case for constructive environmentalism
- Privatise the Western Cape's shacks
- Tenders: Not open to employees or their families
- Hurricanes fuel climate sensationalism
- Next: Gross-out warnings on food
- No new deal: The failure of Zumanomics
- Benoni has a bright idea
- Was I wrong about acid rain?
- Public food gardens: Where dumb ideas thrive
- Rethinking the costly food label madness
- Give hunting a chance
- Fracking gets green light, but here's the risk
- Socialists, bless 'em, visit Cape Town
- Buy a 1Time ticket now
- Give the ANC credit where credit is due
- The myth of the competent apartheid government
- It's a disaster that 'peak oil' is not a disaster
- No Gravy: a label for sustainable business
- This lightbulb's going to blow
- Smokers? Get 'em up against the wall!
- Inflating the obesity scare
- Bring a Shotgun to School Day
- GMOs: Hacking genes to feed the world
- The hidden dangers of charity
- Fracking: the unread paper debated
- Fracking: The “U-turn” paper nobody has read
- Eco-cronyism is as dangerous as any other
- SKA: Be grateful Karoo residents didn't object
- Energy: Get cracking on fracking
- Fair trade, unfair trade-off
- Casual labour is only bad for Vavi's unions
- 'Externalities', the catch-all justification for regulation
- 'Externalities', the catch-all justification for regulation
- How do we fix our dismal education?
- Barter: the rebirth of sound money
- Rights are not entitlements
- Debunking 'limits to growth' inanities
- Tax: Why align with "most other countries"?
- Newspaper sensationalism doesn't help rhinos
- Rolling Stone reprises Gasland's fracking fantasies
- Cosatu's manipulative march move
- Why do 16 million people not constitute an economy?
- The age of smear politics
- Does fracking cause earthquakes?
- The Chinese model is morbidly obese
- Green tech: doubling down on a losing bet
- Rape, pornography, and hell's grannies
- Petrol taxes won't hurt the poor
- Jailtime mooted for bad weather warnings
- Let's ban bans, and start with CITES
- In defence of overpaid sport stars
- On the death of Kim Jong-Il
- COP17: Let's ban fire
- Cancer gets you when nothing else can
- COP17: The 'party on' agenda
- COP17: The Blue Line of Death
- New seven natural inanities
- Occupiers' anger is all that makes sense
- The Luddites and Technocrats live on
- Malema marches for economic slavery
- Profitable purveyors of pudendal prettiness
- Sense? Us?
- If they want rhino horn, let's sell them some
- "Stimulate" economy by ending telco abuses
- Executive pay makes nobody poorer
- Malema's real persecution
- Mogoeng: Lock up your daughters
- Don't mandate insurance, deregulate healthcare
- I sympathise with Malema's persecution complex
- Short selling: panicked pols ban proof of failure
- Don't blame those who saw it coming
- What's obscene about profit?
- In defence of Bombela
- Dear president Zuma, you are not above the law
- The economics of love
- Treasure the Karoo? Ban the SKA!
- Malema is right, you know
- Gautrain's PPP: political patronage profiteering
- Kumi Naidoo is no hero
- LeadSA fails to lead when it matters
- No logo means carte blanche
- The drug war: dopey but dangerous
- A response to fracking critics
- Don't vote. It's your right.
- Welcome Walmart
- If you're happy and you know it clap your hands
- Buy local, support poverty
- Ubuntu, the free-market way
- Karoo fracking scandal exposed!
- I'm ashamed for my profession
- The bill of bunkum
- Being gay: a brand new concept!
- Who's afraid of the nuclear wolf?
- The nationalisation canard
- Ogilvy should grow a spine
- The new robber barons
- A classy revolution: Why we cared
- Bombastic Bombela balks
- Liberty is more than mere democracy
- Gautrain has a law unto itself
- The irony of 'services for all'
- How to hire a hitman in SA
- Arrive alive and neurotic
- The oppression of taxis
- Protection of Information Bill and why WikiLeaks is so dangerous
- Fifa, Russia and Qatar deserve each other
- One day, we'll all hate WikiLeaks
- The cycling mafia strikes again
- What Julius got for Christmas
- Let's return the beads
- Away with fascist seat belt laws
- Tintin Mbeki in the Sudan
- How the ANC can make everyone happy
- Currency: the race to the bottom.
- Hurrah for national healthcare!
- Give Zimbabweans citizenship
- Carte Blanche has no carte blanche
- That finger-licking, lip-smacking taste
- Bomb the barbaric lot already
- Green tax: another raid is coming
- Do strikers deserve anything?
- The media will lose this battle
- Global warmism needs a fisking
- A glass half-full
- Go ahead, have a baby
- Stop the handouts - end xenophobia
- The right to fire
- FIFA's heart of darkness
- Have some self-respect
- I ordered an orange skirt
- Secretly, Match blames South Africa
- The stupendous Gautrain: a rare marvel!
- The Fifa conquistadors are coming!
- What's wrong with everyone?
- Leave poor BP alone
- The destructive power of government
- The bonsai economy
- The darkness of Africa
- Who is ripping off whom?
- Anatomy of a whitewash
- While FIFA takes over, we fight
- The pointless pretence of Earth Hour
- Ten reasons to reject climate alarmism
- Really, boycott the FIFA farce
- The climate dominoes fall
- Lessons in ethics from Dick Cheney
- Screw the consumer
- In defence of bankers
- Break the banking cartel
- Julius Malema, the walking contradiction
- Boycott FIFA
- Climate clarity
- In defence of Boney M
- Pray Copenhagen fails
- Capitalism is not unkind
- Climate fraud kills people
- Pop goes the hot air balloon
- Peace, love and schadenfreude
- The irony of the left
- Too late to cool it?
- Going cold turkey