Friday, 12 August 2011

The Lunatics are in Charge Again.

When market crashes happen, there is always some politician who blames "speculation" for the fall in share values. Specifically "short-sellers" are blamed. This is where stock is lent (for a fee) to someone, who then sells it hoping to buy it back later at a lower price, pocketing the difference.

By banning this process, governments hope to stop the markets falling so fast. However it doesn't work.

  1. It signals panic, causing long-only investors to sell out
  2. It causes the unwinding of pairs trades (where you go long for example Barclays and Short RBS) - this means buying RBS and selling Barclays.
  3. It forces buying of the bad stock, which often has to be paid for by sales elsewhere.
  4. by removing a significant chunk of the market's power to signal the correct price, volatility often increases.
Europeans often blame "anglo saxon capitalism" for their financial crises. This one, however can be laid squarely at the door of that stupid political vanity project, the single European currency. Banning short selling won't change the end result: The suffering of the People of Southern Europe.



8 comments:

Single acts of tyranny said...

Exactly right, by shorting you can hedge a position, like an insurance policy. Take away the insurance and you ensure greater chaos. Rather like blaming breaks for making car journeys jerky and banning them.

Umbongo said...

As James Bartholomew was allowed to say on Today this morning before he was interrupted, this is simply shooting the messenger and, as SAoT wrote, will ensure greater chaos.

Single acts of tyranny said...

"breaks"

utter twat

brakes !

Anonymous said...

The throw-away remark about the stupid political vanity project no doubt hits your union jack-waving readers buttons, but as far as I'm concerned the euro crisis flows seamlessly from the world financial mayhem of 2008.

The west has lived through a period of total irrationality about risk and borrowing capacity -whether of private individuals or states. And the wonderful financial innovations which made it all possible - sub-primes and securitization of garbage, were definitely US inventions.

You didn't have to be a club med EU member to get wiped out by unsustainable borrowing. Remember Iceland?

By the way, the inventors of the vanity project did actually design it to include limits on public deficits, but these were ignored in the general feeding frenzy of public borrowing in the last few years.

And of course the prime participants in the feeding frenzy were the US, aided and abbetted by "end of boom and bust" Gordon.

So its not all the fault of the EU.

But I don't read your blog looking for a balanced view, or course.

Jackart said...

OK Anonymous, your choice of example, Iceland, demonstrates your utter ignorance. Iceland recentlytapped the bond market & paid less than Spain.

This is because that country with just 30,000 people was able to default, devalue & move on. Unlike Spain, Greece, Italy & Ireland who are shackled to "political vanity project".

You lose.

andrew_paradigm said...

I'm no expert by any means, so please correct me if necessary, but I always thought that short selling helped correct overpriced stock. In other words it helped keep stocks at the right price.

Surely that's a good thing?

Obviously governments fail to agree...

Humph said...

Perhaps these fucking idiots might want to consider banning going long in times of irrational exuberance too? I know, why don't the government just set equity prices themselves? There is no right or wrong, there is no truth except the market. Why can these Eurotards not understand this? My cat could manage this mess better than these simpletons. Greece should really just grow a pair and leave the project or their next 2 generations really will be fucked.

Trooper Thompson said...

Jackart,

I'm not sure you're right about Iceland. I don't think they defaulted, rather the government (with the people holding a pistol at its head) didn't bail out their crooked banks. I guess this would be a default if they were supposed to guarantee the banks.

I agree that they're doing fine now, as you say.

With regard to shorting, do you approve of naked shorting? Would you make a distinction?

There was an error in this gadget