FT.com / Europe - Germany moves against short sellers.
I wrote about short selling and the danger it causes a few days ago and the right wing blogosphere - blinkered to a man (are there any right wing women?) - led by Tom Worstall (as usual) responded with the usual clkaims that a) I had no clue on the issue b) there was no problem c) there were no consequences.
They are, of course, completely wrong. If you assume markets are efficient and allocate resources perfectly - as these bloggers do - then of course the outcome is always perfect. The reality is that markets are hopelessly inefficient much of the time - because they work on imperfect and not perfect information - and as a result the damage caused is substantial.
I'm pleased to se that despite the alleged error of my ways Germany agrees. As the FT notes:
German authorities on Tuesday night cracked down on what Berlin views as destablising speculation in the financial markets by implementing a partial ban on naked short-selling of certain stocks.
The German action against naked shorting — or selling securities such as shares and bonds that are not owned or borrowed — comes amid heated discussion in Europe of regulatory curbs on speculative trading, which has been widely blamed by politicians for exacerbating the Greek debt crisis.
Quite.
I rest my case.
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Of course markets are imperfect, and respond to imperfect information, but they are much better than state planners whose information is far, far, worse.
Two points in favour of short sellers.
1) Every buyer needs a seller – otherwise the price will rise too high. Without traders willing to go short of things, you would have no market.
2) Short sellers are the best policemen in the market. They are the most efficient regulators, and trap crooks like Maxwell, Enron et al. Maybe if we had more short sellers of banking stocks in 2005, then we wouldn’t have had the credit crisis.
I agree that short sellers are very useful – the canaries in the coalmine.
However, I think his German regulation is wrong for other reasons. It bans naked shorting – i.e. selling stock that you do not own or have not borrowed. I think it would be better to ban lending stock. I find it unbelievable that fund managers use investors money to buy shares which they then, for a small fee, lend to people who want to short that stock. I cannot see how the small fee charged for stock lending outweighs the risks suffered by the investor.
“The reality is that markets are hopelessly inefficient much of the time – because they work on imperfect and not perfect information”
Richard, please, get a grip.
Absolutely no one says that markets either work upon or require perfect information. Absolutely and unequivocally the opposite in fact. We all agree that we have imperfect information.
Firstly, as concerns the future of course: we do not and cannot know what the future will bring. Secondly, and much more importantly, we do not and cannot have perfect information about the present. This is apparent when we talk about the socialist (or economic) calculation problem. That problem being that because central planners can never know all of the necessary information about an economy in order to be able to plan it then efficient planning of an economy is not possible.
Now, whether you believe that socialist calculation problem or not is of course up to you. But I think we could manage to agree that I certainly do believe it?
Thus my beliefs are based upon the inevitably imperfect information of reality that we must try to act upon? So it cannot possibly be true that I think that markets work upon perfect information: I am, rather, arguing that markets are a better method than planning to deal with the imperfect information which is our inevitable lot.
If you want to argue that bureaucrats or politicians are a better method of dealing with this necessairly incomplete information that we have then go right ahead. But please don’t assume or insinuate that I hold opinions obviously entirely divergent from the ones that I do hold.
Markets do not require nor do they act upon perfect information: for perfect information is an impossibility. Markets are simply and effieient method of dealing with the necessarily imperfect information that we have.
Indeed, if we had perfect information then not only wouldn’t we need markets we couldn’t actually have them! If we knew, with absolute certainty, what something was worth, then how could we have the buying and selling which depends upon differences of opinion of value?
Yes, there are right-wing women. At least by your definition of ‘right-wing.’
“Are there any right wing women?”
Erm Richard, would the odious chief executive of, and chief apologist for, the British Bankers Association – Dame Angela Knight – not qualify here?
In this context and her case the adage “the female of the species is more deadly than the male” being particularly apposite.
Er.. you were talking about funds short selling the Euro.
1. The Germans are not putting a ban on short selling the Euro.
2. My counterargument was that a weak Euro would be a good thing because the way out of this mess is for Germany to accept a higher level of inflation in order for the south to avoid deflation.
3. A weak euro is not destabilising. Policy makers shouldn’t worry about hedge funds ‘betting against’ the euro (in the context of betting it will go down)
4. As an aside it is the sovereign CDS market that is toxic and should be banned.
5. On this specific issue- you have no clue, there is no problem, there are no adverse consequences (other than policy makers unneccessarily panicing and doing something stupid)… but keep up the good work on everything else.
You forgot to include the word ‘naked’, Richard. It makes all the difference.
@Will
A weak Euro is not detabilsiing pe se
If the Euro is weak, so be it
Currency speculation is massively destabilising
Short selling – naked and otherwise – assists that instability
There’s no government that thinks otherwise
Germany included
Any other argument is wrong
I know exactly what I am talking about
No jurisdiction forced by markets into over-rapid revaluation has not suffered severe social consequences
I don’t give a damn that markets clear (which is what Worstall assumes since all his economics is based on that premise – even if he doesn’t know it). I care about social consequence
And that’s why I’m right
@Tim Worstall
Your economics is built on this assumption
Ergo, what I say follows
What is wrong is your claim I believe in state central planning
What a ridiculous claim
I am a social democrat
I defend the virtue of markets
But markets that are open, honest and transparent – virtues you seek to deny
And which are well regulated to make sure the impact of imperfection isn’t the concentration of wealth – which is your objective
My position logically follows from my belief in imperfection
Yours does not from your claim of belief in imperfection
For which reason I do not believe your claims
I just don’t agree with you on currency speculation being destabilising- with one exception- if there are consequences from those actions- ie self fufilling feedback loops. In the case of a classic emerging market crises, where there is a lot of foreign denominated debt, then the action of short selling/speculation is destabilising- because as the currency falls the foreign amount of debt rises, breaking the economy and so on, justifying a further fall in the currency, etc- but this is because there is a self reinforcing feedback loop.
In the case of the Euro (and in the case of £ in ERM) that is not the case, because the debt of the Eurozone is in euros. Soros did the UK a favour in 1992, and currency speculators bringing the Euro down are doing the same. The European governments may think that speculation against the Euro is destabilising but they are wrong.
They should adopt a policy of benign neglect towards their exchange rate, (but focus their attention on those activities where there are feedback loops such as sovereign CDS which are positively toxic).
Ultimately the problem is not the markets. It is the fact that the Spanish/greek/ portuguese price level needs to drop by 30% relative to Germany and nominal wages do not fall by that amount without depression and social unrest. My view is that the markets understand this problem better than German politicians, and shooting the messenger in this instance is not helpful.