No, look at the other hand!

What\’s important is not what\’s being done in the open, with the hand you can see, what\’s the other one doing?

A \”reprofiling\” or \”soft restructuring\” of bonds held by private investors, defined as a voluntary loan \”extension\”, was floated by Jean-Claude Juncker, Luxembourg\’s prime minister and president of the eurozone finance ministers, after a Brussels meeting.

Yes, obvious, everyone else worked this out 6 months ago. But that\’s the news they\’re headlining.

What\’s the other hand doing?

Separately, European ministers unveiled plans for new laws to curb the short-selling of state debt and company shares.

That\’s the important bit. They\’re going to cock up financial markets just because they don\’t like the prices that financial markets put on things.

There\’s nothing wrong, eveil, even slightly dodgy, about short selling. But they\’ll try to ban some of it just the same, make the markets less efficient.

Depending upon how they do it they might even make it impossible for there to be options or futures markets. For shorting the underlying asset is an essential part of being able to write certain futures and options. And crippling the futures markets will indeed make government borrowing more expensive. But they don\’t understand this and so they\’ll, again, shoot themselves in the feet. Both barrels.

3 thoughts on “No, look at the other hand!”

  1. Actually there *is* something slightly dodgy about short selling. The risk profile is not fair. If the short seller makes a profit he/she keeps all of it: if he/she loses more than the company’s net assert value, someone else suffers the downside. Secondly, in the case of equities (at least) the short selling distorts the price – the supply-demand curve is moved because the supply of shares is greater than the total number of shares in issue so the “price discovery mechanism” that hedge funds invoke to defend their behaviour discovers a *different* price from the true one.
    That does not make it evil, unless someone is systematically exploiting that discrepancy, and may not apply to Scandium, where you can act as a referee, but if you want fair equity markets you should make individual hedge fund dealers and their bosses liable for losses down to the last dollar in their wife’s name (or children’s trust fund) and to their Guccis and the shirt on their backs (just leaving them their designer jeans and Calvin Klein underpants) .
    I suppose that if you are using Rothschild in 1815 as an example then short-selling government bonds can be morally neutral, but please don’t swallow whole the hedgies’ self-justification.

  2. The long term effect being that both buyers and sellers go to Singapore and Dubai to do business. I used to find it difficult to understand how Dubai could have got so rich when it is the only gulf state without oil.

  3. Mr. Worstall – are we talking “normal” short selling, or naked short selling ? Thanks.

    Tim adds: Difference between them so trivial that both.

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