Friday, September 19, 2008

The FSA: Blindfolding the markets in a minefield since 2008

Short-selling: A practice by which speculators bet, often with good information, on who is going to go bust next and, by doing so, act a bit like a canary in a mine.

If someone takes away your canary, you won't stop being scared of gas. No, you will be scared of gas everywhere, rather than just in places where your canary is pushing up daisies.

Malicious short-selling is already illegal. Therefore, the FSA's decision will just make the credit crunch drag on, since rotten institutions won't be quickly put out of their misery by speculators.

You don't blindfold frightened people. Oddly enough, it doesn't calm them down.

3 Comments:

  • At 9:45 am , Blogger Joe Otten said...

    Not convinced. A sound institution can become rotten if enough people lose confidence in it.

    Soros didn't just predict that the pound would leave the ERM, he made it happen.

    Couldn't short selling of shares in financial institutions do the same?

     
  • At 10:38 am , Blogger Femme de Resistance said...

    I'm not F&M's financial expert, but AFAIK the people who have been whinging at the Government are not the potentially sound institutions.

    The main moaner was HBOS, which had suffered a speculator hit in March (http://www.forbes.com/markets/feeds/afx/2008/03/20/afx4798525.html) and kept issuing statements that it was fine (always a bad sign).

    I would far prefer a short, sharp shock with some false alarms, where the Government focuses on protecting pensions/savings, than a situation akin to the 10-year Japanese recession.

    There, the Government quietly propped up a number of unviable banks, which subsequently became 'zombies'. These hung about crippling the economy by sucking up Government money without generating wealth.

    It's not clear whether the two remaining large, independent investment banks are suffering misplaced speculator panic. Either way, by merging with commercial banks, they can easily restore market confidence. They would not become victims of short-selling.

     
  • At 10:52 am , Blogger Femme de Resistance said...

    I just feel this move is a cynical ploy to respond to public opinion that nefarious speculators are threatening ordinary people's savings. And because of intensive lobbying by the jolly people at the banks being speculated on who used old people's savings to buy ready-packed mortgage junk.

    Trying to make a quick buck using some statistical tricks is, fortunately, a self-punishing crime (people left with toxic mortgage junk go bust). The Government should let it stay one, while protecting the innocent old ladies' savings that these jokers have abused.

    It's possible some of them didn't understand what they were buying since it was Triple-A rated. But, my understanding is that it had relatively high interest rates. And sensible people know there's no such thing as a free lunch.

     

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