I spoke today in Prague at the second installment of the Free Market Road Show. I gave a standard presentation about fiscal policy, including strong warnings that all industrialized nations run the risk of Greek-style fiscal collapse because of entitlement programs and demographic changes. What’s remarkable, though, is that nobody pretends anymore that this isn’t happening. The question and answer session saw many people ask when the world was coming to an end (from a fiscal perspective) and whether certain nations would be good places to escape when welfare states descend into lawlessness and chaos. Meanwhile, in the Nero-fiddles-while-Rome-burns category, Europe’s statist Chancellor, Angela Merkel, confirmed to the world that she is a blithering idiot and/or a shallow and reprehensible political hack by imposing a ban on “short selling,” which occurs when investors make decisions based on an assumption that an asset (such as a Greek government bond) will fall in value. In the real world, short sellers perform a valuable role by helping to limit speculative bubbles. In the political world, however, short sellers are targeted by demagogues. If Merkel is right and short sellers are guilty of causing assets to fall, then thermometers are guilty of causing fevers. Bloomberg reports on Germany’s national embarrassment:
German Chancellor Angela Merkel laid out proposals to gain control over “destructive” financial markets, after she imposed a unilateral ban on naked short- selling that sent stocks sliding. …“The lack of rules and limits can make behavior in financial markets driven purely by the profit motive destructive and lead to an existential threat to financial stability in Europe and even the world,” Merkel told lawmakers in Berlin today.
Unable to take out CDSs as mitigating factors against various investments in certain troubled European countries (unless they also hold sovereign debt for the country itself), many investors will shun investment in the very countries the regulation aims to protect, which, after all, are the very countries that need investments the most.
In other words, if successful, the ban will backfire.
You need to start a “populism vs. logic” series Mr. Mitchell.
You left out the scariest sentence:
Germany will lobby governments to introduce a tax on financial markets, and for ratings companies to come under European supervision so governments regain “primacy” over markets, Merkel said.
Let that phrase turn over in your mind, “governments regain “primacy” over markets”. I don’t know what species of beast grows out of that, but it’s not a market.
There are only 12 million Greeks about the place, exactly how much money have these people been lent? How can a mere twelve million bring down the whole house, unless it is a house of cards?
Tulips are coming to mind now, shares of tulips.
Please answer the question about where might be safe haven in the coming madness.
Katherine
Banning short selling is like hoping to avoid future fires by taking the batteries out of the smoke alarm. At best, it may save you a few nuisance alarms. At worst…
“…then thermometers are guilty of causing fevers.”
Thermometers tell you your fever is rising, so you can consider taking some mitigating action before you get into temperature induced hallucination, seizure and possible permanent brain damage.
Banning short selling and naked CDS (*) is like banning thermometers to protect yourself from flu viruses. You are taking away the tool that will help you determine the severity of the flu.
This will only aggravate the eventual, “the ballot box is like an ATM”, welfare state seizure.
(*) As if it were that easy to determine who is naked and how naked – if a businessman with significant exposure to Greek government construction contracts wants to buy a CDS against Greek government default then is he naked? Wearing a fig leaf? Bikini? Shorts? Parka? Space suit? What is it? – What types of exposure are considered non-naked? Asinine political populism.
http://online.wsj.com/article/SB10001424052748703957904575252611852571860.html?mod=WSJ_business_whatsNews