Selling Shorts in the September Sun

I’ve been following the wild instabilities in the stock market over the last few weeks with a mixture of amusement and despair. On the one hand it’s not at all unpleasant to see some overpaid city slickers brought back down to earth, but on the other it’s alarming to see how the world economy depends so strongly on a the whims of a bunch of erratic traders.

After what seems like weeks of falls on the stock market, shares suddenly leaped up by about 8% this morning on news that the government had banned “short-selling” on a particular set of shares. As I understand it, short selling basically means you borrow shares in a company and then sell them in the hope that the price will fall. When it does, you buy back the shares at a lower price, return them to wherever you borrowed them from, and pocket the difference. Basically it’s a bet on the future behaviour of the shares. This violates one of my two rules about gambling, namely that you should only gamble with your own money and it is a bit surprising it was ever allowed anyway.

On the other hand, even this is a bit more transparent than the practice of buying and selling derivatives, where you don’t even have to possess (however temporarily) the thing you sell. This kind of activity is what hedge funds do all the time. They operate on the principle that you can make different kinds of bets at the same time in such a way as to guarantee a win. Bookies on a racetrack are smart enough to ensure that a punter can never make a combination of bets that ensures a profit, but this is not the case with shares and other financial dealings.

Anyway, apparently the reason why banking shares have plummetted recently is that there’s been a lot of short selling and the government decided to stop it, at least temporarily. I suppose it’s good that they are actually trying to do something to stop the chaos, but I think the underlying problem is that the UK and other western economies have been living beyond their means for many years and, despite best efforts to paper over the cracks, some kind of retribution is inevitable. It wouldn’t surprise me if next week the FTSE dived again as emerges that hedge funds weren’t really responsible for the problem in the first place.

Maybe the reason why the FTSE has really been falling has been overlooked. Over the last two years since the credit crunch became apparent, the weather in the UK has been very poor. Two summers of heavy rain may have had more influence on the optimism of city traders that interbank lending rates. Perhaps that’s the kind of liquidity that really gets them down (geddit?). This week the weather is nicer, so shares have risen. I’m sure you can correlate the FTSE index with the weather and a result at least as significant as with any other econometric indicator.

I’ve got a little bit of personal interest in this because, although I’m not really a player on the stock market, I do have a 10-year investment plan that matures at the end of October this year. If I’d been able to bale out this time last year I would have made a healthy profit on it, but now it looks like this years losses will wipe most of that out. Even if they don’t, it’s been a white knuckle ride so when I do get the cash I’ll probably put it somewhere much safer, allthough I don’t know what is really safe these days and I’m maxed out on grannie bonds.

In the meantime, I’m just left with the feeling that so much of our modern economy is not only artificial but also impenetrable to ordinary people. In a sense it doesn’t matter very much if a few city tossers get burned, but the fallout from the ongoing Credit Crunch will have a real impact on the lives of ordinary people through redundancies and loan defaults as unsustainable companies go to the wall. We all fool ourselves that we live in a democracy where we can influence the way the country is run, but the fact of the matter is that governments really don’t have the resources to control or even influence global capitalism to any great extent.

Surely there has to be a better way…

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