Musings, Politics

A Peculiarly English Crisis

Every few years the people of this mighty island known as the British Isles have an identity crisis. The Scots want out, the Welsh want in and the English are completely befuddled as to their ancestry. The Celts were here first but as I understand it then came the continentals – Normans, Anglo-Saxons, Vikings, Romans i.e. virtually everyone from continental Europe. This is the ancestry the English deplore because, “We have a special relationship with America”. Our renegade political reprobates otherwise known as the Tories (the Republicans of the realm) will rather Britain go its own way, a Colossus bestriding the planet. These behemoths of paleolithic-era thoughtfulness are still  holding court in 1945. We have just won the war (with our comrades the Soviet Union and the US) and we sit on the UN security council. Germany doesn’t. Ha, ha!

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So who needs basket case Europe? Aren’t they those meddlesome continentals who can’t organise a Tea Party in Boston but want to define a sausage in several hundred pages of inane regulation? Every  Tory Prime Minister carries this cross: what then to do with the elephant next door. It’s big and we can’t deport it Down Under. “Ditch it”, cry the croaking faithful. And so we get David Camern, who kind of tries but can’t quite do it. Instead he plans a “whittled down” role for Britain whatever that means – that’s his vision. From a man who is short vision, that’s pretty bold.

I expect the next PM to reverse course. We are the 2nd or 3rd largest economy in Europe. 50% of our trade (providing the foreign exchange we need to import all the things we love to buy and that our businesses need) is with Europe. One key attraction of London as a financial centre is that it’s in Europe and inside the European Union. London provides a shield for companies who want to be in Europe but would rather comply with English than French or German law. America’s identity is turning increasingly Hispanic and America’s priority now is China. What planet are these Tories on? Yes, reform the bloated EU bureaucracy and let’s work together to change their ridiculous policy making but a whittled down role for Britain is pure fantasy. That’s like a bird wanting nothing more to do with the sky because it rained on it.


As Spain Bans Short-Selling, Sing Hallelujah

It’s uncontroversial to say that people like good things to happen to them. Good things only please, no bad ones. But sometimes there can be too much of a good thing.

Take short-selling. Free market acolytes and their captive professors will aver that short-selling is good because it promotes perfect markets, improves market efficiency and enables price discovery. There are gigabytes of academic papers to convince us so. Intellectually, I can appreciate the fine argument. A security is “overpriced”. The short-seller borrows the security from someone who has it and then sells it in the belief that the price will (soon) drop and he can buy the same security back at a lower price and return it to the lender. His profit is the difference between the high price at which he sold less the lower price at which he bought the security back less any charges. But wait a minute.

Wait a minute! Who said the security was “overpriced”? Where is the “fundamental value” of a security recorded so we can compare it to the market price and “know” that the security is “over” or “under” priced? Secondly, when the short-seller short sells, is he doing it for market efficiency and society or to make a profit? That’s easy, he wants to make a profit and this is where he and his professors quote Adam Smith. By making a profit he is contributing something good to society, like the baker who doesn’t care about feeding you, really, only about making a profit while he sells you bread. Fair enough. Where I get lost is the automatic jump from baker to short-seller. The baker produces things. The short-seller is a speculator.

The act of short-selling increases the ratio of sellers to buyers thus arresting the price of the security. If there are enough short-sellers selling the stock, then short-selling becomes self-fulfilling as the price of the security plunges. This only encourages more people to dive in to line their pockets and keep up with their peers (or else you get sacked for “underperformance”). Even people who want to buy the stock (i.e. go long) will take a breather and wait for the price fall to stop before dipping in. Afterall, why buy now if you can pick it up cheaper later.

Here’s the thing though. Even the company might panic into buying its stock to support prices, that is, instead of using cash to invest. Employees panic too as they see their delayed stock compensation plummet. Talk about aligning employee and stockholder interests. One may even question what sort of a shareholder owner will lend his stock to be shorted and potentially send the price to zero. These are not true owners, they are rascals. What sort of baker sets fire to his bakery except he’s trying to collect on the insurance.

At some point all short-sellers have to buy the security back (to cover their shorts) which can send the price sharply up particularly if the security can’t be found because a few wise souls have cornered the market (i.e bought mass-loads of the security and then removed it from the market only to drip feed it back to the hungry short-sellers caught short). That’s illegal or at least frowned upon. More likely the price of the security see-saws back and forth and there’s no telling where it goes. You see it here, you see it there and you see pictures of traders glued to their monitors doing nothing productive. Or it becomes a game the market plays, indifferent to the impact on people’s lives. A fine way to run an economy!.

Is there any good in short-selling? Perhaps, in small measures there is a case for having a mechanism for preventing prices reaching for the stars because when they come back down, a lot of simpleminded investors will be hurt. Yes, I know a fool and his money are soon parted and maybe that’s natural justice but a government shouldn’t just sit by. On the other hand, short-selling should be regulated to prevent it sending security prices, at least theoretically, to zero. It distracts the economy and if companies falter then, again, the ordinary people suffer but this time through no fault of theirs. Governments should not just sit idly by.

I hope some day it won’t be controversial to have policies that control security prices so they are not bid through the roof in speculative madness or bid to the floor by the collusive action of short-sellers. Which ever way security prices go, perfect and efficient markets should guide them towards the Aristotelian mean. Allowing security prices of companies (not in distress) to go to extremes is too much of a good thing.

Musings, Politics

Adrian Beecroft: Deft or Daft?

It’s frightening and sickening that in today’s Britain, you can pass brown envelopes stuffed with money to the ruling Conservative Party, and you automatically earn the right to make government policy. Yes, just like Mohammed, you can emerge from self-imposed hibernation, brandishing your own holy book of rules. And like Big Mo, we are all impressed upon to comply.

The band of young, privileged, merry and utterly visionless, not to say brainless, men and women who rock the party in our Cabinet leave me speechless. For all Obama’s (alleged) faults, at least the man thinks and deliberates. Everything is considered from every angle. But in Britain, we have Cameron – a most unimpressive man at best. He has and has had nothing of import or interest to say. Most of his utterances of late are geared towards poking his nose in the Euro crisis and annoying the French and Germans even as his party wants to be at the heart of Europe or is it to break free from Europe. I’m confused. Given a chance they would all sail west to America. They don’t seem to realise that America now has bigger fish elsewhere to attend to.

If the news is to be believed, it seems the British government as constituted by the Tories have delegated employment policy to their party donor, Adrian Beecroft; and his grand idea: give bosses the right to sack anyone if, when and how they like. Apparently sacking people creates jobs. Huh? And if you point out the obvious contradiction or the potential for massive abuses of power, he calls you a “socialist”.  What a prick.

First of all, something as important as employment policy should never be handed over to a single individual, let alone a party donor. Secondly, there’s nothing wrong with our bosses present ability to fire us: 1m of us have been fired since the economic crisis began. In a country with only 60m people that’s a large number. And lastly, we the British people do not want to go back to servitude of the Dickensian kind. Germany, afterall, with all its tough pro-employee laws is both richer and more productive than we are. The ability to fire workers at will is neither a necessary or sufficient condition for economic success. Who will tell the brainwashed Tory party?


Cute is All For One and One For All

Here’s a problem. The average European graduate is reckoned to earn €123,000 more over a typical working life than the non-graduate. The degree costs €35,000 so over say a 35 year working life (age 27 to 62), that works out at €1600 a year in today’s money if we assume an inflation rate of two percent. At a four percent inflation rate, the real value of extra earnings is down to approximately €1000 a year. Doesn’t sound a lot for four or more years at University. And if you consider that, since we are talking averages, some people will do much better but many will do much worse, then for many graduates that degree is just not worth it. I speak economically but admit there may be superior qualitative benefits to earning a degree. Speaking economically, it is more useful to know the distribution of earnings but on this cute point the common average is silent.

Here’s a problem. Nine of ten citizens in Country A earn €10,000 a year and the tenth €1m (don’t think how). The average is €109,000. Meanwhile, all ten citizens in Country B earn €90,000 a year so the average is €90,000, that is, almost 18% lower than Country A. Which country would you rather work in given exposure to the same global market of goods and services? That cute question is rather a doddle to answer.

Here’s the rub: people err when, in isolation, they compare one country’s GDP per capita (e.g. the US) to another country’s (e.g. Sweden or Germany). This information is, not quite but almost, useless unless we know the distribution of incomes and productivity. Yes, the concept of distribution is more difficult for most people to understand but so are the rules of love and that hasn’t stopped people chasing cute people.

Here’s another rub. The linked article above makes a seriously good point about providing the young (and I suppose any other willing person) with skills training. So even if extra education may not pay off in a better paying job for one individual, for the country, skilled labour is a boon for productivity and competitiveness. This is only one example when individuals acting in their own perceived best interests do worse than working together. Working to a common good is not communism. It’s cute.