Wednesday, 15 October 2008

The Independent earns its name

The Independent is an interesting newspaper. It is mostly left wing, but sometimes it presents unconventional viewpoints. Nothing could be less conventional, or more right, than this article by Dominic Lawson. An extract:
John Maynard Keynes, rather than Ludwig von Mises, is the economist whose name is currently being invoked on the airwaves in Britain. in his own day, too, Keynes obliterated Mises: it became fashionable to believe that Roosevelt's New Deal was a kind of successful rudimentary application of Keynesianism.

Yet Roosevelt's policy of massive intervention by the state to prop up wage rates and inflate credit gets a much better press than it ever deserved. Consider this: in September 1931 the US unemployment rate was 17.4 per cent and the Dow Jones industrial Average stood at 140. By January 1938, unemployment was still at 17.4 per cent, and the Dow Average had dropped to 121.

Mises' followers insist that the present problems in the economies of the West have not been caused by laissez-faire, but by the opposite: politically sensitive central bankers so desperate to prevent any stock market slump that they cut interest rates to a level which turbo-charged the debt markets. So when George Osborne, as he did yesterday, declares that "laissez-faire is dead", the Mises-ites – one of whom is the libertarian ex-Presidential candidate, Congressman Ron Paul – would protest that such a policy was never tried in the first place.
Read the whole thing. Also read Andrew Medworth's comment, which identifies the fundamental issue:
A crucial question, not addressed by this article, is why these disastrous policies were followed in the first place. Here we must turn to moral philosophy. Ayn Rand, herself a great fan of Mises, observed that laissez-faire policies such as the gold standard depend crucially on egoism, the view that self-interest is man's proper fundamental motivation. Government inflation has always been justified by the claim that it helps the poor: ultimately, of course, it harms us all, but if we want to see a change, we must address the moral issues behind the policy debate.
Capitalism is the only practical socio-economic system because it is the only moral system.

Sunday, 5 October 2008

Killing the messengers doesn't change the facts

To the British government, and a distressing proportion of economic commentators, it's still all about spin: the problem with the markets is lack of confidence. Silence the doomsayers, and all will be well; credit will continue to flow to the unworthy, and no one will have to call in the loans any time soon. Subjectivism rules: if you just believe that everything is fine, it will be - so long as we manage to suppress those spivs who tell it like it is.

Well, here's a different view:

In Defense of Speculators and Short-Sellers

By Amit Ghate

Everywhere today government bureaucrats and media pundits blame
unwanted price movements on speculators and short-sellers. If prices
are "too high"--it's the fault of greedy
speculators; if prices are "too low"--it's the work
of evil short-sellers. To hear these critics tell it, speculators have
the ability to create artificially high prices, while short-sellers
can wantonly destroy sound companies. (Ignore for now the obvious
question: "Where are the short-sellers in markets that are 'too
high' and the speculators in markets that are 'too low'?")

The critics then claim that since neither speculators nor
short-sellers perform any positive economic function, barring them
from the marketplace is an appropriate remedy, one that's long
past due. (Recently the United States did just this by making some
shorting illegal.)

So to begin, let's ask what the critics consider a
"correct" price? Clearly it's not the price which
obtains when all market participants are free to engage in trade based
on their best judgment, because this is precisely the free-market
price--a price which they so vociferously condemn. But if "too
low" and "too high" aren't judged relative to
the free market, what is the standard? Stripped of euphemism: their

For example, they wish--contrary to all relevant facts--that oil be
priced at $20/barrel and that Lehman's stock trade at $80/share.
Never mind that environmental policy has prevented the drilling of oil
and the development of nuclear power for decades now, or that Chinese
and Indian oil consumption is growing relentlessly; forget too that
Lehman chose to leverage itself at 35:1 and made riskier trades year
after year--if these critics wish for a price, then that should be the
price, facts be damned!

But of course, attempting to set prices by wishing doesn't--and
can't--work, not for Lenin, Stalin or Brezhnev; or for Paulson,
Bernanke and Bush. If prices are to reflect reality, they must be the
result of an objective process of discovery and judgment performed by
interested actors.

So just as doctors specialize in identifying and evaluating the facts
affecting health and disease, speculators and short-sellers specialize
in identifying and evaluating the facts pertinent to market prices.
They make it their business to understand economic facts like supply
and demand, and then risk their capital on their judgment, properly
profiting if they're right and losing if they're wrong.
Thus in a free market, rather than prices being set by wish or decree,
they are set by a rational process, one which benefits from the
knowledge of all who participate.

For instance, if speculators believe that future oil supplies
won't match demand, they buy oil, increasing its price. If
they're right, and oil prices continue to increase, they sell
their positions, profiting from their insight but also capping prices
as their supply comes to market; furthermore, their initial effect on
prices signals to the market that greater oil supplies are needed and
reduced oil consumption is appropriate--efficiently allowing market
participants to adjust their actions to the facts.

So too for short-sellers. If they judge that Enron is cooking the
books, or that Lehman is insolvent, they can seek to profit from their
insight by short-sales. These lower stock prices in the present and
convey to the market that there are potential problems with the
companies, helping others avoid losses in the stocks. And if shorts
are proved correct, rather than exacerbating any price slide, they
actually mitigate price declines when they buy their positions back.
(Of course, short-sellers, like speculators, only profit if their
judgment is correct. If they short a productive, undervalued firm,
say, e.g., Wal-Mart or Apple, they lose when the actual facts belie
their predictions.)

Consider the recent failure of Lehman, where critics claim that
short-sellers caused the decline by obscuring and distorting the
company's true value. The facts say otherwise. When the
government shopped Lehman to potential buyers, opening the books to
them, not a single buyer emerged, not at any price! Everyone who
examined the company concluded it was worthless. This was the fact
that short-sellers grasped earlier than others--it wasn't a fact
they created.

Speculators and short-sellers don't create facts, they seek to
identify and respond to them; and in the process they help adjust
prices to economic conditions and establish smooth and liquid markets.
As a result--instead of being scapegoated and banished--they should be
respected and welcomed for the productive role they play in our

Amit Ghate is a guest writer for the Ayn Rand Center for Individual
Rights, a division of the Ayn Rand Institute. He is a full-time trader
who often speculates and shorts.

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You can also see this article, and others on the financial crisis, on Amit Gate's blog, Thrutch.