Saturday, 20 September 2008

International finance: Epic Fail

In times like these, I find re-reading the (now regretfully silent) deconsumption blog's Timeline for Unfolding Crisis of Mankind strangely comforting. To call it prescient would be a stretch, but it helps to know that there are ways to rationalise the strange high-level narrative we find ourselves in.

I don't know, honestly, what to think of this week's government interventions (in both Britain and the U.S.) in the financial markets. If a government's chief responsibility is to improve the welfare of its people (and increasingly, the people outside its borders that its policies affect), then the only question is whether to put the long-term consequences to society before or after the short-term benefits. The house of cards that is the global investment world is (as houses of such shoddy material are likely to be) structurally unsound. Should we reinforce those sagging cards on the back of quasi-socialist government policy (but don't call it that, let's call it, um, economic intercession), or should we let the damn thing collapse so we can build it back up from a better plan?

But people, of course, tend to act in typically Maslovian fashion (especially in a voting year, or with a ruling government on the brink of failure), and hang on to their pyramidal entitlements with passion born of primal fear. The governments know this, and know that to stay in power (and I'm not talking about Republicans vs. Democrats — Obama, for all his rhetoric, is not claiming he wants to fundamentally change the macroeconomic model the way, say, FDR was forced to), they must do their best to opiate the masses, perpetuating the belief that there is only upside.

That, indeed, is the psychological message they hope to send by outlawing short selling (a practice which, by the way, most experts agree has very little impact whatsoever on equity prices). You can't bet against a horse, you can only bet for it. Therefore, all horses will be winners! This is so counter to any market intuition that it begs credulity. Let's review: in capitalism, there are winners and losers. There have to be both, so that the market can be efficient (which has the nice side effect of creating, on the whole, fair prices for consumers). The better companies prosper, the worse (less efficient) ones fail. You can argue to what extent the recent financial paradigm has approached that ideal, but that's the concept, anyway. Restricting short selling (or indeed, any form of derivatives) will not alter this; what's needed is transparency, visibility of investments and exposure, and fierce enforcement of fraud.

I don't want people to suffer, but I also think at some point you have to tear an edifice this flawed down and build again. If spending half a trillion dollars of taxpayer money to buy back all our excesses of yesteryear (I think that qualifies as bursting one's own bubble) is the first step to something new, then I applaud it and think it's a sacrifice well taken. But if it is done under the assumption that the way of life and level of the pyramid that we are accustomed to are inviolable, then it is no more than throwing good money after bad.

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