Markets are, in very important ways, metaphors.
And three metaphors have really stuck out in my mind over the past few days. The first comes from the inimitable Daniel Beunza, who spent 34 months in a participant-observation study of an investment-bank arbitrage trading room in New York some years ago. Beunza writes:
To answer this question, one needs only ask whether tainted meat scandals ever led to the disappearance of the hamburger. In effect, CDOs and processed meat are ontologically not so different: take some parts, create a whole. Just as it is cheaper to do a single slab of hamburger meat out of different scrap parts, it is more efficient to combine mortgages in a bond that to finance them individually. It is no coincidence that the US –home of the hamburger and McDonald’s– gave the world securitization…
He draws some interesting parallels with Enron, that go beyond the obscene payouts to directors. Fwiw, things are so bad that McDonalds can’t get credit either.
Secondly, I was really struck by these remarks from Gottliebsen in response to the Short Selling ban:
The vicious practice that the hedge funds devised was to locate a highly leveraged company – it could be any trading company, investment house or even a bank. The funds would undertake incredible research looking for a weakness. Sometimes they would discover that there was a weakness in the way a major shareholder had borrowed to buy stock, so that if the shares were driven low enough, the major shareholder’s financiers would sell him out and send the stock down further, enabling the shorters to buy back at huge profits.
Another common scenario was where hedge funds would see that some of the company’s loans had a market capitalisation trigger figure that enabled banks to appoint an administrator if the capitalisation fell below a stated level. The hedge funds would drive the stock down to that level. Sometimes the information the hedge funds used was clearly an inside tip.
Once they discovered a weakness, the hedge funds would borrow scrip from index funds, superannuation funds or others and try to bring on a crisis by ruthless shorting. An essential part of the process was to flood the market with rumours – some Australian companies have reported up to 70 a day. Sometimes a journalist would write a really tough article on a company often inspired by the shorters’ research. The stock would slump. Sometimes the inside information was right and other times it was wrong. It did not matter much.
Of course, there’s more than ‘just’ words at stake here, but a peculiar system that I’m not convinced the kind of Middle Range theories of orthodox economics like Information Assymmetry capture. Rather, much in the same way that the Israeli Defense Force has developed a vocabulary from the works of poststructuralist theorists like Deleuze and Debord to talk about their urban operations, there’s a kind of celebration of the failures of ‘philosophies of the ground’ at work here; a rhizome like burrowing through the epistemic formalisms invented by orthodox economists.
The third metaphor that’s been getting a fair bit of airtime is the End of Kapitalism meme. I think it’s useful to distinguish between capitalisms and Kapitalism: the grand, modern, ideological project opposed by Socialists and championed by the IMF, and the likes of The Economist – who acknowledged that they were open to the charge that “the system we championed has merely enabled a few spivs to get rich.” Looking forward, I do wonder about the extent to which we’ll in fact return to more ‘modern’ forms of fact making as the material realities of both the work commodified by traders and their work itself is made more public. To quote Hillary Clinton, of all people:
“The real problem has always been the way our mortgage system got totally out of whack with new kinds of instruments that were sold many times over with very little regard to the realities of life, human nature and the inevitable ups and downs in the economy.”
The machine dreams of Economists may indeed by useful to account for markets as spaces where anonymity is assured and calculations can take place easily. As numerous commentators have pointed out, traders will probably be able to reach similar net positions to short trading using other tools – a point seemingly lost on the market yesterday.
But, and this is a point largely orthogonal to the Regulation is Part of the Problem chorus, from the ashes of this crisis we need to confront more than ever that social relationships pervade markets through imitation. I suspect that just as the success of LTCM was in no small part due to the reputation of Merton himself, the great unravelling of contracts and elegant instruments will uncover the incredible ambition of economics in practice.
Stephen Long from ABC has been talking about toxic debt. Last night on PM he invoked Monty Python by saying that the Bailout amounted to a call for people to “bring out your debt.”
Gobblestop’s rant makes no sense. Doing “incredible research” into a stock is now a “vicious practice”? Ditto finding a company is overleveraged and has agreed to absurd loan terms (ie, market capitalisation clauses)?
Surely these shorters were merely agents of capitalism, working in the market to discover price?
Or does that only apply on the way up?
” I think it’s useful to distinguish between capitalisms and Kapitalism: the grand, modern, ideological project opposed by Socialists”
Without any elaboration, this sentence makes no sense to me at all.
What is “ruthless shorting” as opposed to “benign shorting’? And surely if the fundamentals are ok with a firm then all the rumours and shorting in the world couldn’t make a rational researcher /investor stop buying if the firm is undervalued. In fact if the firm is ok then an intelligent investor would go mad and go long while the shysters were going short. I reckon the ban on shorting is only another example of the government being conned into proping up those who should perhaps cop a sharp smack around the chops – like Macquarie
Matt C, would it help if I added this link to the sentence?
Bill, maybe you’re right. I’m sure someone who knows the trading regulations better than me can comment. But my point is that these asymmetries are endemic, something less regulation can’t help.
So they went for the biggest short selling exercise of all – the country.
FXH, I’ve been trying to pay some attention to the justifications offered for shorting offered over the past few days.
I can’t see that the argument that it should be allowed when the market is falling because it’s allowed when the market is rising is a sufficient or particularly compelling one, nor that “growth” for “funds” at all costs is a benign objective. I’m waiting for someone to justify the “provides liquidity” argument rather than just assert it.
mark – perhaps one of the advantages of the current shorting ban is that we may get some research – or at least figures – that give some idea of what shorting does or doesn’t do in the market. Or at least some idea of the volume of shorting. The problem is that there are a lot of other variables whizzing around.
I reckon Turnbull is urging a ban on shorting to save him and his mates a motza. Why we feel sorry for people gambling by going long (normal shareholding) and yet get all in a lather about people taking the other gamble – going short?
Well, yeah, FXH, but I’m interested in the liquidity justification – some dude on Lateline Business repeated that but no one appears to explain it. Personally I don’t think gambling to make dosh on the markets in this form is any more useful or to be encouraged than gambling and losing dosh. It seems to partly defeat the so-called informational function of markets.
As an interested non-economist type guy, my impression of ‘shorting’ is that it an action carried out by those institutions (hedgefunds etc) who identify one or more fundamental weakness in a targeted stock. If this is the case, then shorting is neither good nor bad – its just one tool of many that enables moneymaking (which, when we look at ‘the market’ in the cool light of day, is the name of the game).
Ultimately, shorting is possible because there is insufficient market transparency and accountability for potential investors to fully background attractive investments. I’m sure shorting wouldn’t be as rife if investors and (arguably toothless) regulators were privy to much of the information as ‘those who short’ have been. If that were the case, there would be obvious disincentives for creating questionable stock items (as the level of debt housed in any given stock could be easily identified, for instance). Wouldn’t this decrease the instances of shorting?
Further on analogies, I’ve seen the emotive term ‘predatory’ bandied around the interweb in discussions on this topic. It should be remembered that while the role of a predator in a natural ecosystem can be viewed superficially as ‘a bad thing’ (if it you who happens to be eaten), predation is largely beneficial to a prey species in the long run (it weeds out the weak and infirm, thereby improving the prey’s survival rate as a whole). It is only when too many predators feed upon a finite number of prey that predation can be a bad thing. Perhaps this is the real message we should be taking from the current market situation…
AlanJae – surely there’s at least a prima facie case for saying that activity designed to drive down the value of a stock is qualitatively different, i.e. worse for the economy, than activity targetted at building value and confidence.
FDB – I guess I’m saying that shorting isn’t the problem, the problem is the current financial mindset which created such an environment where short selling became so prevalent (and let’s not forget, financially rewarding). Just as you wouldn’t buy a meat pie that is all ‘lips ‘n’ assholes’, wouldn’t a greater level of transparency discourage investment in shoddily structured stocks? Wouldn’t this in turn, reduce the pool of stocks which could theoretically be the target of shorting?
Is it possible to view short selling as a weapon? In that case, its the intent of the wielder that determines whether the weapon is good (ie. in the hands of most policeman) or bad (to shoot a moose).
Rethinking what I said too simplistically, of course activity which falsely drives up stock value and creates overconfidence is also damaging, which driving down stock that deserves to go there anyway might not be. So maybe the prima facie case doesn’t bear much scrutiny anyway.
I like your idea of baking the financial system pie with clear pastry and thus nothing but chunks of steak and field mushrooms inside, but I can’t really see it happening.
whichwhile*le sigh*
Either way, as my background isn’t in any stream of economics / finance, I’m sure that I’ve made a goose of myself for either oversimplifying an (overly?) intricate process or mistakenly elevating a minor fragment of the broader situation to Palin-esque levels. Bless the anonymity of the web!!
Nah, me neither! We human beings are creatures of habit and self-interest. IMHO this means we are inherently underqualified in enacting significant changes of any type, especially when there’s a quid or two involved (just see climate change)…
Apologies for my hastily typed comments.
Oops.
Was apologising for my poor grammar, not necessarily the content…
Oh yeah? How? I don;t see it. Maybe you shoulda gone the simile instead; markets are like metaphors.
.
I still don’t see it.