Denninger is Wrong Again - This Time About the German Government's Desperation Moves
Karl Denninger is wrong again. He should turn off his caps lock and think a bit harder about the desperation move that is the German government's ban of various free market transactions like short selling and credit default swaps.
Credit default swaps (CDS) are a good idea that make it easier for bonds to find the right market prices. The cash bond market is illiquid and CDS are an innovation that makes pricing information enter the market more easily.
All these arguments about CDS buyers "burning down their neighbor's house" where they don't have an insurable interest are hogwash. Notice all the complaints about CDS come from entities that have an interest in bonds NOT finding market prices. Notice you never hear Norway complaining about hedge funds buying Norwegian CDS.
There's no such thing as "naked shorting" of common stocks in the United States of America, and I doubt it's a problem in Europe either. I have a terrible time finding shares to short when I have a bearish view on a company. Notice that insolvent banks and companies with bad business models complain the loudest about "naked shorting". When was the last time Microsoft went on CNBC to complain about short sellers? In 2009 when Georgia Gulf was financially distressed, they quietly fixed their company by conducting a brutal restructuring, and never said a word about short sellers.
Hedge funds are not the problem. Hedge funds speculate with their own money, not government money like investment banks. Hedge funds have skin in the game. If a hedge fund is buying CDS on something, you can bet that they have identified a real problem.
The Euro is failing because it's a disaster, because for it to survive would require people who don't like each other to make huge sacrifices on each others' behalf, not because of hedge funds.
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4 comments:
CP,
Couldn't agree more. Denninger, the ZH people and various other lefties/academics (note: not including Denninger and ZH as lefties/academics, just putting them in the same list) suffer from "model economics syndrome." People afflicted with this condition believe that markets and economies should perform according to textbook models they've learned about. A market should do X. An economy should do Y. When X or Y doesn't occur (or when Z, an event or activity not part of their model) occurs, they resort to reactionary law-making (bans) to force these activities out of existence or to try to recreate the textbook conditions of their model markets so that they will "function properly" again.
You see this a lot with the FTC-types, too. They have this model of competition (perfect competition) and then whenever some competition doesn't fit that model they go apeshit about it. Doesn't matter if the competition is created by voluntary exchanges and circumstances. See Skip Oliva and his blog Under Penalty of Catapult for more on that.
Point is, I agree with you. KD and others have yet to explain why something should be banned just because they don't find it to be valuable-- obviously the agents making these exchanges find value in them, otherwise by definition they would not make an exchange.
One big problem with government statist types is the idea of a "100% solution" to every problem.
Bad things happen in life and you can't make them all go away by passing laws against them.
The best you can do is have a fair, level playing field - a free market.
From Gary North:
The euro faces the problem that every cartel faces: cheating by its members. In a cartel of goods, members secretly sell below the agreed-upon price. In a monetary cartel, members cheat fiscally. They run up the bill, then threaten to default if the other members do not fork over the money. This is Europe's problem today. The cartel is breaking apart.
The key to any cartel is its ability to impose painful sanctions on cheaters. It is now clear that the European Union has no negative sanctions that are taken seriously by member nations. The voters in each nation can inflict negative sanctions on politicians who impose austerity programs, such as higher taxes or cuts in spending. Politicians fear voters more than they fear the EU.
I agree. I have a brief post about Denninger at:
http://mishiswrong.blogspot.com/2010/02/karl-denninger-is-wrong.html
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