Tuesday, 27 September 2011

It's an ill wind...

That would be a kind interpretation of what one trader had to say about the possibility of a further economic collapse.  Too kind, in fact – far too kind.
It’s unclear whether he’s as central or as influential as he makes out, but I suspect that he’s only saying what many others of those involved in the ‘markets’ are thinking but have more sense than to articulate so publicly.  There will be many of them who have been placing large bets on a negative outcome for the Eurozone in the hope of enriching themselves and their clients at the expense of ordinary working people in countries such as Greece.
So what?  What’s wrong with a little flutter, whether on the horses or on the markets?
The problem arises when the act of betting starts to affect the outcome of the event on which the punters are betting.  In horse racing, it doesn’t matter how many people back the favourite; the amount of money bet on a particular horse will not affect that horse’s performance directly.  (It may encourage dishonesty or nobbling, of course, but that’s an indirect effect). 
In the money markets however, the betting directly affects the outcome.  This isn’t a case of a quiet wager between friends about where prices will be tomorrow or next week; these bets are made by trading in the instruments, and that trading affects the price.  If enough people bet on a particular outcome, then that outcome becomes more likely.
Supporters of the financial markets would argue that the outcome in fact reflects the collective wisdom of the experts in the field.  From that perspective, it’s a bit more than a mere gamble, because it’s about predicting what is likely to happen and planning to benefit from that outcome.  So, if collective wisdom says that Greece is going to default, then protecting themselves and their clients from the effects of that is just doing their job.
It is the fundamental untruth behind that apparently reasonable line which the comments of this one trader expose so clearly.  The betting on a Greek default isn’t driven by collective wisdom at all, but by naked self-interest.  They want Greece to default so that they can make money as a result.
The question for the rest of us is why we allow the financial system on which our daily lives depend to be run in such a fashion.  Why do we allow capital to remain as king?

7 comments:

Anonymous said...

But you are blaming it on him. He is only betting against the insanity of Greek and European politicians. If you take your money out of a bank which offers 125% motgages eg Northen Rock you are in fact betting against it. If you leave your money in there because you are getting a good return eg the Icelanding Banks.....then you are either ignorant or 'betting' that their business is soundly run. He's doing the same with Greece. I did the same to a small degree with the British Pound. I bought some Silver. OK...it's take a hit the last few days but this story isn't over yet with more money printing on the horizon. I am therefore betting against Brit politicians and their running of the economy. I think it's a pretty safe bet. One can go on and on.....when you buy a house....you are really betting against fiat currency again the creation of politicians. They trash it....I prefer to call it thieving by stealth. Most people think their house price goes up....but no, it's their money which they have worked hard for is being trashed by the politicians who are in the pockets of the bankers. Good luck to the guy in your video.

You mean there's more??? said...

I think you have put it very well here John. We are not dealing with people with any sense of connection or responsiblity. Accountability is to the balance sheet and outcome is a new Porsche, they are not physically making anything or benefiting annyone apart from themselves.

That they continue to do so is a reflections of a political hegemony inhabited by parties of all colours.

Anonymous said...

"We are not dealing with people with any sense of connection or responsiblity. Accountability is to the balance sheet and outcome is a new Porsche, they are not physically making anything or benefiting annyone apart from themselves."

Your description fits that of politicians. Did you see the programme on Tony Bliar last night? Talk of, as I mentioned earlier, being in the pockets of bankers.

John Dixon said...

Anon,

I agree that there is an element of risk every time we decide to use bank A rather than bank B; and there is a possibility of making or losing money when we buy a house. I'm not sure how many of us are actually assessing that level of risk and making those comparisons before deciding what to do - I'd guess that an awful lot of us buy houses to live in rather then because of the possibility of making money.

Nevertheless, your basic point, that there is an element of 'taking a gamble' in all of these decisions, is valid, even if we are not particularly conscious of it at the time. I'd draw a very clear and important distinction, though, between that element of taking a gamble as an accidental side effect of taking everyday life decisions and the conscious decision to place a large bet, particularly when the placing of that bet is intended, at least in part, to influence the outcome in a particular direction.

Siônnyn said...

Banks play a very important part in any economy in facilitating trade, providing custody of funds, injecting short term liquidity to businesses, finding capital for investment and transacting foreign exchange conversions for export. They also, of course, provide a convenience for individuals in the retail sector. However, modern banks long ago lost sight of these important functions, preferring instead to invest in and transact instruments that often have no actual basis in real trade. They have become adept at creating money from nothing, conjuring it up from thin air from loopholes in accounting procedures and imprecision in their - and their counter-parties' ability to properly evaluate risk. Investment Banking it is called, and has little, if anything to do with investing in real business.

They need to be brought back through regulation to their original function, and if they want to gamble on dodgy,abstract propositions, they should do it with their own money - not ours. And the sort of short selling and un-balanced hedging that this trader is talking about should be banned. If he wins, whole countries go bust and he makes a fortune. If he loses, he loses his job. Big deal.

Anonymous said...

It`s not Banks that need more regulation, its politicians that need to be regulated. It’s said “we deserve the politicians we get” –it’s true, all parties have built party rules that make politicians uncontrollable and unaccountable between elections.
Little Gordy Broown and the rest ilk (crooks in suits)bailed out the banks to try and save their corrupt regimes, which has only served to invite the big money to come to the casino and gamble even more, as there is an agreement that win or lose you will never lose your stake.
Banks like any other industry need to go bust if they are bad, then investors will think twice before giving them their money to play with.
Anon. made some interesting points – wise words indeed.
If only the Blessed Adam Smith were alive.!

Siônnyn said...

The support for the Forbin Hood tax (or tobin tax or Ftt) is growing, and appears to be gaining heavyweight support from some very influential people.

Apart from raising funds for the poor, it will act as a break on pure speculative trading that have proven to be so dangerous for companies and economies.

I support and recommend the organisation robinhoodtax.org.