The Gnomes Of Gnowhere
By Daniel M. Ryan
The contrast between the American legislature and the German last week actually makes the American politcos look more with-it. Angela Merkel has declared speculators to be the enemy, and has been encouraging other European political figures to see and treat them as such. The remedy she proposes to fend off speculative "attacks" is fairly mild: requiring anyone shorting bonds issued by European governments, allied credit-default swaps and big bank stocks to borrow the securities beforehand. The opposite – dropping a short-sell order and worrying about borrowing the securities later – is called "naked short selling." It would be a dubious practice even if complete laissez-faire reigned. Shares sold short in that way, if borrowable securities can't be found by the settlement day, lead to a "fail to deliver" or "fail." Since the buyer of those securities bought them in good faith, which means that a fail trade isn't reversed, it can also lead to more securities outstanding than have been issued. The naked short seller sold shares that don't exist, but are nevertheless recorded in buyers' accounts as if they did. They don't disappear until the naked short is covered, which zeroes out the fail. When common stocks of corporations are naked-shorted in large number, it could lead to more votes cast than shares issued.
It really wasn't the measure that sent down world markets, it was her talk. Merkel's performance invites a Germanesque quip: "Why did Chancellor Merkel's war against speculators turn her into a Green? Because she: reduced Germans' portfolios; reused phrases from her father; recycled the Bundesrat."
The libertarian classic "I, Pencil" is a basic expounding of the principle of specialization. Because of the resultant global interconnectedness, the free economy is too complex to be messed with by central planners. Perhaps it's time for "I, Speculator": "I am a speculator, I buy and sell stocks and bonds. That's all that I do. Like many of my breed, I am a loner at heart. I prefer my organization small, and my hands not tied by collaboration. And yet, even if I downside to an organization consisting only of myself, I cannot act alone. In buying and selling, I not only do so for myself but also the owners of the capital I need to do so…."
On this point, United States politicians seem more aware that the "speculators" are acting as agents for other aggregators of capital. It's true that there are some billionaires and other rich folks among the capital suppliers, just as there are some billionaires in the hedge-fund proprietor ranks, but the mother lode of capital is from institutions. Mutual funds, university endowments, and pension funds. A "lone-wolf" speculator running a large hedge fund, even one who really is a lone wolf at heart, may well be making (and sometimes losing) coin for tens or hundreds of thousands of future retirees.
Merkel et al. seem unaware that speculators are part of a deep capital market that tends to put institutional capital into hot hands. The fact is, current industry pressures mean that aiming to manage rich individuals' capital is a lot like opening up a luxury store in Beverly Hills. It can produce a nice living, and can occasionally lead to a powerhouse, but it's a good way to stay relatively small. The big money is made by signing up institutions that aggregate many individuals' capital, just as selling goods to the masses is the standard way to build up a huge retail chain. No Wal-Mart began in Beverly Hills.
It's a sad truth, but the reason why American politicians seem more aware of this fact is not because they have a finer economic education than their European counterparts. It's because of lobbying. It's easy to see the nature of the beast as "speculating in legislation futures," but a lot of lobbying is outreach. With respect to speculators, a lot of outreach consists of dispelling the myth of a speculator as a pirate in a ship of one. When it was said that Dodd's financial-services bill was not meant to punish Wall Street, it was meant. Too many American politicians know that too many speculators are deploying the capital of too many constituents.
That said, I'm not trying to justify the lobbying industry. The only way I can think of is to cast it as campaign contributions replacing the old boys' network. Instead of being confined to individuals with the right schooling or pedigree, anyone with money can play. It really isn't much of a justification. Merit money lacks a sense of noblesse oblige, and the overall high achievers' culture in D.C. leaves less access time for ordinary folks. A more Americanesque folksiness gets the point across:
"What does it take for a fella get to know a Congressman? Five figures, and a Senator takes six. Just make sure it's not you who signs the check, otherwise your representative will get to know an idiot."
Daniel M. Ryan is currently watching The Gold Bubble.