tag:blogger.com,1999:blog-7366878066073177705.post6389317711328211322..comments2024-02-09T18:16:45.614+00:00Comments on The Psy-Fi Blog: Save Our Short-Sellerstimarrhttp://www.blogger.com/profile/06254802085744425067noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-7366878066073177705.post-48827494250042609372010-03-30T07:38:20.406+01:002010-03-30T07:38:20.406+01:00Hi Michael
I don't disagree with that: the ev...Hi Michael<br /><br />I don't disagree with that: the evidence seems clearcut that behaviour of this type did cause real-world economic issues. However, the problem here wasn't shorting but regulation, or the lack of. In the arms race between speculators and regulators the former are usually the winners. In a world in which profit is the only motive then what else can we expect?timarrhttps://www.blogger.com/profile/06254802085744425067noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-3096249656612417422010-03-30T01:08:55.399+01:002010-03-30T01:08:55.399+01:00"The researchers suggest that their findings ..."The researchers suggest that their findings indicate that if regulators wish to reduce the boom and bust cycle of markets they should look to find ways of reducing the costs of short selling while improving the transparency of information around stock lending markets. Sadly the reaction of the authorities to the inevitable busts that follow booms is usually exactly the opposite."<br /><br />Worth noting Yves Smith recent post challenging some of this logic, in connection with Michael Lewis' lionization of various short-sellers in the Big Short. She persuasively argues that certain shorting behavior had the perverse behavior of extending the boom: <br /><br />"The subprime market would have died a much earlier, much less costly death absent the actions of the men Lewis celebrates. They didn’t simply keep the market going well past its sell-by date, they were the moving force behind otherwise inexplicable, superheated demand for the very worst sort of mortgages. His “heroes” were aggressively trying to find toxic waste to wager against. But unlike short positions in heavily-regulated equity markets, these wagers, the credit default swaps, had real economy effects. The use of CDOs masked the nature of their wagers and brought unwitting BBB protection sellers to the table, which lowered CDS spreads (and as in corporate bond markets, CDS dictate, via arbitrage, interest rates for bond issues) and pushed down the interest rates on the cash bonds backed by those same loans, which in turn made it perversely attractive for lenders to generate mortgages with the worst characteristics."<br /><br />More here: <br />http://www.nakedcapitalism.com/2010/03/debunking-michael-lewis-subprime-short-hagiography.htmlUnknownhttps://www.blogger.com/profile/06518261098501289814noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-48992180321698282132010-03-28T19:05:07.229+01:002010-03-28T19:05:07.229+01:00Our regulators and politicians would do better to ...<i>Our regulators and politicians would do better to try and figure out how to stop markets becoming overpriced in the first place. </i><br /><br />Yes. Once a market becomes overvalued, it's hard to get prices back to normal because all investors see themselves as obtaining a benefit from the overvaluation. Overvaluation begets greater overvaluation. Overvaluation is something that needs to be stopped in the early stages if it is to be stopped at all (and to fail to stop it is to insure an economic crisis).<br /><br /><i>Making it less risky and less expensive to short stocks would be a good start.</i><br /><br />I think the more effective way to stop overvaluation is to encourage all investors to adjust their allocations in response to big price changes. That makes it impossible for overvaluation to gain a foothold. <br /><br />Another possibility would be to permit long-term shorting of the market. If those who understand valuations could take a bet that stocks will be crashing within 10 years, overvaluation would never again take place because the rewards of betting on a crash would be so great that these bets (which would pull prices down) would become all the rage.<br /><br />Today, there is no way to benefit from knowing that a crash is coming within 10 years. That's the primary reason why the market is so wildly inefficient today. We need to provide financial incentives for betting against overvaluation for market inputs to become balanced.<br /><br />RobRob Bennetthttp://arichlife.passionsaving.comnoreply@blogger.com