Economics via the London Review of Books
Sep. 2nd, 2011 05:31 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
johnny9fingershttp://www.lrb.co.uk/v33/n17/john-lanchester/the-non-scenic-route-to-the-place-were-going-anyway
Now, John Lanchester has given, in this article, a summary of where we are now, and where we're going to.
In this article he quotes David Brooks comments on 'The Deal of the Century' offering ‘trillions of dollars in spending cuts in exchange for a few hundred billion dollars of revenue increases' which the Republicans turned down. I re-quote:
"A normal Republican Party would seize the opportunity to put a long-term limit on the growth of government. It would seize the opportunity to put the country on a sound fiscal footing. It would seize the opportunity to do these things without putting any real crimp in economic growth.
The party is not being asked to raise marginal tax rates in a way that might pervert incentives. On the contrary, Republicans are merely being asked to close loopholes and eliminate tax expenditures that are themselves distortionary.
This, as I say, is the mother of all no-brainers.
But we can have no confidence that the Republicans will seize this opportunity. That’s because the Republican Party may no longer be a normal party. Over the past few years, it has been infected by a faction that is more of a psychological protest than a practical, governing alternative."
Lanchester's article also gives a lovely precis of short-selling, which I shall also quote:
"Short-selling is on the decent-sized list of practices which seem bizarre to civilians but to insiders are a routine feature of how modern markets work. A short-seller borrows shares in a company, and then sells them, with the intention of buying them back at a cheaper price, returning them to the lender, and trousering the profit. Say you decide that, to take one purely hypothetical example, News Corp is overvalued because – oh, I don’t know, just to make something up – because all its senior management are going to go to jail. The current price is $15.80 and you reckon it’s heading for ten bucks. So you find a willing lender, borrow one million shares with an agreement to return them on a specific date, and then you sell them. Notice that this selling is not a neutral event: by dumping $15.8 million of News Corp stock you actively help to drive prices down. Critics of short-selling point out that this shades into a form of market manipulation, which is illegal. A short-seller isn’t just betting on an outcome, he (it’s usually a he) is trying to bring it about. Anyway, some months pass, the News Corp execs are charged with multiple malfeasances, the stock tanks to $10, you buy back the million shares – this is called ‘covering the short’ – and give them back to the lender.[*] You have benefited by the difference between $15.8 million, which is the amount which you banked when you sold the shares, and $10 million, which is what it cost you to buy them back: $5.8 million. Nice ‘work’ if you can get it."
I shall also quote the footnote:
"[*] I make this ‘covering’ sound routine, but it isn’t, and can go horribly wrong – wherein lies much of the risk in shorting shares. In 2005, Porsche began to buy shares in Volkswagen (I know that sounds the wrong way around), to help it ward off a foreign takeover. They kept buying shares over the next three years, and as they did so the share price rose. As it did so, the remaining Volkswagen shares, obviously, kept becoming more expensive, so it became clear that Porsche wouldn’t be able to afford to buy all the rest of them and take full control of the target company. At the same time, prospects weakened for the global car industry. The hedge funders took out their crystal balls and concluded that this meant Porsche would stop buying shares, and so the share price would fall, and they began to short Volkswagen stock. So far, so routine. But what they didn’t know was that Porsche was secretly using Germany’s not so transparent rules to accumulate more and more shares, until 26 October 2008, when Porsche announced that it now owned 75 per cent of Volkswagen, i.e. pretty much all the publicly tradeable stock – most of the rest was, for various reasons, locked up in places where it couldn’t be sold. At which point, the hedge funds shat themselves. Remember, all those shorted shares were borrowed, and had to be bought back and then returned – but where were the hedge funds going to buy the shares to return them, since there was now no stock on the market? Answer: they’d have to pay whatever the seller wanted to charge. In 48 hours, Volkswagen’s share price went from €200 to more than €1000. Hedge funds lost £24 billion betting against Volkswagen and Germany’s fifth richest man, Adolf Merckle (b. 1934, cement, pharmaceuticals), threw himself under a train."
You know, folk should really read the LRB. Since I will no longer read the Times Literary Supplement, the LRB has taken its place in my affections and proven to be a source of information, and just occasionally, some amusement.
As is, sometime or other I'm going to have to beg John Lanchester to autograph some of his first editions which I am fortunate enough to own.
Now, John Lanchester has given, in this article, a summary of where we are now, and where we're going to.
In this article he quotes David Brooks comments on 'The Deal of the Century' offering ‘trillions of dollars in spending cuts in exchange for a few hundred billion dollars of revenue increases' which the Republicans turned down. I re-quote:
"A normal Republican Party would seize the opportunity to put a long-term limit on the growth of government. It would seize the opportunity to put the country on a sound fiscal footing. It would seize the opportunity to do these things without putting any real crimp in economic growth.
The party is not being asked to raise marginal tax rates in a way that might pervert incentives. On the contrary, Republicans are merely being asked to close loopholes and eliminate tax expenditures that are themselves distortionary.
This, as I say, is the mother of all no-brainers.
But we can have no confidence that the Republicans will seize this opportunity. That’s because the Republican Party may no longer be a normal party. Over the past few years, it has been infected by a faction that is more of a psychological protest than a practical, governing alternative."
Lanchester's article also gives a lovely precis of short-selling, which I shall also quote:
"Short-selling is on the decent-sized list of practices which seem bizarre to civilians but to insiders are a routine feature of how modern markets work. A short-seller borrows shares in a company, and then sells them, with the intention of buying them back at a cheaper price, returning them to the lender, and trousering the profit. Say you decide that, to take one purely hypothetical example, News Corp is overvalued because – oh, I don’t know, just to make something up – because all its senior management are going to go to jail. The current price is $15.80 and you reckon it’s heading for ten bucks. So you find a willing lender, borrow one million shares with an agreement to return them on a specific date, and then you sell them. Notice that this selling is not a neutral event: by dumping $15.8 million of News Corp stock you actively help to drive prices down. Critics of short-selling point out that this shades into a form of market manipulation, which is illegal. A short-seller isn’t just betting on an outcome, he (it’s usually a he) is trying to bring it about. Anyway, some months pass, the News Corp execs are charged with multiple malfeasances, the stock tanks to $10, you buy back the million shares – this is called ‘covering the short’ – and give them back to the lender.[*] You have benefited by the difference between $15.8 million, which is the amount which you banked when you sold the shares, and $10 million, which is what it cost you to buy them back: $5.8 million. Nice ‘work’ if you can get it."
I shall also quote the footnote:
"[*] I make this ‘covering’ sound routine, but it isn’t, and can go horribly wrong – wherein lies much of the risk in shorting shares. In 2005, Porsche began to buy shares in Volkswagen (I know that sounds the wrong way around), to help it ward off a foreign takeover. They kept buying shares over the next three years, and as they did so the share price rose. As it did so, the remaining Volkswagen shares, obviously, kept becoming more expensive, so it became clear that Porsche wouldn’t be able to afford to buy all the rest of them and take full control of the target company. At the same time, prospects weakened for the global car industry. The hedge funders took out their crystal balls and concluded that this meant Porsche would stop buying shares, and so the share price would fall, and they began to short Volkswagen stock. So far, so routine. But what they didn’t know was that Porsche was secretly using Germany’s not so transparent rules to accumulate more and more shares, until 26 October 2008, when Porsche announced that it now owned 75 per cent of Volkswagen, i.e. pretty much all the publicly tradeable stock – most of the rest was, for various reasons, locked up in places where it couldn’t be sold. At which point, the hedge funds shat themselves. Remember, all those shorted shares were borrowed, and had to be bought back and then returned – but where were the hedge funds going to buy the shares to return them, since there was now no stock on the market? Answer: they’d have to pay whatever the seller wanted to charge. In 48 hours, Volkswagen’s share price went from €200 to more than €1000. Hedge funds lost £24 billion betting against Volkswagen and Germany’s fifth richest man, Adolf Merckle (b. 1934, cement, pharmaceuticals), threw himself under a train."
You know, folk should really read the LRB. Since I will no longer read the Times Literary Supplement, the LRB has taken its place in my affections and proven to be a source of information, and just occasionally, some amusement.
As is, sometime or other I'm going to have to beg John Lanchester to autograph some of his first editions which I am fortunate enough to own.
