Did the City make money out of the Greek crisis?
Which activities of city traders are damaging to ordinary people and employment?
Occupy London and Occupy Wall Street
were right to focus on the stock exchanges of the two capitals as
symbols of the financial systems which have grown out of control over
the last 50 years. The occupy movements have a unique opportunity to
propose reforms to benefit ordinary people worldwide. Realistic
proposals could be supported by many other groups and organisations.
I am not a city expert. Although I qualified as a Chartered Accountant, the complicated financial arrangements which have arisen in recent years are beyond my experience. I rely almost completely on the hedge fund manager turned philanthropist George Soros for the details of the financial crash and the remedies which must be put in place. Fortunately, in his book, 'The Crash of 2008' he deals with the lack of ethics built into the system and some of the errors in current economic teaching. He has acted as an adviser in counties like Brazil to set up an ethical system of home loan finance based on the Danish system.
I would like to discuss they ways in which short selling shares, bonds, financial instruments and currencies damages the lives of ordinary people and should be eliminated
George Soros sees the market as a
battle between traders and regulators. This is an interesting
viewpoint as each group would claim to be acting to benefit a market
which benefits commerce. He blames lack of regulation for the
financial crash which has cost the public in many countries so much.
Among other measures he recommends a complete overhaul of the
mortgage system, an innovative energy policy and reform of the
international financial system.
Short Selling
This is an illustration of short selling shares from the Wikipedia article on the subject
Shares in C & Company currently trade at $10 per share.
A short seller borrows 100 shares of C & Company and immediately sells them for a total of $1,000.
Subsequently, the price of the shares falls to $8 per share.
Short seller now buys 100 shares of C & Company for $800.
Short seller returns the shares to the lender, who must accept the return of the same number of shares as was lent despite the fact that the market value of the shares has decreased.
Short seller retains as profit the $200 difference (minus borrowing fees) between the price at which he sold the shares he borrowed and the lower price at which he was able to purchase the shares he returned.
On the surface this appears to be a situation in which an astute trader has correctly anticipated a decline in the share price of C & Company and has made a profit from his knowledge. It is sometimes claimed that the fall in price would have happened anyway. It could also be claimed that the sale and others like it caused the market to fall. It would then be held that the trader had taken away the opportunity for a genuine shareholder to sell his holding at $10 per share.
When short sellers act together this becomes a bear raid which causes the weakest companies or currencies to fall costing the public their livelihoods and their savings.
If shares are to continue to be a way for investors, whether individual or corporate, to finance production and employment then the market must be free from such destructive forces. Genuine buyers must be linked with genuine sellers without intermediates gambling to their disadvantage on every rumour. While such pure trades were not possible manually they are now possible electronically. There seems to be no reason why those willing to buy may not display the price they are willing to pay for would be sellers to clinch the deal electronically, and vice versa.
Bonds and other instruments
The same logic must hold good for trading bonds and the many sophisticated instruments that have been created. There is no good reason to allow short selling or any trade in which the buyer is not directly connected with the seller electronically.
Currencies
Short selling currencies will probably be needed for commercial purposes in support of international trade.
For
example if a toy manufacturer has a contract to deliver $1 million of
toys to the USA in 10 monthly deliveries from UK he will be buying
materials and paying labour in UK during the year and receiving
dollars to pay those costs. He wants to know the dollars he gets will
convert to sufficient sterling so he sells the dollars he does not
yet have in the market at the price the market thinks will apply in
3, 6, or 9 months time. He can be sure of his profit before he signs
the contract.
However this legitimate short selling
is dwarfed by the currency gambling by traders who are using rumours
to take profits out of the market and endanger national reserves. The
solution is to authenticate genuine sales of future revenues by
authorised audited corporations and ban unauthorised short selling.
Winners and losers
It is easy to see how a useful means to finance business and
employment has turned into a piranha pool which consumes the public
and industrial sector to benefit the few.
George Soros claims the size of the financial markets has grown out of all proportion during the past 40 years of deregulation and now is endangering all world prosperity. Particularly in USA and UK the financial earnings have become a large part of GDP which the countries will be reluctant to surrender. However the public in both countries have suffered from the inflated hopes and the costly realities of the bail outs.
It is time to return to reality and to make markets serve the community instead of letting them destroy it.
Malcolm Crocker 19/11/11 malcolmcro@aol.com