As countries world-wide shut down, short-sellers scurry around like thieves in the night. Why are they dangerous and what could be done?
The board rooms of banks and fund firms are never serene. Below the surface ‘the vague panic fears and equally vague and unreasoned hopes’ are never really ‘lulled’, so Keynes wrote in 1937. Adele Ferguson, one of our best journalists on banking, has just warned about a ‘Test for regulators as bots run wild, short sellers smell blood’ (SMH March 21-22, 2020:2).
What does she mean in saying, ‘until there is certainty’ the present financial rollercoaster will go on? Ferguson interviewed brokers and fund managers. My interpretation is not very pretty since there is never certainty anywhere, even if bank profit-seeking is a predictable motive. Moreover, financial product trading is the most socially damaging; these ‘products’ are securitised promises on promises crafted by banks and shadow banks. Sellers and buyers on such markets are interchangeable; they suffer the ‘gambler’s curse’ – keep the chips on the table, or on sell-buy instead of getting out before it’s too late.
Short sellers just sell stocks they don’t own but have been lent and aim to buy at a later time. They assume the price will be lower, so they can pocket the difference. As in the dot com bubble bust, this became easy pickings on Wall Street because there were so many margin buyers – who bought on borrowed money (margin loans) – now forced sellers. Margin loans are the first to be called in, so there’s a spiral downwards; these days High Frequency Trading builds in these tricks into computers and also has insider advantages of nanoseconds.
One debate is whether to ban short selling (as today in several countries) or if there are deeper problems to these asset price spirals up and down, far more importantly including the pitiful shape of economic activity under the LNP, then the megafires and now COVID-19. Ferguson quotes one global bond manager pleading for central bank help: “instead of quantitative easing (QE) and buying government bonds, which won’t help people pay their mortgages, the RBA should give direct loans to the Treasury at zero interest rates for 50 years, with terms and conditions attached. These conditions would include that the loan and money can be used only for the creation of productive infrastructure that earns income to stimulate jobs”.
It looks attractive at first sight. But the RBA put conditions on banks in last week’s bond buying. Banks were to help small and medium businesses only. Instantly Treasurer Frydenberg was on TV praising this as private banks’ action when it was the RBA’s. Central banks always lend to banks when asked: QE is just more of the same, but the RBA and others are reluctant for two reasons. Banks just loan for more asset bubble activity with their central bank back-stops and can start-stop at whim. The RBA’s current near-zero interest rate is only to ward off the thousands of indebted households from going bankrupt.
For years the RBA has asked governments to create job-creating ventures with long-term returns. The LNP has declined; as well it has attacked wages and unions and only doubled Newstart for a mere 6 months. It does not defend jobs or help to build up purchasing power or criticise mass sackings (e.g. Qantas). Of note, improved wages give households the chance to avoid incurring the debt of desperation. But banks want more opportunities for usury, not the reverse; an unmentionable.
Further objections to the idea the RBA lend for ‘productive infrastructure’ include why would we trust a Morrison government? Or the private banks, which need controls, as Ferguson rightly suggests. Chances are that any LNP projects will do further ecological damage not the hopeful reconstruction of decent, nationally owned, job-creating firms. Why should the RBA do all the heavy lifting and be blamed when banks and governments fail?
A lot of people are saying ‘globalisation’ is over: that is good if it stops mobile capital ruining places and lives at whim. We desperately need to support the better international institutions we have. COVID-19 warnings of the WHO were ignored to extreme negligence; the climate agreements still lack major countries implementing the now large carbon emission reductions. Another idea should not die with CV-19: only in January this year, the Bank for International Settlements proposed that central banks across the world act in concert to buy up the seriously failing and dangerously heavy carbon emitters, with an aim to convert ideally to renewables. This could be extended to the vaccination ‘industry’ which has no place being in private hands, nor private health providers.
The fear is mobile capital will remain under government lifeline, rather than life on earth in many ways. Perhaps the UK government has seen the light since its policy of ‘herd immunity’ but I suspect pigs might fly for any US or Australian global cooperation. In the meantime, all of us lucky enough to have some modest investment should ignore this appalling short selling, do not copy rather urge their super funds to switch to decent health and climate abating investment.
Jocelyn Pixley is Honorary Professor in Sociology, Macquarie University. Here she uses work published with Cambridge University Press, including her Central Banks one.