The government of Germany led by Angela Merkel began the process of putting an end to the practice of short selling securities on the markets, and the promise is that the process will continue till it is completed and duplicated everywhere in the world. The reaction of the investors who want to make a living by investing their money honestly has been to praise the German leader while the reaction of the confused who don't know what they are talking about, and that of the con artists who want to live off other people's money has been to attack the good woman and accuse her of shooting the messengers. To understand this part of their argument we must go back in time to an earlier era.
There was a time when the motto of journalism was: “To comfort the afflicted and afflict the comfortable,” a saying coined by Peter Dunne in the Nineteenth Century. This was a time when journalists were true observers of life in the sense that they had no skin in the game. However, by observing and reporting what they saw, they inevitably spoke truth to power and this made them a class of people that irritated the powerful. In an epoch still earlier than the Nineteenth Century, the messenger that brought bad news to the powerful was put to death. Later on, this reality spawned the saying: “don't shoot the messenger” which was a metaphor to convey the notion that you must not resent those who point out your imperfections. Luckily, the Nineteenth Century did not see the shooting of journalists but these people and everyone who spoke truth to power were resented and often maltreated by the powerful.
And like everything else, that saying was abused with the passage of time when its true meaning began to fade from the memory of people. This happened because some individuals used the saying to justify behavior that was never meant to be covered by it. A good example in this regard are the journalists who, in violation of the law, took hidden items inside an airport to point out the security deficiencies that exist at some airports. These individuals were successfully prosecuted despite the protest that they and their supporters mounted while arguing that they were only the messengers who brought bad news to the authorities. In fact, they had expected to be praised not punished but they were wrong and they paid for their bad judgment.
Now take this mentality a step or two further and see how far you can go with it. Say, for example, a bank robber robs a bank and calls the police to have a discussion. When the police arrives, the robber argues that he should be praised for pointing out the security deficiency at the bank and he insists on being allowed to keep the money he robbed as a reward for the service he just rendered to the public. Far fetched, you say? Not at all. This is what the short sellers do with the markets. And here is an example as to how the thing often unfolds: The stock of a company owned by thousands of people and institutions races ahead of itself for a flimsy reason or no reason at all. A professional short seller spots the discrepancy between what the estimated value of the stock ought to be and the price at which the stock currently trades. Instead of alerting the shareholders by going public with his observations, he sell shares of the company he does not own and this causes the price of the stock to come down. A number of shareholders who actually own those shares panic and dump their holdings at a low price, a move that sends the price lower still. The short seller then buys the shares at a low price and delivers them to the people who bought them from him at a high price; and he pockets the difference. Most of the time the shares of such companies rebound to their former level or near to it. In such a case, the people who get hurt would be the ones that panicked and sold at a low price. At other times, however, the company collapses and the shares go to zero. In this case, everyone who had a skin in the game gets hurt except the short sellers whose fortune rises in direct proportion to the hurt that everyone else suffers.
We are then treated with the unseemly spectacle of the short sellers arguing -- much like the bank robber -- that they have rendered a service to the public by pointing to the temporarily inflated value of the stock. And they try with this argument to convince the authorities that they should be allowed to continue making such gains if not be praised for the altruistic behavior they exhibit given that they can lose their shirt in a transaction like this, which they sometimes do and go sob to the media. You may feel depressed by now, dear reader, so here is a true story that should bring a smile to your face. Sometime during the Mulroney era in the Nineteen Nineties, the bond vigilantes -- or as the late Louis Rukeyser used to call them, the bond goulds -- started to attack the Canadian dollar in the pits of the Chicago Board of Trade for no reason except that there was no other host at the time on which to feed and satisfy their insatiable parasitic appetite. These were the short sellers who probably thought they had bad news to send to the Minister of Finance in Ottawa, news to the effect that the Canadian dollar was inflated. But Minister Wilson had thoughts of his own that were lingering in his head for some time, and he was itching to deliver them to the short selling goulds in the pits of Chicago.
Now take a deep breath, my friend, and read on to find out what happened. Here it comes; the Canadian Minister of Finance contacted his colleagues in the other wealthy nations and asked them to set up a temporary line of credit on which he can draw the hundreds of millions he will need for a worthy operation. They most certainly understood what he had in mind so they gave him the lines of credit he requested. He waited for the bond goulds to finish short selling all the Canadian dollars they could sell but did not own. This done, the Minister swooped down on them like the hungry eagle who has a preference for the succulent meat of parasites. He used the lines of credit set up for the operation and bought every Canadian dollar in sight, paying for the transactions with American, British, Japanese, German, Swiss, Australian and French currencies. This is where the naked short selling parasites started to scurry hysterically trying to cover their bottoms. They bought back what they sold at a price much higher than they sold them just minutes ago. And guess who they bought these dollars from; yes they bought them from the Minister who made a nice little profit for his country. And by the time the whole operation was over, the goulds had lost not only their shirts but their underwear too. And no one tried to pull a number like this on the Canadian dollar ever again. Now you can smile and breathe again, my friend.
This is probably not the reason why this kind of selling is called naked short selling but the incident illustrates why people instinctively resent the naked short sellers. When these people attack the currency of a nation or its bonds or when they attack the stock of a company, they do so by upsetting the existing balance between supply and demand. In essence, they create a fictitious supply of a commodity that is endless. With this, they overwhelm the demand side of the equation thus drive the price down long enough to buy back at a low price what they sold at a high price. In reality, therefore, they violate the law of supply and demand which is the absolute most fundamental law governing the capitalist system to serve their own end. This is what we normally call stealing yet, these people execute unimpeded what they falsely and shamelessly call a capitalist transaction, and they find enough voices in the echo chambers of some prestigious publications to support their definition. But if we all come to accept this definition, we must also accept that every bank robbery is a capitalist transaction and every bank robber a great capitalist. Who wants that?
And you will understand why this is a serious problem when you look at the May 20, 2010 edition of the Wall Street journal. There is in it an editorial published under the title: “Germany Shoots the Messengers”. Here you have what used to be the flagship of capitalist publications treating the equivalent of bank robbers as victims of the authorities whose job it is to uphold and defend the principle of law and order from the activities of the lawless who violate something as fundamental as the law of supply and demand, a violation that does not seem to bother the editors of the Journal.
Worse, the Journal paraphrases and uses as subtitle a quote from Shakespeare's King Henry IV: “First thing we do, let's kill all the short sellers.” Notice that the idea which the Wall Street Journal preaches here is the reverse of what we accept as normal behavior. The Journal's view is this: In the same way that the lawyers defend the country in Shakespeare's play against the lawless who would spread anarchy, the short sellers of today are the good capitalists who defend the world against the socialist agenda of leaders like Angela Merkel, a leader that is destroying the brave new capitalist system we imagine, a system that tries to blossom here, in Germany and everywhere else in the world. And this says that the Wall Street Journal is no longer the impartial messenger that speaks to power; it has become the power that speaks for itself to itself.
In the face of this reality, you begin to wonder what skin these people have in the game. You realize that when the messenger acquires the power and he decides to speak, he tends not to speak at all but to sing a pleasing falsehood to himself. What he says does not travel out in a straight line but reverses itself and comes back to enchant the ear on the head from where the mouth spoke the falsehood. You wonder if these people are not trying to comfort the already comfortable and further afflict the already afflicted. You then notice their demonstration of financial dyslexia and you readily understand why the center of economic gravity is shifting to the Orient. To use an apt analogy from the art of the make-believe, when Captain Kirk and Mr. Spock both get infected by a disease, someone from outside the Federation is bound to take control of the Enterprise; and the enterprise here is the capitalist system no less. Goodbye Manhattan; hello Mumbai and Shanghai!
Please speak up again, Angela Merkel, those who wish to see a nicely balanced world want to hear from you more often and hear you louder than before.