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Giles Fraser: The bubble needed to burst

24 September 2008

A crisis always needs a scapegoat. And the scapegoat of the current financial crisis has become the short-seller, who allegedly profiteers from the misery of falling stock. Thus it was that last week the Financial Services Authority slapped a mora­torium on short-selling until January. For my money, it has got this one wrong.

The ordinary trade, if one can call it that, involves buying first, then selling. Short-selling is the other way round — selling a stock first, then buying it later, and you hope buying it much more cheaply than you sold it for. Short-sellers therefore sell a stock before they actually own it. They offer their buyer a price, gambling on their being able to obtain it more cheaply some time in the future.

When the market tumbles, short-sellers can make a great deal of money — as, famously, the financier George Soros did when betting against the falling pound back in 1992.

The case against short-sellers is that they make their fortunes when other people are suffering, and, moreover, that they are capable of manipulating the market, driving down the price, and pushing a stock or currency towards crisis. Thus short-sellers have been partially blamed for the current upheavals.

Yet, by blocking short-selling, all that the regulator does is to en­courage the value of stock to become over-inflated — and that is precisely the problem of our world markets. For instance, there is no way of short-selling the housing market. As a result, house prices have become absurd. Householders may scream blue murder if the value of their property goes down, but it ought to be clear to most people that a great many houses are vastly overvalued. It is just this overvaluation that generated the sub-prime crisis in the first place.

Short-sellers are a vital corrective to the instinctive bullishness of most city traders. Sure, it is immoral to sell a stock, talk it down, then buy it for a large profit. But that is no different from buying a stock, talking it up, then selling it on at an inflated price — the “pump-and-dump” man­oeuvre.

Modernity has given us the myth of continual improvement; that technology and human advancement will lead us ever onward and upward. It is the philosophy of New Labour’s “things can only get better”. And it is the naïve mantra of the city trader for whom the stockmarket always goes up.

Such a philosophy encourages us to borrow money against our ever-rising fortunes. In such circum­stances, making money is easy: bor­row as much as you can, and invest. It is a proven recipe for boom and bust.

The Revd Dr Giles Fraser is Team Rector of Putney, in South London.

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