During economic bubbles, should governments do short selling?

[PseuTonym]

Instead of making cryptic comments about “irrational exuberance”, that could be interpreted as threats to change interest rates …

Instead of waiting until after the bubble is starting to burst, and firms are failing and need to be bailed out …

… a government could use its resources to make money, while simultaneously putting downward pressure on the bubble.

 

[Tomdstone]

Instead of making cryptic comments about “irrational exuberance”, that could be interpreted as threats to change interest rates …

Instead of waiting until after the bubble is starting to burst, and firms are failing and need to be bailed out …

… a government could use its resources to make money, while simultaneously putting downward pressure on the bubble.

The federal reserve has the authority to set the interest rates.

 

[catholictiger]

Instead of making cryptic comments about “irrational exuberance”, that could be interpreted as threats to change interest rates …

Instead of waiting until after the bubble is starting to burst, and firms are failing and need to be bailed out …

… a government could use its resources to make money, while simultaneously putting downward pressure on the bubble.

I’m not sure if that would do much to soften the bubble. If a bubble is growing it’s going to burst it’s just the way economies work.

 

[exnihilo]

Instead of making cryptic comments about “irrational exuberance”, that could be interpreted as threats to change interest rates …

Instead of waiting until after the bubble is starting to burst, and firms are failing and need to be bailed out …

… a government could use its resources to make money, while simultaneously putting downward pressure on the bubble.

Businesses don’t need to be bailed out. Badly run businesses need to go out of business. Their executives need to lose their jobs because they are not good at them. The resources, including labor, need to be reallocated to more productive purposes or with more productive businesses.

The government does ‘make money’ through the Federal Reserve. This is exactly what causes bubbles. The money goes first to the connected people and institutions. The new money is spent in ways that cause a distortion in the economy otherwise known as a bubble.

 

[Zzyzx_Road]

Besides which one can get just as easily burned selling short as he can buying long. Another view is that Keynes once said the market can remain irrational longer than one can remain solvent. Government really has no business trying to do this; there is not the expertise in government service that would know how to do this well. That is the domain of the professional traders.

Simple question, how do we even know we’re in a bubble. We might have thought the domestic stock market was in bubble territory last year, but if one tried to short at that moment, one would have lost money doing it.

There have always been business cycles sure as the sun rises and sets… they can be suppressed only for so long before the distortions introduced snap back.

 

[PseuTonym]

Besides which one can get just as easily burned selling short as he can buying long. Another view is that Keynes once said the market can remain irrational longer than one can remain solvent. Government really has no business trying to do this; there is not the expertise in government service that would know how to do this well. That is the domain of the professional traders.

Why not leave the bailout of a company such as A.I.G. and automotive manufacturers to professional traders?

You could say that the government really had no business bailing out A.I.G. and bailing out automotive manufacturers and bailing out any investment banks that the government might have bailed out in 2007 or 2008.

My proposal is for prevention. The alternative to prevention is to allow an economic crisis to occur and to then seek to treat both the symptoms and the underlying cause of the problem.

Simple question, how do we even know we’re in a bubble.

As you know, simple questions do not always have simple answers. I would not say that a bubble is something that we are “in”, because I would distinguish between a bubble and the expansionary part of a business cycle. The first issue for us to discuss is whether or not you agree that there actually exists such a thing as an economic bubble, that it is real and not merely a matter of wording, spin, imagination, etc. If you agree that economic bubbles are real, then your “how” question can be taken literally.

 

[exnihilo]

My proposal is for prevention. The alternative to prevention is to allow an economic crisis to occur and to then seek to treat both the symptoms and the underlying cause of the problem.

There really is no prevention of bubbles. They happen from time to time. The best thing to do is to allow the efficient clearing of bubbles. If the state controlled the economy (fully or partially) you’d sill have bubbles. The only difference would be the only way to clear them is political. That is much more difficult to do and generally takes much more time.

 

[PseuTonym]

There really is no prevention of bubbles. They happen from time to time. The best thing to do is to allow the efficient clearing of bubbles.

Can you support any of those claims?

If the state controlled the economy (fully or partially) you’d still have bubbles. The only difference would be the only way to clear them is political.

I acknowledge that there might be some connection between your words that I have quoted and what I wrote, but I see no connection. First of all, I am not talking about something like setting interest rates, which is an action that a private institution cannot do as a participant in the market. Setting interest rates is something that is done by what we might think of as a moderator or administrator of the game or discussion board. However, setting interest rates is normally thought of as having been separated from political control. For example, look at the following:

Alan Greenspan served five terms as chairman of the Board of Governors of the Federal Reserve System. He originally took office as chairman on August 11, 1987, to fill an unexpired term as a member of the Board of Governors. His last term ended on January 31, 2006. He was appointed chairman by four different presidents.

Link:
federalreservehistory.org/People/DetailView/6

Entering the market as a participant (who sells short some key securities that are priced at levels that are unsustainable and part of an expanding economic bubble) is a role quite different from the role of being in control. Unless the concept of separation of powers into executive, legislative, and judicial branches is a complete fabrication or delusion, it should be possible for one branch of government to play a role as participant while other branches exercise regulatory functions.

 

[exnihilo]

Can you support any of those claims?

What is a bubble in the first place? One thing about a bubble is they are identified by the masses only after they popped. Most people don’t recognize a bubble when it is happening. Most people are happy to make good money while a market is going up. They don’t clamor for regulation during that time. Only after they lose money do they think something needs to be done.

However, setting interest rates is normally thought of as having been separated from political control.

If you have an institution which exists to control the economy then it is a political institution. That is true whether it is formally part of the state or not. Some people may believe the Fed is non-political but I do not.

Entering the market as a participant (who sells short some key securities that are priced at levels that are unsustainable and part of an expanding economic bubble) is a role quite different from the role of being in control. Unless the concept of separation of powers into executive, legislative, and judicial branches is a complete fabrication or delusion, it should be possible for one branch of government to play a role as participant while other branches exercise regulatory functions.

Control doesn’t mean you get what you want or that you have direct power over the actions of others. Institutions like the Fed exists to exert control over the economy. They fail frequently, so it is obvious they don’t get what they want. That is unless what they want is different from their publicized objective, which may well be the case. The Fed can’t control my actions. But it does use its powers to attempt to bring about a certain outcome. The Fed by itself doesn’t produce a good. It does not produce a product or service that anyone purchases. It simply attempts to control the economy through monopoly power.

The separation of powers in the US is a joke. The power has naturally flowed to the executive. Those subject to election want to avoid accountability so they let the executive grow in power. What cannot be accomplished by popular but misinformed will is accomplished through judicial fiat.

 

[Ridgerunner]

I wonder whether short selling would be of any real value. In order to sell short, you have to borrow the asset from someone who owns it. If the government did that in any scale likely to have an effect, it would be immediately known. There are traders who are willing to “bet against the shorts” because they know that sooner or later the short seller has to buy in order to cover the short sales. Some join in the short sale orgy themselves, but some watch to see when the prices caused by the shorts are ridiculously low. Then they start buying and the short seller either has to short sell some more in order to keep downward pressure on the market, or it throws in the towel and buys in order to cover. That buying, if it’s on a large scale, causes prices to rise and the short seller can lose his…um, shorts…covering his sales, which makes the prices go right back up to where the market thinks the intrinsic value is, right or wrong.

I’m no financial guru, but I, myself did some of that back in 2009 when financials were so disfavored. I could see that short selling was far out of reason, and started buying. Eventually the short sellers bailed and had to buy, which caused the stocks to go up, up, up.

People would figure it out and likely skin the government out of a lot of money because the traders are better at what they do than bureaucrats are likely to be.