Tuesday, August 10, 2004

De Jasay on Speculation 

Here is a crisp explanation of why speculators are essential and are a positive factor in any maket.

It is taken by the review by Anthony de Jasay of Claude Bebear's book: ils vont tuer le capitalisme.

Incidentally the second part of De Jasay's comments, when he argues about the practical impossibility of a speculator "inventing" market momentum (manipulation) over the medium term is a great confutation of Soros "Reflexivity"'.


The whirlwind of speculation

Nobody seems to like speculators. A defender of capitalism, however, ought to like them, rather than accusing them of generating vicious spirals. A speculator in stocks or currencies hopes to anticipate what the next man, and the one after that man, will do, and seeks to beat them to it. If he thinks there will be a buying spree, he will buy now, and if he expects a selling spree, he will sell now. He will sell what he has bought before the buying spree is exhausted, and buy back what he has sold before the selling spree is exhausted. If his anticipations were right, he will make money, and he will lose money if they were wrong. Obviously, however, if he was right and has made money, by beating the next man to both the purchase and the sale, he will have lifted the price when it was still low and lowered it when it was already high. In other words, if he was successful, he will have smoothed down the swing in the price that would otherwise have taken place. A market with active and successful speculators will be less volatile than it would otherwise be. Contrariwise, if he anticipated wrongly, he will have accentuated the swing and "destabilized" (forgive the trendy word) the market. As Nicholas Kaldor, no apologist for capitalism, has shown in a famous paper, speculators are benign if they make money and harmful if they lose it; but if they lose enough, they are wiped out and the harm stops. There is no vicious spiral, and the Tobin tax is otiose

In Mr. Bebear's book, however, the speculator does not anticipate a movement that is going to take place. Instead, he initiates and causes it. He sells (as a typical manager Mr. Bebear dislikes bears more than bulls), and his selling sets off an avalanche of other selling, driving the price down to a level where he will buy back low what he has sold high. A man of vast experience of the securities markets seems really to believe that speculators, or at least some of them, have this magic power over the expectations of other market participants. However, if even a single one had such a power, his every move would set off moves by hordes of others in the same direction. The more he speculated, the more slavishly would others follow his infallible lead, the more money he would make, and the more powerful would be the next whirlwind he could set off. Before long, he would own the world. But this is not how the economy really works, and Mr. Bebear must know it.


Wednesday, August 04, 2004

The 9/11 Commission: Another PATRIOT blunder? 

Most of the commentaries about the recommendations of the 9/11 Commission have focused on the bureaucratic reorganization of the intelligence services. Much less was discussed about two series of proposals which are prominent in the report:

1) the introduction of national forms of identification supported by biometrics in the US

2) an emphasis on border control and screening of passengers on planes

The first point is quite simple. The damage to liberty from a further increase in the power of Government over its citizens bears no proportion to the benefits. biometrics would not have prevented 9/11 and will do nothing to fight terrorism, but they are very effective to limit trade and freedom of movement for everyone else. the biometrics lobby, like the farm lobby and other lobbies, are just asking for lucrative government contracts.

The second point is even more simple. With tens of millions of people moving across US borders each year, the probability of catching a handful of people is negligible. Sealing borders is a silly illusion, a waste of resources and a criminal act (witness the dozens of poor mexicans shot at the border every year, Berlin Wall style).

Lastly, are we not fighting the last war? As can be seen by the situation in Israel and Iraq (where security is much tighter than in the US) car and truck bombs at malls and major buildings are the most likely problem. CAPPS and PaTRIOT measures which kill liberties of all Americans have no bearing on that.

Why can heavy trucks still circulate through Manhattan all day long? Why not simply restrict vans and trucks to certain hours? Do we need to wait a rush hour attach on the Rockefeller Center? But major Bloomberg is more interested in parking tickets...

See also the excellent editorial "CZARDOM" on the WSJ dated August 3rd, 2004 about the creeping abuse of influence by the commission, who is taking advantage of the summer recess by flooding the media with proposals which are destructive of basic liberties and rightfully belong to Congress not a bunch of publicity seeking panelists.


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