Comments on: What use short selling? A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: bleichroeder Tue, 05 Jan 2010 18:36:17 +0000 ‘social productivity’- another well intentioned, scientifically dubious journalistic slap at financial markets by a man who should know better. You either allow free markets to allocate resources or you leave it to grand Soviets and government ministries. To say that short sellers are wasting their talent by playing a part in the aggregated resource allocation mechanism of society is to say we should all start queuing for the bread line.

Socially unproductive work is a reality of a world of human self-interest. Even in your populist dream world where bankers till the fields and traders run charity bake sales for the poor, smart people would still spend plenty of time ‘gaming’ systems and markets for their own advantage. Whether that takes the form of short-selling, learning how to card count in blackjack, practicing the SATs, or figuring out how to legally shield the most of their income from the taxman.

Mindless drivel.

By: Philon Sat, 02 Jan 2010 05:01:57 +0000 This is an old theme. Felix does not say that *finance* is useless in general, and that charging interest is *contra naturam* (or at best “socially useless”), but he gives no argument against short selling and (unspecified) other financial activities that would not apply equally to lending at interest.

By: MarkC123 Fri, 01 Jan 2010 17:30:46 +0000 > While finance may or may not be good at the efficient allocation of capital, it seems to be positively bad when it comes to the efficient allocation of the labor of intelligent and perspicacious individuals.

On many levels, I don’t get this. At the most immediate level, doing quality, in-depth analysis of companies — whether your bias is long or short — requires intelligence and perspicaciousness, so some degree of allocation of talent to finance is always going to be useful and beneficial.

Bigger picture, you may well think there are too many people playing the finance game today, and I wouldn’t necessarily disagree. But the extent to which finance has drawn talent away from less “parasitical” industries is a direct function of the obscene profits to be had in finance in recent decades, which in turn is derived from the outsized share of the gains corporations (and their owners, in the form of shareholders) have received from business activity (arguably at the expense of workers). If you think this is a societal ill, then the obvious policy solution is to reduce corporate profits as a share of GDP, and thus diminish the opportunity for parasitic profit.

By: fmb21 Thu, 31 Dec 2009 22:03:42 +0000 Isn’t the whole point that the people working for Kodak have *not* been “genuinely add[ing] value in the real world” but instead wasting their efforts for the last 2 decades? Short-sellers have helped reduce the degree to which that is true.

Would it be better if short-sellers instead went and built another film company?

By: lsa2010 Thu, 31 Dec 2009 17:47:12 +0000 please do not generalize.

i short sell. i also donate over 90% of my after-tax gains (i am onshore and do not dodge the tax man) to a number of social causes that i think are important.

i could be mistaken but the medical researchers that i support in the uk do not think that i am socially useless. these folks are brilliant but find it almost impossible to receive funding from the established channels – so i help them. i am also thrilled to know that their work will be published in the next 12-18 months (depending on the turnaround of several journals) which will make headline news.

my wife is a school teacher and is working on a number of education programmes that my short-selling funds. i am happy to get into details but the basic point is the same – the governments, NGOs and private donors who we reached out to for help wanted to play politics instead so rather than ensuring red-tape, we, as a family, are trying to be social entrepreneurs. the kids in the indian village where my grandmother grew up seem to be over the moon. again, i could be wrong, but i do not think that they would brand me socially useless.

i am not smart enough (i wish i were) to cure cancer, capture carbon or to figure out how to fund the west’s entitlements but i do have a good sense when management teams are lying to me and when markets get ahead of themselves. so sure, my direct day-to-day, does not improve the world – i cannot accept that but please do not generalize. some people try to do some good with their profits. i can also give you the libertarian treatise but we can debate ideology forever. my simple point is that short selling is not a pure end in itself and sometimes can lead to some good.

please do not generalize. i short sell but do so in order not to be socially useless. being long in 2008 cost alot of people their retirements and good causes their endowments. now are those financial advisers or fund managers socially useful?

By: Anonymous Thu, 31 Dec 2009 06:13:27 +0000 Steve55 puts it very well. Short-selling helps keep a lid on speculative excess. Short sellers prevent too much speculative capital from entering the market, and from being allocated inefficiently.

The function of the capital markets is simple, to allocate capital to those firms most deserving of it.

The problem is in how that determination is made. Without short sellers you would have a market more like that of housing. One that functions in only one direction. That is not in society’s best interests. For evidence, see the housing market of recent years.

Perhaps the larger issue is that short-sellers have taken on the tasks that the regulators and journalists believe belong to them. Even more embarassing for the government and 4th estate is that short sellers consistently ferret out frauds and bubbles far quicker, more effectively, and (gasp) for a healthy profit.

Professional jealousy Felix?

By: Steve65 Thu, 31 Dec 2009 04:55:48 +0000 Kodak buyers at the peak lost 95% of their investment. Short sellers could have performed a socially useful function by preventing Kodak from ever getting to $95 by continuing to provide selling liquidity and educating the market about Kodak’s future.

Reducing volatility like this would reduce the lottery-like nature of the market where the difference between haves and have-nots is largely a matter of luck. And that would be socially useful.

By: Steve65 Thu, 31 Dec 2009 04:37:00 +0000 What if you don’t assume with hindsight that Kodak was pre-ordained to fail. What if intelligent short-sellers educated the market about Kodak’s futures in time for management to get the message and fix the problem (market leading innovation in digital, deep research and strong patent protection, etc.) Maybe Kodak would be stronger today.

Gates had the information and shared it with just a few people. That did no good for the management and shareholders of Kodak. Short sellers would have the profit motivation to do a better job.

By: DavidMerkel Thu, 31 Dec 2009 03:45:44 +0000 I don’t short. Short selling is socially productive though. Here is how:

1) Sniffs out bad management teams.

2) Sniffs out bad accounting.

3) Adds liquidity.

4) Defrays the costs of the margin account for retail investors. Institutional longs get a rebate. Securities lending programs provide real money to long term investors, with additional fun because when you want to sell, you can move the securities to the cash account if the borrow is tight, have a short squeeze, and sell even higher.

5) Provides useful data for longs who don’t short. (High short interest ratio is a yellow flag in the long run, leaving aside short squeeze games.)

6) Allows for paired trades.

7) Useful in deal arbitrage for those who want to take and eliminate risk.

8) Other market neutral trading is enabled.

9) Lowers implied volatility on put options. (and call options)

10) And more, see: nt-policy-created-too-hastily/

Short selling is a good thing, and useful to society, as long as a hard locate is enforced.

By: Uncle_Billy Thu, 31 Dec 2009 03:07:42 +0000 “what does that make financial bloggers?”

Or commenters on financial blogs? There’s no end!