The latest squeal at the sheer unfairness of ‘of the absolute power that the markets have over government decisions’ can be found at LibCon.  To be honest, I can’t make much of it: some of it literally makes no sense to me on the third reading.   For example, what does this mean:

Furthermore, this missed opportunity has allowed Anglo-Saxon hedge funds to speculate on Greek debt, and could lead eventually to the end of the Euro.


To be charitable, I think the author is calling for creditors (the ‘markets’) to take some of the pain in the Greek situation.  I sort of agree.  It takes two to tango.  Remembering what Megan said – “The fact that some moron is willing to lend you money is not a good reason to borrow it” – means that both moron and borrower deserve to learn some manners.  If creditors are NEVER punished, then the market never exercises discipline ex ante – and ‘ex ante’ is when you want the discipline to be exercised – when you can still make a difference.

But as Krugman and many others have pointed out for many posts, it is no good just funding the liquidity crisis if you can’t do something about the deeper problems – the pachyderm in the chamber being uncompetitiveness:

What makes Greek problems so intractable is the fact that there’s little hope for growth for years to come, because Greek costs and prices are out of line and will need years of painful deflation to get back in line. Spain wouldn’t be in trouble at all if it weren’t for the fact that the bubble years left its costs too high, again requiring years of painful deflation.

Some shocking examples of this are in recent FT’s.   From Munchau a couple of days ago:

A reader wrote from Madrid last week that, in his estimation, the price level in his city was about 30 to 40 per cent higher than in Germany – as a result of which he orders all his durable goods from abroad. It is not surprising therefore that we are starting to see core price deflation as Spain cannot maintain a large price differential with Germany forever

And Michael Skapinker today:

A more recent OECD document outlines how much Greece’s pensions weigh on its economic life. In Germany, a typical retired person receives a public pension equivalent to 40.5 per cent of average earnings. In the UK, the figure is 28.9 per cent. In Greece, it is 93.6 per cent

None of these are solved by either (a) bailing out the creditors or (b) whaling on the creditors.   See this graph from the IMF document about the source of the increases in debt: note to all the Spending Splurge Fanatics, only 10% is because of fiscal stimulus (taken from Ryan Avent at the Economist)

Note, again (yes, I am repeating myself): it is a loss of revenues.  But what that revenue loss means is: you need to cut spending at some point.  It is not happening (just) because the market is telling us.

All in all, people take the markets too seriously as some sort of person, or worse a deity. But as Aditya reminds us:

Rather than being one all-knowing entity, financial markets are a convenient term we apply to the hundreds of thousands of daily deals between buyers and sellers and middlemen. When the FTSE goes up, the price of government bonds normally goes down, and what the Swiss do with their interest rates can cause all sorts of mischief for the pound

The markets do exactly the job they should do – intermediate the givers and the takers of money.  They don’t always do it right, but there is no crisis of illegitimacy – as Stelzer writes:

The so-called bond vigilantes – investors who discipline borrowers by dumping their IOUs – are in control, as well they should be: it’s their money that is at risk.

Yup. Aditya is right – the market is not some knowing mind, like a deity. There is no ‘the market thinks this’ or ‘the market demands that’.  This is why setting it up in some sort of opposition to democracy is neither right nor wrong: it’s meaningless.  It’s like complaining about the right of the volcano to disrupt our traffic, or of the right that people have to prefer Eastenders to Shakespeare.


8 thoughts on “Blaming the speculators, part MXXVI or whatever

  1. Following on from your last paragraph….

    ….It does make a very convienient straw man though. Politicians who have got things horribly wrong and have no painless or real solution to financial problems use those terrible speculators asthe bogeyman to cover their own failures.

    Look at all the protectionist nonsense we are getting out of Germany now…apart form AIFM they are talking about banning FX derivatives unless they are for hedging and they have banned some short selling and CDS transactions in the near term. The result? Euro fell from 1.2440 to 1.2220.

    They seem to believe that by stopping all aspects of short selling and speculation they can make markets more stable, given people are only allowed to go long. The reality is though, that it is effectively a capitulation. It’s a sign of terrible weakness when governments feel the need to try and rig the game in their favour.

    1. Could not agree more. I think it is quite equivalent to the government losing popularity feeling it needs to force the newspapers to write nice things about it.

      1. Further to what I said about banning things being a sign of weakness….rather than propping markets up, the short bans have only served to act as a massive sell indicator.

        Even bunds have been murdered, with people selling them in favour of Gilts. Who’d have thought it…

  2. Ok. The line that is causing so much anguish:

    “Furthermore, this missed opportunity has allowed Anglo-Saxon hedge funds to speculate on Greek debt, and could lead eventually to the end of the Euro.”

    In the laws of grammar, when a clause separates a main clause from its subclause, you have to read through it. I.e. “this missed opportunity… could lead eventually”. That is the sense of the sentence. The missed opportunity is the fault of the Eurozone governments (i.e. THEY should force restructing of the economy and debt). The hedge fund issue is not something I explore in my piece!

    1. I still don’t get the ‘allowed AS hedge funds to speculate’. Could they not before? And do they make more money when things go well or badly? Do you know whether they are long or short?

      I am sure it makes sense with enough further sentences – but I need also to understand how the break up of the Eurozone would happen. Do you mean Greece leaving? That does not mean the end of the Euro ….

      many thanks all the same, I was too quick without tracking back through the clauses, agreed

  3. “Allowed” perhaps in the sense that if you don’t run up debts you do not have to have an outside authority (banks, government, parents?) interfering in your spending habits, but if you do, you have ‘allowed’ them to interfere?

    i agree with the argument here except I think Stelzer’s argument is in fact the opposite – a vigilante is a self-appointed policeman, and I don’t think most bond investors see there role as changing government policy as opposed to getting the highest risk-adjusted return.

  4. It takes a lot more words to set out why the whole global financial system needs to be changed than it does to offer platitudes about the markets just doing their job. That’s why the OP you refer to is necessarily elliptic, as many of a similar ilk are. There’s more persuading needs doing to change the status quo than there is to maintain it.

    The markets just doing ‘the job they should do’, when that job ends up in people losing their jobs and the poor getting stuffed, is a lazy platitude.

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