Jeff Neal for C.U.R.E. - Certain Unalienable Rights Endowment

Glenn Beck and Finance

In Financial, Opinion, Regulation on March 27, 2011 at 10:31 am

Mr. Beck,

You contributed to the downfall of America on March 1 by perpetuating a couple of myths.

First, oil speculators CAN NOT force the price of oil up.  In every futures contract, there is a ‘long’ side and a ‘short’ side.  For a speculator to make money on the way up, someone has to lose money; for there to be a gain on the UP position, some third party will have speculated on the opposite movement, DOWN, and his loss is the first speculator’s gain.  So, unless there is a complicit, knowing loser on the other side of the trade, forcing the price up by speculation is impossible.  To say otherwise is to feed fear, the last thing we need.

Second, you spoke at some length about “bear-runs” – circumstances where companies’ stock prices were “forced” down by short sellers.  For starters, see above – there are two sides to every trade – some one else believed the opposite, that the share prices would be stable or rise.  In addition, the examples of Bear Strearns and Lehman are telling.  The problems in those two situations were not the short-sellers; the main problems were those companies’ business plans, plans which the short sellers believed would fail.  The short sellers invested their money such that they would profit if their assessment of the plans turned out to be accurate.

In the case of Bear, that problem was worsened by US Treasury Department intervention to (1) assume all of the liabilities of Bear Stearns and (2) sell the remaining assets for a price that didn’t take that $30 Billion white-wash into account.  JP Morgan stole the company with the government’s sanction, getting to keep the assets with the assurance that the contingent liabilities that were on Bear’s balance sheet would be paid by the government – nice work, if you can get it.

With Lehman, the government doomed Lehman when it said “we’re not saving Lehman.”  (I’m not suggesting the government should have ‘saved’ Lehman – the government should have never been involved in the matter.)  We will never know if Lehman could have made it out of their over-commitments to real estate, but they were never given the chance.  Instead government intervention and mark-to-market accounting forced them into insolvency.  Eventually, Lehman filed for bankruptcy and, notwithstanding all the predictions to the contrary, the world did not end.  The market deals with failure almost as well as it does success.  It cleanses the system of bad business plans, and government intervention to keep the market from finding the bottom, so it can bounce, prolongs the pain and moves the bottom DOWN further.

Much can and has been written – much of it wrong – about the financial crisis of 2008.  More populist, anti-Wall-Street-trader rhetoric will not help the country avoid future crises.  More regulations, more government and more mud throwing will all worsen the problem and lead to worse outcomes.  A more clear understanding of how markets function – including how they function to punish failure – will make for a less interventionist government and better outcomes.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: