Thursday, October 02, 2008

In Defense of Speculators and Short-Sellers

My piece on the subject is now up on the ARI/ARC site.

So far the editorial has been carried in the following papers and magazines:

Hawaii Reporter (Honolulu)
The American Chronicle
The Daily Citizen (Dalton, GA)
Capitalism Magazine

And on following websites:

Der Informant (International Perspective for Capital Preservation and Growth)
Space Coast Politics
Enter Stage Right

Thanks to all who have reprinted or linked to it.


Blogger Paul Hsieh said...

Excellent piece! I submitted it to Diana to link to it on NoodleFood.

Given the current trends, it's too bad I can't "short" the US government under a future Barack Obama...

10:47 AM  
Blogger Amit Ghate said...

Thanks Paul!

Yeah shorting either party would be a "no-brainer".

I've often thought too that it's too bad there was no way to short housing, as that would have mitigated the extent to which the bubble expanded, and therefore when inevitably it popped, the pain would have been reduced.

12:36 PM  
Blogger Richard said...

This comment is out of place, but I have no other means of getting it to you.

I ran across a marvelous image of wild orchids at,, and thought of you immediately.
The image caption reads: "The path reveals a row of orchids and ferns surrounded by Majestic palms, monkey pod and guava trees."

I've never seen orchids growing naturally, and they are all so healthy. Note the epiphytic orchid.

The 'lucky' blogger lives there!!

Best health and premises,

11:05 AM  
Blogger Galileo Blogs said...

Congrats, Amit. It is an original and insightful defense of these two despised activities.

2:03 PM  
Blogger Amit Ghate said...

Thanks Galileo!

And those are some gorgeous orchids Richard, thanks for the photo.

4:50 PM  
Blogger Unknown said...

I enjoyed and learned from your article. Please, if possible, elaborate a bit more on your "obvious question" of where are the speculators in a market that is too low. I've wanted to understand that more.

8:01 AM  
Blogger Richard said...

Amit, I too enjoyed your artcle, it was indeed excellent.

Like big jim, I have a question: Is your view of derivatives is any different?

8:21 AM  
Blogger Amit Ghate said...

Hi Richard and big jim,

I'm trying to meet a deadline for a second op-ed, but will answer your questions by the weekend at latest.

sorry for the delay,


7:55 PM  
Blogger Richard said...

Sorry to dump so much in your lap, but this may lead you to another OpEd!

The name "JoeSixPack" has been usurped, in a good marketing move, by Mark Wyatt.

Wyatt argues that the ultimate financial disaster lies in the enormous house of cards that is the derivatives market.

I cannot begin to untangle the reality of the claim. Is it a doomsday cry from a financial Chicken Little, or are derivatives the un-named "elephant in the room" as he suggests?

12:55 PM  
Blogger Amit Ghate said...


I'm no expert on derivatives, but my general answer is: let the private market work it out. If some contracts don't make sense or are harmful, people will lose money and the product will disappear, assuming the market is left free (i.e. unregulated) to make the appropriate changes.

More specifically, I think some of the claims floating around on the internet and in the media, e.g. regarding the CDS market, are probably alarmist, or at least could well be explained by rational behavior.

As an analogy, consider hurricane insurance. If one insurance company happens to have most of its branches in Florida, it will likely sell most policies there and so would be very vulnerable to a large hurricane which could affect most of their insurees. So what they properly do is buy re-insurance from firms who have no Florida exposure, say e.g. from Canadian and French insurance companies. This is a derivative (since it's based on the original insurance contract) but it serves to distribute risk and thereby makes it more likely that people will be covered in the event of an emergency. It also makes earnings of all the companies more stable, since they now have geographic diversification. Yet in this situation, especially if the French and Canadian companies further diversify by buying re-insurance on their re-insurance, you may have notional insured values much larger than the actual Florida market size.

The same is quite possible in the CDS market, though you'd have to know all the details to say anything definitive.

2:47 PM  
Blogger Amit Ghate said...


There are short-sellers and speculators in all markets, e.g. there were short-sellers in the oil market who lost money when oil spiked to $140, just as there were speculators in Lehman stock when it went bankrupt.

Choosing to blame one or the other when the price goes in a direction against that which the authorities/media want is pure scapegoating since they completely neglect traders on the other side of the trade.

Hope that answers your question, if not please feel free to ask a more detailed one.

6:21 AM  
Blogger Richard said...

Thank-you Amit,

I knew insurance companies distribute costs over a wide group of people, but it had not occurred to me that they would also do it across insurance companies, and even national borders. That clearly adds stability to the industry; it's smart.

You ended, saying:
"The same is quite possible in the CDS market, though you'd have to know all the details to say anything definitive.

That was really what I wanted to understand, in an "Objectivist brief" manner.

Derivatives seem to me to be a variation on naked short selling, but not necessarily restricted to the shorting aspect. The article at the link I included in my last comment argued that trade in derivatives seems to be like gambling on horses —not that there is anything wrong with that. The participants (should) have definite knowledge of the 'animal' involved, but the gambling has no direct impact on the performance or success of the horses.

However, if the risk taking involved in the derivative market is distorted by the Fed's monetary policy and other government actions, then that market will also be a 'house of cards'. A market correction, in derivatives, would also destroy a lot of the apparent wealth, with a ripple effect across other markets. So I wonder how serious the effects would be, and why this matter is not in the news?

I hope I am making sense.


7:25 AM  
Blogger Amit Ghate said...


There are several issues in your last comment.

One of the main, actually the main, problem in the current crisis is that the Fed pumped liquidity into the system to a such a degree and for so long that many economic decisions were made on faulty data or information. The result, among other things were asset bubbles first in tech stocks and then in housing. The latter affected credit and derivative markets to a much larger degree than the former. So to get a full understanding of the situation you have to trace back all the consequences of the Fed's actions (something which I'm not capable of doing in any detail).

But even so, there is no need to condemn the derivative markets wholesale. As I indicated, they are often used as insurance and no doubt much of the CDS market had a legitimate use. This is confirmed when we find that the Lehman CDS settlement went for much less on a net basis than on a notional one.

As to naked short-selling, you'll have to explain to me why you find it a problem. There are whole markets that rely on it completely, for example in the futures market farmers short-sell wheat (i.e. they sell it before it's even grown). I think this is good not bad.

12:26 PM  

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