Almost everyone condemns naked short selling. But not the British Treasury

George Monbiot | Comment is free | The Guardian.

The refusal to back a ban on naked short selling, despite the risk to the economy, exposes the cynicism of the Conservatives

  • George Osborne listens during a session on a new global trade deal at the World Economic Forum in Davos, Switzerland in January. Photograph: Virginia Mayo/AP 

    You think you’ve seen the worst of it; you haven’t. Last week I wrote about how the British government, while imposing extra taxes and devastating cuts on ordinary mortals, has quietly engineered a new tax exemption for the banks and corporations, which also encourages these businesses to shift some of their operations overseas. I thought that was as bad as it got. I was wrong.

    On the day I wrote that column the Conservatives were doing something just as repulsive, and far more dangerous. On Wednesday George Osborne told the House of Commons “we will make sure we learn every lesson that needs to be learned – so that this [the financial crisis] never happens again”. Two days before, his government demonstrated that nothing has been learned at all. Let me first explain the context.

    Most people obtain shares or bonds or other securities in the hope that their value will rise. Short sellers hope their price will fall. They might borrow, for instance, 10,000 shares and sell them for £1 a piece. Then they pray that the value collapses. If they’re in luck, and the share price halves, for instance, they can buy the same number as they sold for 50p each. They return the shares to the broker who lent them, and pocket £5,000 (minus fees).

    It’s a controversial practice. Some people say that it helps markets find the right price for their wares. Others maintain that it exacerbates risk, as the sellers are using assets they don’t possess to take on potentially unlimited liabilities (while share prices can’t fall below zero, there is no fixed limit to their increase in value). Short selling also creates an incentive to try to drive down the price of securities, amplifying or even creating economic crises. An example was the Asian financial crisis of 1997, triggered by a co-ordinated attack by short sellers on the Thai baht. It destituted tens of millions.

    You don’t like the idea? Then take a look at naked short selling. In this case sellers not only don’t own the assets they’re selling, they haven’t even borrowed them. They sell a promise of shares, hope the price falls, then try to obtain the shares they’ve sold. In the surreal traditions of modern finance they’re effectively selling securities that don’t yet exist (perhaps they should be called insecurities). Naked shorting may grant short sellers golden opportunities to wreck companies and economies, by flooding the market with low-cost ghosts.

    Almost everyone condemns naked (also known as uncovered) short selling and wants it banned because of the huge risks it presents to the economy. It has been prohibited in the US, Japan, Hong Kong, Australia and Brazil: none of which are renowned for draconian regulation. The European parliament has drafted a directive to bring it to an end within the EU. I did say almost everyone, didn’t I? There’s one group frantically seeking to protect naked shorting and strangle the directive: the British Treasury, and Conservative MEPs acting on its instructions.

    At a committee meeting in the European parliament last week, Tory MEPSyed Kamall inveighed against the ban. When I asked him how he justified this position, he claimed that ending naked short selling “will reduce liquidity, meaning that borrowers will insist on higher returns, pushing up the cost of borrowing. This will lead to governments spending more money on servicing debt and less on state-provided public services.” This, as far as I can determine, is rubbish: perhaps the polar opposite of the truth.

    Kamall’s office told me his position “reflects that within the government”. The Treasury confirmed this: “The UK does not support permanent restrictions on the uncovered short sales of either equities or sovereign debt … we believe it will do much to impair liquidity.” Tory MEPs will be instructed by the whips to oppose the ban when they vote on 28 February. The UK government will then oppose it in the European council.

    So here we have a government which claims to have learned the lessons of the financial crisis, opposing an obvious precaution against insanely risky speculation. How is this possible, when it knows what lax regulation does?

    To understand its position, you must first understand that the government is not managing the economy for the people of this nation. It is managing it for a tiny transnational elite, a kind of global gated community. To the people inside the gates, who fund the Conservative party, who own our politics, the media and the banks, the rest of us are an inconvenience, to be bribed, threatened or fooled.

    The politicians who get to the top in these circumstances don’t just present no threat to the gated community, they actively do its bidding. That is why Tony Blair succeeded where his Labour predecessors failed. Talent, hard work and intelligence all help, but only if they are harnessed to the interests of economic power.

    Governments don’t ask themselves “what can we do that is good for the people?”. They ask themselves “how do we persuade people that what we want to do is good for them?”. The task of both politicians and the corporate press is to convince us that what is good for billionaires is good for everyone but billionaires. This was the thrust of Osborne’s statement to the Commons last week.

    The social isolation of those now in power makes the task easier: they were born into the gated (or moated) economy, and they share its views. Theirs is a different challenge: to disguise their indifference towards the other 99%. They must kiss the babies of the electorate, listen to its complaints, drink its tea – and carry a handkerchief in which to spit. Their interests are not our interests. Their interests are the opposite of ours. If a measure enhances the wealth of the people inside the gates – even if only fleetingly – the government will back it, though it might beggar everyone else. The Treasury’s support of naked short selling is the homage it pays to naked greed.

    An economic war is being fought here. Wealth is being transferred from the poor and middle to the rich at stupefying speed and on a stupefying scale. The financial sector seeks to wring every drop from the productive economy, heedless of the eventual impacts. The government is there to help.

    So what do we do? Look to Cairo. I suspect that UK Uncut – the most coherent response so far to the economic transfer – could be the beginning of something very big: a mass citizens’ revolt against institutional theft. The point is not to overthrow the government: that must be done electorally in the UK. The point is to make it impossible to keep fleecing the nation to serve the elite. We go unarmed into this battle, but it’s the government that’s naked.

    • A fully referenced version of this article can be found on George Monbiot’s website


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