Why intervention doesn’t work

This week Germany has announced a variety of measures to combat what it regards as unfair manipulation of markets by those in a position to short sell a variety of instruments. Once again this typifies the attitude that it is the market that is at fault and not Central Banks and Governments. I find it somewhat incredulous that this has extended to the sales of certain financial stocks, when a glance at the market shows that the Dax is still up on the year. It begs the question what would happen if the market actually did turn negative. The history of intervention is awash with failure down the years and whilst they often create temporary respite, the dominant theme and therefore trend that the market dictates usually quickly re-asserts itself. When the Sec banned short selling on Sept 19 2008 a 450 point one day rally in the Dow to 11,500, saw the market then collapse to 7900 just 3 weeks later. Obviously those naked short sellers couldn’t have been the reason. Neither for that matter, was the panic and huge falls of May 6 this year the result of a fat finger as was muted at the time. Thus far they cannot find a reason. I can give them one. Panic and a complete lack of faith in the ability of Governments and regulators to get there act together.

Once again the powers that be fail to see the folly of there own policies. The faults in the Euro zone are obvious to all apart from those who hang onto a flawed dogma. The market was led to believe that the Greece bailout was to the tune of 30 billion, but it didn’t believe this and punished Greece and the Credit Default Swap market. Then, low and behold the bailout suddenly becomes 100 billion, with another 450 billion plucked out of thin air in case there was any other countries being economic with the truth about there attitude to debt. Is it any wonder that the currency fell?

The reality is that the markets are there to provide the reality check and expertise in understanding the fault lines and weaknesses in the Global economic system, and whilst markets overshoot when panic sets in, prompting cries of the evil forces that would destroy, the regulators and politicians are happy to see markets overshoot equally when the outlook is viewed through rose colored glasses.
Therefore whilst some measure such as providing circuit breakers to excessive short term falls makes sense and moves to take certain OTC markets into the exchange traded world can also be viewed as a positive, more blanket measures to curb what is regarded as rampant speculation are counter productive. The irony of the latest Hedge Fund directive from the European Union, when viewed against the move to Mifid which has caused large scale market fragmentation in exchange traded instruments and the creation of dark pools is obviously lost on them. All politicians and regulators would be best served to be reminded of the law of unintended consequences before looking for someone other than themselves to blame.


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