Crippled by space money

In the South Park episode Pinewood Derby (originally aired 15.4.2009) the countries around the globe get their hands on a pile of what they think is stolen space cash. When the Intergalactic Police comes to make inquiries about the cash, the countries deny knowledge of such money. Instead they go on a spending spree not realizing that the cash actually holds no value but the value the countries themselves give to it. Amidst the folly, Finland is the only country who would like to come clean. As a result Finland faces the fate of an unwilling martyr, whereas the rest of the countries later end up realizing that through all the lies they were in fact condemning themselves to a life without a possibility for real growth.

Somehow, all of this sounds awfully familiar.

A huge pile of space cash as depicted in the South Park episode

What we're now experiencing in Europe is the result of another type of space money. Greece, most notably, did what the countries in South Park did: it lied. In other words, it misrepresented its fiscal statistics in order to join the party and get its share of the space money. As a result it got money for a cheaper price that would have been fundamentally justified - just because it was part of the monetary union. As years passed, the illusion of a steady source of money led to deeper debt, which would eventually explode into a myriad of problems for the neighbouring countries as well.

Just like in the real world, the ultimate breakdown didn't occur all of a sudden in the South Park episode either. In the television series, as countries such as Mexico and Japan were spending huge amounts of money on water parks and giant robots, the Intergalactic Police expressed suspicion. Still, the nations kept lying and were thus sweeping the issue under the carpet. The constant yet obviously inadequate attempts at bailing out the troubled economies could be considered as a real world equivalent to this: lending money to the troubled economy can in fact be just postponing the inevitable.

Since a financial breakdown is an unpleasant scenario with a highly unpredictable outcome, it's tempting to try to keep it away for as long as possible, even if it would be likely to make it even worse in the end. No one wants to be the one to cause an economic crash or to be a party pooper. Accordingly "not on my watch" may in practice be a major guideline for many politicians: if the problem culminates after their watch they might not be the ones to blame.

In South Park, Finland tried to "spoil the party" by bringing the downward spiral of lying to a stop, but the other nations literally shot the messenger before it could act. This was undeniably bad judgment and a disaster not only for Finland but for the rest of mankind as well. In our actual debt crisis, Finland has also taken the role of a troublemaker of sorts by demanding collateral from Greece. Greece and Finland even made a bilateral deal about it four weeks ago. Even if its idea of using cash as collateral for cash seemed absurd to begin with and was abandoned as such by the rest of the union, the underlying message might have been a bit different: the whole bailout is an act of folly, since Greece will default any way.

Greece's default is just around the corner. One of the few questions remaining are what would be the best time for the default to happen and when will it actually occur. An essential factor related to the latter question is how the timing will affect the other troubled economies like Portugal, Ireland and Spain. In any case, postponing has already been going on for 1,5 years and banks have had plenty of time to react to this, so couldn't it already be time to let go and just recapitalize the banks where necessary?

The people in the world of South Park were put to the test when they got the space money, and they failed miserably. As Greece falls, EMU and the euro will be put to the test as well. We'll probably do better than they did on South Park, but it still might be a bumpy ride.

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Does short-selling make a difference?

Short-selling refers to the practice of selling securities like stocks without owning them in the first place. The seller just borrows the stock eg. from a broker to be able sell it, then tries to buy the stock back cheaper in order to give it back and make money out of the process. In so called "naked shorting" the seller doesn't even make that the security can be borrowed. Needless to say, it is a risky process especially considering the potentially limitless losses a short-seller may have to endure. But it can result in significant profits as well.

The thing that makes this a timely topic is the fact that Italy, France, Spain and Belgium set a ban on short-selling two weeks ago to calm the plummeting stock markets . A couple of days ago, they decided to extend the ban for probably at least till the end of September (see Reuters). Were the bans a good decision? An average person usually finds short selling a crazy, speculative and detrimental practice that should be banned not only for a limited period of time but permanently. Many people working in the field of economics on the other hand think that short-selling makes the market work more efficiently and should never be banned. But does short-selling actually make a difference? And if it does, why, how and when? Let's have a look.

An equal selling offer and a buying bid - this should result in a transaction, right?

Starting with the facts, both the people against shorting and supporting shorting can be seen as having legit points. Firstly, like the layman sees it, trying to make money out of falling stocks is not productive for the society in general. On the other hand neither is regular trading. Secondly, like those who support short-selling assert, shorting does support market efficiency. To have a transactions you need someone who is willing to buy and someone who is willing to sell at that price. Anyone can buy shares even if he or she didn't own any, but to be able to sell, you have to own shares of that certain stock. In other words, without short-selling there is much more potential to make a bet that a stock will rise than to bet that a stock will fall.

This partially unilateral nature of a market without the possibility to sell short has a couple of implications. For one, it means that there will be less people willing to sell. This means that the spread between the buying and selling bids increases, which can be seen as making transactions more expensive - in other words the stocks become less liquid. What's more important is that without short-selling, bubbles could easily become bigger, as many of those who would want to bet on falling prices simply wouldn't be able to do so. On the other hand in the case of falling stocks, selling short can make the prices fall unnecessarily deep. Accordingly selling short can make a difference in terms of how stock prices behave. That on the other hand might affect how tempting it is to start trading on the stock market or how the wealth gets redistributed eg. in times of crises.

But does that matter much to the layman who doesn't have a dime invested in the stock market? It might. Stock market doesn't exist in a vacuum, but rather reflects the confidence in economy in general. The bigger the bubble the stock market experiences the bigger the general downfall may be, and the more dramatic effects it may have on the real economy - thus also affecting the life of the layman. In that sense, short-selling can be good for everyone. On the other hand, in a bearish market it might make the overreactions at the lower end more deep and thus cause unnecessary damage to the real economy, which would make short-selling bad in that situation - even though studies haven't found many signs of this.

Short-selling does make a difference for all of us. Especially thinking about overheated markets (like in 2007), I think it's better to always allow short-selling than have it permanently banned. Still, I'm not sure if bans are always a bad idea either. If imposing a ban on short-selling ever makes sense, it should probably be at times when the stock markets are being hit particularly hard - like it now has been.

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World in turmoil

Just a couple of years ago perhaps the most major subject of global debate at least from a European perspective seemed to be global warming. The reason for this increased interest was probably largely the fact that on the surface economy and life seemed to be developing so smoothly that there was enough mental resources to concentrate on something that's below the surface; something that seemed to call for serious long-term planning. Now, even with some small glimpses on the subject we get especially through the misery and famine caused by the drought in East Africa, several other more acute themes have taken over.

The world is in turmoil. As the death of one man caused the whole Arab street starting from Tunisia to stand up and demand for proper human rights for the average citizen, Europe is also starting to face more riots that are fundamentally stimulated by immigration-related social segregation, latest of which we've now seen in London - riots that were also initiated by the death of one man. On another front, the supply and demand of oil have reached the point where extracting oil from for example the bituminous sands in Canada has become lucrative despite the expensiveness of the process. Utilization of oil is thus reaching its final frontiers, while another form of energy, namely nuclear power is facing serious opposition and even shutdown plans eg. in Germany due to the terrifying aftermath of the tsunami that hit Japan in March this year.

Still, the economy is currently taking the biggest headlines in the western world. Whereas many economies in the East, most notably China are still rapidly developing, the economies in Europe and the United States are facing serious issues with debt and insufficient economic growth. A week ago we got a significant indication of this: one of the three major credit rating agencies Standard & Poor's downgraded the rating of United States from AAA to AA+ for the first time ever. This change, even though perhaps not that big per se, is historical and might be a sign of what's to come.

'World sucks', a statement painted on a stone in Athens during the 2008 Greek riots. (Picture taken on 29.12.2008)

Environment, democracy, culture, energy, finances - they are all important areas of how the human world functions. The politics, economy and social relations around the world are becoming more global year by year, which causes local troubles to span across the globe more easily. The philosopher Hegel once said "periods of happiness are empty pages in history". This doesn't mean that mankind would need wars, but sometimes difficult times can result in something better in the end. Accordingly, the interesting question is, how the world will appear once things settle down.

On a global scale, the economical turmoil might have a favourable outcome in the end: a more equal world, with a wealthier east and hopefully a more balanced financial system everywhere. The disturbance in the Arab world should also finally result in sounder, more democratic societies. The question is just when and how this will exactly happen, but like we've seen, the ease of spreading ideas through modern technology can give a serious boost to potential revolutions.

What's potentially more unsettling in the longer run are the subjects that are not currently hitting the headlines. Global warming (whether caused by mankind or not) might have much more dramatic and seriously detrimental consequences at least in some parts of the world, even though I don't find widespread or large scale problems very likely. But how about what will happen when the global economy is back on track again? The demand for oil will increase, and if we've reached the peak in oil production, the prices might easily skyrocket to levels that are ultimately unaffordable by both individuals and businesses alike. Is the global infrastructure really prepared for that?

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Greece and bankers should take their responsibility

Greece has agreed to accept the bailout terms. In other words, it accepts taking the helping hand. It is a little bit peculiar to think that the whole process could have been depending on Greece's approval. It is obvious that with or without a bailout, the crisis will have a serious effect on the lives of ordinary Greeks. Yet based on common sense, one would think that the bailout would make the bumpy road of the upcoming years at least a bit more pleasant. So why shouldn't Greece accept the terms? However, the other countries in the eurozone would have at least two reasons not to...

1. Greece has enough assets to pay the debt off?

The first, yet perhaps less significant reason not to support Greece is partially moral. Why should we support a country, who cheated its way in joining the EMU? Or should we support their ridiculously low average 53 year retirement ages? Or the pensions that the civil servants' daughters are allowed to collect - civil servants who themselves practically can never be fired? Other curiosities like the bonus for arriving to work on time, 14 month annual salaries or the computer usage bonus basically remind me of the rather silly looking evzones of the presidential guard (on the right): is this the kind of circus other eurozone countries are financing?

Of course the most obscure practices in the Greek economy will most certainly be dealt through the terms of the bailout. And the crisis could have been mostly avoided, with a tighter control on Greece joining the euro or preventing it from getting into this much debt. But now this is the situation we have to deal with, so the question remains: should Greece have a greater responsibility for the problems that it has caused by itself? Although control will probably be tightened due to these experiences, the bailout gives an unconstructive message: if we end up in serious trouble, the others will help - so why not continue our irresponsible economy?

If a country didn't have any possibility to deal with its debt, then forcing more responsibility isn't really an option. However, is this really the case with Greece? According to Financial Times, Greece has properties of over 300 billion euro. If this is true, from what I've understood, this is relatively unmatched in most western countries. Iceland has endured significant losses when Icelanders have had to sell their possessions at low prices due to their crisis. Why shouldn't Greece also need to sell some of its possessions - especially if it really has the assets to do so? Couldn't this be a part of the bailout terms?

2. The bailout is supporting the banks

Another factor is that the bailout is basically supporting the creditors, who took a risk when loaning money to Greece. Biggest of the creditors are German and French banks. From what I've understood they might be the biggest creditors even in comparison to the size of the German and French economies, which would mean that Germany and France benefit the most from the bailout. Can this be right? There are also other creditors, some of which are even outside the eurozone. Do we also want to support them?

The purpose here is of course maintaining economic stability and credibility. But couldn't it be done without giving out the message that banks are free to take risks for profits, but the bigger losses will be socialized anyway? Couldn't the debts be organized in such a fashion that the eurozone countries would get shares of the banks that they are basically supporting? Thus, the current owners would have to face the realized risks, but the economic system would be left almost unharmed.

=> Co-responsibility?

Grasping the entirety of the situation, and evaluating the possible scenarios caused by various courses of action, is of course very difficult. The motivation for the bailout is not saving Greece per se, but maintaining economic stability. However, for the aforementioned reasons the current bailout seems morally wrong and transmitting all the wrong messages. Why should the eurozone pay for the mistakes of Greece and the banks that gave Greece loans? Shouldn't at least part of the liability be pushed to that direction? If Greece would sell its possessions for the worth of even 50 billion, and euro countries would receive shares from the banks they are basically financing, the whole crisis would be a far better lesson in economic morals.

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