Words of wisdom

The First Minister was on fine form as he laid into those responsible being blamed for the demise of the Bank of Scotland.

"It was laid low by the actions of speculators in the money markets and action must be taken against them. Other financial institutions will be targeted unless restraints are made to short selling. Short selling is when people enter into selling shares they have absolutely no title to whatsoever, and do it with the aim of making a speculative profit over other people's misery.

"I understand Russia has outlawed it, and that America has suspended it. I would urge our financial authorities to follow suit."

Shorting is to all intents and purposes a gamble that the price will fall. A Put option is also a form of shorting, so I assume that these should be banned too.

Going long is the alternative, and involves betting that the share price will rise, or as the FM might put it:

Going long is when people enter into buying shares they have absolutely no title to whatsoever, and do it with the aim of making a speculative profit out of other people's hard work.

Whilst, admittedly, no firm complains about its share price rising, but a speculatively overpriced share will fall back to its real level which can cause just as many problems for the company that is targeted.

Of course, the real problem is the economists who came up with the wonky theories that allowed the banks to construct crazy trading rapacious lending and borrowing techniques which resulted in huge dividends and staff bonuses* that brought the whole edifice down. Which, of course, means that a large part of the blame lies with HBoS management for allowing such an exposure to arise in the first place.

But, let's not mention that, shall we.

If shorting and margin trading is banned then the liquidity in the market will drop significantly, meaning that it becomes harder to sell, hence depressing prices further.

Reaching the point of equilibrium will be very painful, especially in a falling market, and if the economy is prepared and able to take the pain then banning shorting thereafter makes some sense, but only until new, more complex, and less quantifiable derivative techniques replace shorting.

In short, we have a soundbite that says nothing, and has offers no solutions that can be effected, whilst calling for more chaos to be injected into the system.

Just remember the basic rules: no one forced the sellers to sell or the buyers to buy.

* I seem to recall HBoS being praised by the FM for making such big profits and paying such large bonuses and dividends.