What's Good for the Goosed Should Be Good for the Goose

by Don Boudreaux on December 2, 2005

Cafe Hayek’s good friend Andy Morriss sent this well-aimed letter to the Financial Times:

Sirs,

You report that France just “discovered” that its national debt was twice the amount it previously reported, a discrepancy due to “off-balance sheet public sector pension liabilities.” (“French debt hangs over heated pension debate,” 12/1). When Enron hid liabilities in off-balance sheet entities, short sellers quickly brought the company down, triggering its bankruptcy and criminal investigations into its officers’ fraud. Unfortunately, the French public cannot sell M. Chirac’s government short and so are stuck with him until 2007. What a shame that politics lacks the accountability of financial markets!

Andrew P. Morriss

Galen J. Roush Professor of Business Law & Regulation

Case School of Law

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alexandre delaigue

In this case, it is simply not true that politics lack the accountability of financial markets. french debt can be sold by shortsellers instantly : they don't seem to do it, even after this so-called discovery.

Maybe the new figure of state debt is as meaningless as the former one; maybe this "new" information was contained in bond prices for a very long time; anyway, financial markets do not seem very disturbed by the level of french national debt, and non-french bondholders (who possess more than 50% of french gov. debt) still buy it. The french government is certainly inept; but if you think that markets are usually right, you must think that it will easily pay its debt.

Noah Yetter

You're missing the point. When financial markets reacted to Enron, the company was destroyed. Even if French government debt suddently became worthless, the French government would still be there. That is the sense in which is it unaccountable.

spencer

The reason that Enron was destroyed is that the market quit lending it new money. If the market quit lending the French government new money rest assured that the government would fall.

John P.

I just wish he hadn't written, "short sellers quickly brought the company down[.]" I realize that that can be a convenient shorthand for what actually happened, but expressions like that contribute to the public misperception that short sellers somehow control the market (just as speculators are somehow able to drive prices up).

Andrew Morriss

You can sell French debt short or you can charge the French government more to borrow, but you can't sell the politicians short. You can't effectively stop lending France money either, since the government controlled international financial institutions will bail out France. I think those are important distinctions between the two kinds of markets. (Also, please keep in mind the limits on letters to the editor in terms of space to develop nuance...)

I am not sure about John P's objection to "short sellers quickly brought the company down" - short sellers did create market pressures on the stock and that resulted in the stock price falling to the point where the various SPE transactions (Raptors, etc.) were not sustainable, which led to Enron buying the SPE vehicles from LJM2, which led to Enron consolidating the SPE vehicles onto Enron's balance sheet, which led people to sell the stock (vindicating the short sellers), etc.

Andy Morriss

John P.

Andrew Morriss writes that "short sellers did create market pressures on the stock[.]"

That is my concern (or perhaps question). How do short sellers create market pressures any different from the pressures created by any other sellers? When more people sell, the price goes down. Sales by short sellers have no more impact than sales by anybody else (it seems to me).