Times Aren’t ’70s-Bad

by Don Boudreaux on July 17, 2008

in History, Standard of Living

Here’s a letter of mine sent recently to the Atlanta Journal-Constitution:

We can debate just how closely the economy of 2008 parallels that of the 1970s (“Today’s crunch feels like ’70s,” July 13).  But one big difference unquestionably – and happily – distinguishes today from the dismal days of disco: no wage and price controls.  This fact alone goes far toward making our prospects today brighter than they were during the presidencies of Nixon, Ford, and Carter.  No inflation camouflaged by government fiat, and no long lines at gasoline stations or anxiety about finding fuel.

Plus, we’re much wealthier today.  Those who doubt this truth can get any Sears catalog from the 1970s, study it, and ask if they’d prefer to use their 2008 incomes to buy 1970s-era products at 1970s prices, or buy today’s products at today’s prices. Even though nominal prices in the 1970s were much lower than prices today, very few persons would choose the 1970s option.

Donald J. Boudreaux

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Methinks July 17, 2008 at 12:44 pm

No price controls, you say?

In a panicked move to mollify the masses, the SEC just restricted short selling in 19 financial stocks in an attempt to reduce the number of possible sellers so that these stocks trade at artificially high prices. This may not be an explicit price control but it is effectively a price control by way of controlling liquidity. As with price controls, prices lose their information carrying role. They become untrustworthy and meaningless. What's the effective difference? There is talk in the SEC of extending this rule to all US traded stocks.

The Fed has been doing everything in its power to keep the housing market from reaching its real, lower prices by hacking at the interest rate and fanning inflation.

Congress wants to reduce trading in oil futures in order to reduce the price (how they will explain the recent drop in oil price in light of all those speculators still running around is beyond me). Of course, this will have the opposite effect but it's still a price control. Again, price controls through liquidity restrictions.

And, if you watched the two days of testimony by Paulson, Bernanke and Cox earlier this week, you may have noticed for the pressure to do more of the same.

Things may not be as bad as the 70's, but we're headed in that direction.

Incidentally, so quick and panicked was the SEC's new rule on short selling that the brokerages only found out when they heard Cox announce it during his testimony on the Hill. And I'm not talking about small brokerage houses. This piece of information was relayed to me by the stock locate desk in one of the biggest prime brokerages on the street. The confusion that ensued between market makers, locate desks, etc. on the street is mind-boggling. Nobody had any idea what any of this meant and were afraid to short any of the 19 stocks at all – including usually exempt market makers. Look what happened to the stock prices of those companies. The SEC has had to delay implementation of the rule until Monday to work out who can and can't do what.

I don't see any of this as positive news for the future.

EconDev_g July 17, 2008 at 3:20 pm

I believe John Williams (http://www.shadowstats.com/) would argue inflation is still hidden by government fiat.

The only difference being, that said fiat is couched in the language of statistics, exclusions, and twenty years of obfuscation.

SteveO July 17, 2008 at 3:59 pm

So if I actually wanted to, can Dr. B hook me up so I can buy some 70's pants at 70's prices?

dd July 17, 2008 at 4:49 pm

What do you think about the Trade Defeceit now, well not the whole thing but the Imported Oil component. Oil Tripling in Price has shot this way up, how much of that is actually coming back now in Foreign Investment? Its driving the $ down, not good.

we should produce atleast 70% of the OIl we consume or more, I think OIl is an exception to the rule with Trade. IMO

Alex July 17, 2008 at 7:14 pm

"we should produce atleast 70% of the OIl we consume or more, I think OIl is an exception to the rule with Trade. IMO"

As long as we're advocating economic planning based on arbitrary bias, I propose that we produce 137.5785% of the oil we consume, and not one gallon more. That percentage looks good to me!

dd July 17, 2008 at 9:53 pm

Govt. banning drilling is why we only produce 25% of what we consume, in the 70's it was over 70% and near 100% in the 60's.

the problem is, with it tripling in such a short time, we are now sending tons of money out of the country. Are we getting it all back already in Foreign Investment?

Oil is a crucial resource, something we are capable of if the Govt. would butt out of producing for ourselves. The main factor that Defeated the Germans in WW2 was cutting off their oil supply.

Babinich July 18, 2008 at 5:56 am


I thought the short selling message was that naked short selling ("selling" before possession) was the issue the SEC targeted.

If so, isn't naked selling prohibited by current SEC law?

Methinks July 18, 2008 at 9:02 am


Naked shorting is not illegal for market makers, including specialists. They are not required to locate, let alone possess the shares. This exemption is permitted because market makers and specialists are required by SEC rules to provide liquidity.

Everyone else, (who is also providing liquidity by participating, btw) is required to "locate" shares before selling them short. The actual contract to borrow the shares is executed by the broker after the brokerage client executes the short sale. A "locate" basically means that the broker has taken a look at how many shares are available to borrow and allows the client to short the amount it thinks it can reasonably borrow on the clients' behalf. THAT is the current SEC rule. Shorting without locating first is illegal.

On occasion, some of the shares disappear from the borrow market after the client has shorted but before the locate desk at the brokerage is able to secure the borrow. That results in some accidental naked shorting and the brokerage has some number of days to locate the stock before buying in the client. Usually, they're able to borrow the "naked" shares within that period of time. If not, the client has to be bought in. The rules are more complicated than that, but I'm a trader, not a locate specialist, so I don't know them all.

The change in the rule will force the locate desk to actually borrow the shares before allowing the client to short. Now, if the broker locates, and the client doesn't actually short (which happens all the time), the shares remain unborrowed and the clock on the interest is never turned on. Since the lender collects interest on the borrowed shares and the borrower pays interest, if the shares are borrowed before a trade is executed, that clock starts running whether or not there's a trade.

Further complicating the situation is dividends. The short seller owes the owner of the stock any dividends that are paid on the stock. If the trader borrows the stock, but never executes a trade, he will still owe the dividend if he has secured a borrow in case he needs to short.

You can see the inefficiencies this will create – especially if a trader trades hundreds of stocks and has to borrow and release for every stock every day. It will become more expensive to short(in all ways cost is calculated, including time). It throws sand in the gears of the market and prevents efficiency by reducing liquidity. This will be especially true for traders who engage in market making activities but are not registered market makers (there are tax disadvantages to being a registered market maker in stock vs. derivatives). Given the added expense, these market participants won't bother if the short is too expensive. Those stocks will experience lower trading volume and more price volatility.

It has been pointed out that you can short via put options (as one example). However, there are some (usually very small, illiquid and RETAIL driven) stocks for which no options trade and for which shares are already hard and costly to borrow. Those stocks, already illiquid, will see further reductions in liquidity and even more erratic price moves. In those stocks, I've seen the specialist (who doesn't have to locate) sell shares as high as 12% above the previous print just because there are no competing offers. So, that market buy order sent in by some hapless retail guy just cost him 12% plus commission. This is exactly the opposite of a liquid, efficient market.

For stocks for which options do trade, expect to pay a much higher premium for the puts to reflect the added demand. But borrowing shares will be even more expensive, so expect short sellers to simply buy puts instead of locating stock and shorting it outright. Those market makers selling the puts have to sell the underlying stock to hedge their short put position. They can sell shares naked. So, the naked short selling will actually increase instead of decrease! If the borrow or even locate rule is extended to market makers, they won't be able to hedge their short put positions and the cost of puts will skyrocket to the point that it won't be worth buying them at all. No negative sentiment will be allowed to be reflected in the market.

The prohibition on naked shorting is arbitrary and the fact that naked shorting has in the past been used to manipulate stock price is used as an excuse to make it illegal – with exceptions, of course. The SEC really doesn't care about the occasional few naked shorts that result from an honest attempt to locate and borrow the stock or from the liquidity providing activities of market makers. After all, the only reason the SEC cares about naked shorts is market manipulation and a couple thousand naked shares which the client either buys back himself or are borrowed on the client's behalf in a few days are clearly not market manipulation. The benefits of liquidity that short selling provides far outweighs any perceived risk of manipulation resulting from a few accidental naked shorts. Keeping in mind, of course, that because market makers and specialists can short naked all day long, unless there's a huge and rising naked short interest it's highly unlikely that there's market manipulation.

Incidentally, there was no increase in naked short positions in the financial stocks at the time the SEC announced this "emergency action". It's all BS. The move was, according to Chris Cox, "prophylactic". In other words, the move was intended to prop up financial firms' stock prices. And it did – especially because hearing it on TV instead of directly from the SEC threw everybody into a state of uncertainty. You really really don't want to run afoul of the SEC. Shorts immediately began to buy back shares lest some of them had not yet been actually borrowed, creating fake demand for the stocks. This resulted in a fictional run-up in the price of financial firms and the share prices clearly no longer reflected the market's opinion of fair value for them. So, the SEC executed exactly the kind of market manipulation for which you and I would rot in jail if we so much as thought about attempting it. It was a price control.

And that's the issue. Sorry that my response is so long, but it's a complicated issue with more facets than I was able to cram into this long post.

By the way, to stem the decline in the Pakistani stock market, they recently prohibited any short selling at all. It's disconcerting that we're following Pakistan's lead.

Per Kurowski July 18, 2008 at 9:06 am

The real difference could be more, as so perfectly expressed by Professor Boudreaux, that of “no disco”, though perhaps eliminating the qualifier “happily”, as at least in my case I used to be able to dance better in the 70s, anything.

Eric July 18, 2008 at 9:20 am


The government isn't hiding the prices in the Sears catalog… so I don't think that the "Shadowstats" argument applies.

John Dewey July 18, 2008 at 9:58 am

per kurowski: "at least in my case I used to be able to dance better in the 70s, anything."

I was never much of a dancer, per, but I think I was better at every physical activity in the 70's. It's not the music, old man. Our bodies just wear out.

Per Kurowski July 18, 2008 at 12:03 pm

The professor says “our prospects today [are] brighter than they were during the presidencies of Nixon, Ford, and Carter. No inflation camouflaged by government fiat, and no long lines at gasoline stations or anxiety about finding fuel. Plus, we're much wealthier today.

Is the professor really sure about this? I hope so but I have my doubts.

We got the end to the cold war but that has not seemed to served to increase our sense of security… even though I am on a no-call list I have to answer unsolicited promotions several times a day… the illicit sector of the world shows a higher and more robust growth rate than the licit world and so we might be overtaken by the mafia… we are going through a financial mess because we counted to much on the terrain knowledge of the credit rating agencies and they are still our guides…and at any moment someone of us could have his genetic map read and be uninsurable for the rest of his life… and I could go on and on… but let us have some faith in the professor… at least while it lasts.

Cheers… and keep up the stiff upper lip

vidyohs July 18, 2008 at 2:41 pm

"per kurowski: "at least in my case I used to be able to dance better in the 70s, anything."

I was never much of a dancer, per, but I think I was better at every physical activity in the 70's. It's not the music, old man. Our bodies just wear out.

Posted by: John Dewey | Jul 18, 2008 9:58:56 AM"

Not that you should lament to much John:

In many, the power and vitality of the 19 year old liberal body migrates with age to become the power and vitality of the 40 year old conservative brain. We see many such on this Cafe Hayek.

In some, Noam Chomsky-Jerry Brown-Al Gore-Nancy Peloski-Barracks Obama-et. al, such a migration never happens and we see things with deterioated bodies and brains. We see many such feted by the MSM.

vidyohs July 18, 2008 at 3:49 pm

Politics certainly haven't changed.


vidyohs July 18, 2008 at 3:50 pm


Politics certainly haven't changed.

Mesa Econoguy July 19, 2008 at 8:31 pm

There’s one other critical difference here, Don: the 1970’s were a high inflation, high interest rate environment. We’re in a moderate-to-high inflation, low rate environment.

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