On Fri, Sep 25, 2009 at 2:28 PM, c b <[email protected]> wrote: > CB: If I follow you and I understand what shorting is, it doesn't seem > to me that the shorters dampened or amplified the trend of the bubble. > > If shorting is a bet that the price will fall it doesn't lower or > raise the prices does it ? In the context of a bubble , it just > anticipates that the bubble will bust , and prices will fall. ? > > Please correct me, raghu.
I am not sure that we are in disagreement here, but here's my take. Speculation, long or short, is a trend-amplifying phenomenon. During the bubble days, most speculators were taking long positions i.e. making speculative investments in real-estate and real-estate-related securities. For e.g., they may buy homes and 'flip' them overnight. Or sell CDS protections on mortgage pools. This made the bubble bigger. Recently during the bust period, speculators were making the opposite bet. Traders like Goldman Sachs, John Paulson's hedge fund all bought CDSes and in the act of doing so, amplified the price declines in many ways. For e.g. some of the counterparties that sold them the CDSes went bankrupt and their assets had to be sold at fire-sale prices further decreasing their prices and so on. It is true that if a speculator takes a short position in the middle of a bubble, they will act as counter-cyclical trend-damping agents. But it is an empirical fact that few speculators actually do this. And those that do fail quickly and disappear. Speculation, in practice, is always pro-cyclical and inherently destabilizing and destructive. -raghu. -- Puritanism: The haunting fear that someone, somewhere may be happy. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
