You think complex financial instruments will set you free?
‘Hedge fund’. It has a bucolic feel to it, and that’s the way they want us to think. ‘Hedging your bets’ means trying to minimise risk. If a vineyard wants to know where it stands, they could sell the 2013 bottles on the futures market – before planting the vines This will give them money to buy more land or vines up front; and a feeling of security about the future. It’ll be a fixed price, whether that year’s wine is liked by the critics or not. He hasn’t eliminated risk, just let someone else take it on. If you were to send Soviet Beret £9 for the next Thee Faction LP, which hasn’t been recorded yet, that would be the same (especially if you believed that you could flog it on eBay for £10 afterwards). Futures are the simplest form of derivative. The derivatives market is so called because the cash is ‘derived’ from another transaction. (The ‘spot market’ is where goods and money change hands at the same time).
This everyday story of country folk is a long way from the reality of what hedge funds get up to. Some are so bonkers they need a bank of linked computers to work out the odds. Nobel prize-winning mathematicians have been sucked into the City to feed this flock of seagulls of ‘financial innovation.’ And the sums of money that they deal with are friggin’ trouser-boggling. Hedge funds are already playing with $2 trillion of your money. Your pension. Money from your council. The fees you pay at University. There are $600 trillion of derivatives just floating around the globe. Marx called this ‘fictitious capital’. He’d flip if he could see the figures and think he’d been ignored. By way of comparison, the world produces less than $50 trillion in new goods and services per annum.
The scale of operation is bigger but the principle is the same as in our vineyard. The vineyard didn’t want to gamble on whether the 2013 harvest would be popular. But that meant somebody else did take a bet – the hedge fund. That’s what hedge funds do – bet with other people’s money (and a wee bit of their own). And bets can get more and more complicated. Ever heard of forecasts, trifectas, jackpots, placepots or pool bets? These are all ways of betting on horses. Usually they make it possible to win more money for a smaller stake. (This is called ‘leverage’ in the financial ‘markets’.) But you need your horse to run faster than the others. Or, conversely, bet on which horse comes last…
Hedge funds bought shares in Northern Rock thinking it would be sold, as it was, to that magpie Branson this week. But they actually brought the bank to its knees in the first place by ‘short-selling’ its shares.
Short-selling is a practice where a capitalist borrows 10 shares worth £100 on the expectation that they are going down, so that if he is right he can buy them back for £80 and keep the other £20 as profit. This is the opposite of ‘going long,’ when a capitalist buys a security in the expectation that its price will rise, and can keep the extra as profit if right. The Financial Services Authority has recently demanded that the bastards ‘short-selling’ company shares should be identified. DUUURRR! It’s the hedge funds. Hedge funds are the worst sort of capitalists. They will tear a firm to pieces if it makes money and then put it back together again if it makes more money. They’re like a bloke that shouts ‘fire’ in a cinema then loots the dead bodies after the stampede.
Capitalists argue hedge funds can make things happen. Share prices go down because hedge funds sell, and not for any other reason, they claim. Sounds like pirates to me. We in The Guild believe that capitalism is an inherently unstable system, and the operations of hedge funds and other speculators are merely the executors of the market forces through which the laws of inefficient chaotic capitalism work. Markets sometimes move in the ‘wrong’ direction’ – the opposite directions to the economic ‘fundamentals.’ (Whatever they are and whether or not they exist.) These are the Bubbles. Bubbles have been a feature of capitalism since its central tenets were first starting to develop. For instance during the 1630s Northern Europe went crazy for Tulips. A rare tulip could sell for more than a whole farm. Why? Because each speculator assumed that, since prices were going up, they would be able to get more for the bulb than they paid for it. And why were prices going up? Because people were buying bulbs. Much like the entrenched belief in the UK , the US , Spain and Ireland that house prices would rise forever. Now Capitalism is in crisis hedge fund managers fear that the printing of money to help ease the financial crisis devalues money. Hedge funds are going after ‘hard assets’ like mining and land in the emerging economies, so the argument that investments drives jobs is horse-shit.
Can speculators make money by putting up prices or destroying the livelihood of firms? Some argue that it’s all a game using sums. If one speculator buys a piece of paper and makes money, then somebody else must have sold and lost money. Certainly society as a whole is not made one penny richer from speculation, a parasitic activity that burns up real wealth. But if there are a group of people with inside information such as hedge funds, then they can profit at the expense of the savings of widows, orphans and others not in the know. You.
Hedge funds are not just gamblers. They are also the bookies. In addition to a share of the winnings, (made with other people’s money) they charge a management fee. As we know, whichever horse comes in first, the bookies always take their cut.
Speculation does not cause shortages, but shortages can lead to speculation – which makes the shortages worse. Think of ballast in a ship’s hold. If the sea were calm, there wouldn’t be a problem. The storm is the cause of the problem. But in a storm the ballast can punch a hole in the ship’s hull and cause disaster. A wall of money can make things happen, but only when they’re prone to happen anyway.
Let’s take speculation in oil. Demand is outstripping supply. Twelve years ago oil stood at $10 a barrel. Oil companies therefore couldn’t be arsed to search for new sources of supply, and the western world guzzled petrol on the grand scale. Nobody knew how much oil the world would want in 2012. Now it’s panic stations.
So the problem is capitalism, not speculation. Prices go up anyway because capitalism is unplanned. Capitalism inevitably creates shortages at some points and gluts elsewhere. Firms go bust and workers lose their jobs because that’s how capitalist ‘competition’ works.
Capitalists believe that their theories of speculation and investment are be judged by its predictive power. We in The Guild believe a theory is to be judged by its explanatory power. The first thing we have to do if we don’t want a world war over resources is smash the hedge funds. This kind of sharp practice has to stop. Now.