Will Hedge Funds Rule The World?
Despite the bold step from the Germans to ban naked shorts, European regulators took another indecisive stand today to wait and watch, as punters hammered down the euro by yet another notch.
One of the reasons for this indecisiveness, is apart from the Germans, none of Europe’s big powers have put their houses in order after the sub prime crisis. Last September the German constitution was amended to restrict long term debts as a result of which German Governments are forbidden from running a deficit of more than 0.35% of the GDP by 2016.
By contrast, France’s deficit stands at a whopping 7.5% of the GDP and further expected to rise to 8.2% during the current year. Though Sarkozy has promised to bring it down under the Maastricht treaty norm of 3% by 2013, everybody knows that it is a tall order that may never be meet. Other EU nations from Italy to UK to Austria hastily announced budget deficit cut proposals mostly due to being worried about the fate of their bonds.
So does this mean hedge funds are firmly in control of the situation and have every right to trash Europe and Euro to junk grade? No. Budgetary deficits never have been a deciding factor in the destiny of nations. It is growth and bold investment policies, adhering to new technology and embracing external investment for productivity that matters.
Spain and Portugal were doing fine with bold moves on non-conventional energy, when the needless debt controversy that started with Greece, got out of control and consumed them. Even Greece got affected by induced volatility in the shipping business,can recover quickly if volatility ends and it can again leverage its strengths in shipping and tourism.
Wall Street’s investment banks have realized that hedging and shorting are the easy way to profits, instead of lending. Whereas tax on Bank profits will not serve any purpose, a marginal transaction tax on short-selling will help, coupled with ban on naked short-selling across the board from currencies to commodities.
If risk taking is not coupled with accountability, the excess cash flow with Banks is going to create volatility either in the currency or bond markets or in shipping, commodity trade, oil or gold. If this volatility is not controlled like Merkel is attempting to do, it will destroy the foundations of EU and rest of the world.
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