Banning canaries in mineshafts isn't a kindness

BP has poured 3.5 million litres of chemical dispersants into the Gulf of Mexico to break down oil released by the explosion of the Deepwater Horizon back in April.

Far from being effective, the dispersants have acted to create a caustic emulsion spread over hundreds of kilometres at different depths beneath the surface.  The dangers of dispersants shouldn't have come as a surprise.

Ten years after the Exxon Valdez, an oil tanker which ran aground on Bligh Reef off Alaska in 1989, scientists returned to the area to evaluate the recovery.  What they discovered was a wake-up call for ecological disaster management. 

Those areas left entirely untreated had returned to full health.  Those treated, although clean, were still barren wastelands. Oil is a natural product even if we don't think of it that way. 

The real horror of the Deepwater Horizon disaster will be the oceanic dead-zones caused by our supposed “best” efforts at cleaning.

The problem now is much the same as that during the credit boom that ended so badly in 2008.  If everyone is piling in to subprime debt and making money, the junior fund-manager that calls this strategy into question is going to be pilloried, not promoted.

Which BP executive would stand before the US Congress and say, “We will tackle the source of the oil slick, but we'll leave the escaped oil to the sea because Nature can deal with it better than we can.”?

There is a proposal that some of the cleanup operations be taken away from BP.  This is a good idea.  It would allow for a number of different approaches to be tried and the best ones can then be expanded.

Speculation and contrarianism are all good things and allow for discovery to take place.  In uncertain times you shouldn't trust anyone who claims that there is only one way to tackle a problem.

So what to make of German Chancellor Angela Merkel's decision to ban naked short selling of shares in ten German financial companies.

"Naked" short selling is where an investor (speculator) sells shares in a company they don't own and have not purchased an option to buy.  Their intention is to profit if the share price drops.

Selling a share you have no intention of owning is no different from buying a house you have no intention of living in merely to profit from the capital gain when you sell it.  Prices can rise as well as fall and so short-selling is extremely risky.  Merkel, and other politicians, blame recent market instability on the actions of speculators who “force” prices down.

Understand this: short selling is only around 3% to 5% of all trades.  It acts as a signal to more general investors.

Say you were travelling in a bus at great speed with a lot of other passengers.  You're all part-owners of the bus and the bus-driver has the ability to inflate the tires as he goes.  He keeps inflating because he believes that harder tires are better.  Some of your fellow passengers don't like that idea.  They can sell their shares, and so leave the bus at a loss, or they can try and do something about the over-inflation. 

Perhaps you release some of the pressure in the tires and store up the released air as your “profit”.  Now, if a disaster happens you can hope that, instead of exploding and sending everyone to their deaths as the bus cartwheels across a field, the tires merely tear and result in a minor wobble.  Even better, when the tire is repaired you can use your “saved” air to re-inflate the tire.

Merkel's attempt to hem in investors has had its inevitable result and markets have been even more unstable.  Killing the canaries before they've done their job doesn't make you safe; it just removes your ability to monitor the danger.