SEC Chairman Chris Cox has apparently decided to ban short-selling for a while. This followed on the UK Financial Services Authority’s decision to ban short-selling in financial stocks until January 16.
The Code of Financial Writing decrees that I’m supposed to condemn this as a politically motivated intrusion into the glorious workings of the market. And maybe it is politically motivated. But, umm, the market’s not really working right now.
In normal times, short sellers obviously provide a valuable service–because they have the motivation to find out and disseminate the honest truth about publicly traded corporations. I’m just not so sure that this applies to financial stocks in times like these. When everybody is this panicked, a bear raid on a bank or securities firm can become a self-fulfilling prophecy. Because the stock is plummeting, customers start fleeing, thus justifying even more of a stock price drop, and so on.
In panic times, you need martial law. Or something like that.
The problem with my argument is that it can be hard to say when normal times end and panic times begin. Some people thought we were at panic levels months ago.
Then there are questions about symmetry. As John Jansen put it:
I want to know why there was not a ban on long purchases in 1999 and 2000.
And maybe the lesson here should be that investment banks have no business being publicly traded companies. They all used to be partnerships for a reason.
But I’m just making the point: Short-selling can accelerate a downward spiral (just like margin buying can accelerate an upward spiral). So curtailing it is not by definition wrong.