I first read the headline in the Guardian this afternoon that the Brits were going to ban short selling. "Wow, stupid move," I thought to myself.
And then it happened here in the U.S.A.
Stupid would be an understatement.
First short selling. Conceptually, it is a little difficult—by shorting a stock or product, a person is selling a stock/product they do not own, and then buying it back. Obviously they are hoping that the price goes down... in effect it's selling high and buying low—the exact opposite of buying low and selling high.
Which has made the pictures of stressed traders on the floor sort of funny... some of these stock traders have probably made a ton of money this week by shorting stock or other financial products. If anyone is getting 'hurt' this week it's the average American's 401(k).
The SEC wants to put a stop to this. The question is why? And what does the SEC hope to accomplish?
Short spelling is not the reason why Wall Street suddenly found it self collapsing this weekend. They did that on their own by buying a lot of bad mortgagees and over exposing themselves to the real estate market. When that bubble burst, some companies—like Lehman went down—while others like Bear Sterns, Fanny and Freddy, and A.I.G. had to be saved by the U.S. Government.
So why does the SEC want to create an inefficient market? It's probably bad enough that the Fed and other Central Banks pumped in a ton of money today. But no why this? It doesn't make any sense.
To no surprise the SEC won't tell us what they're thinking... so I'll guess.
By banning short selling, or so they hope, they'll slow the fall in the stock market. Are they attempting to play politics with policy? Keep the stock market indices higher than they would be naturally to help out John McCain? Or do they actually believe that by banning short selling that the stock market will rise and everything will recover and in three months time they will have saved the U.S. economy? Coming from the Bush Administration... they probably do believe this just how the believed we could waltz into Iraq and everyone would love us.
But here's the problem... it is a pure market manipulation. And market manipulation is a very very very bad thing. Because eventually things will sort themselves out and it will be much worse than what we're going though at the moment.
This is potentially a very sad and bad day for the United States and the U.S. economy. And this is some of the worst policy making in the last 30 years. But then again, if the Bush administartion has been good at anything, it's bad policy.
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