Short Selling Ban Backlash

Market manipulation draws fire.

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As you've heard, the SEC is banning short selling in nearly 800 financial stocks to help "restore equilibrium to markets."

That's code for market manipulation, but if it can stop bank shares from free-falling, the trade-off seems worthwhile—at least for regulators.

Later, I'll bet we'll worry that the government picked one of the most reckless bits of the market and decided to protect it from traders trying to reconcile banking sector abuses with reality. Nobody likes shorts, and there will undoubtedly be some signs of manipulation among bank shares, but blaming shorts for this week's stock market mania is beside the point. The punishment doled out to banks this week is extreme, but so were their inflated risk appetites that spawned reckless lending behavior for the better part of a decade.

Everybody understands the move, but nobody is excited that the government is stepping in to dictate trading. Some reactions:

Paul Kedrosky at Infectious Greed (who is on a roll today):

The trouble is, blaming short-sellers works, as does, at least sometimes, banning short-selling. First, short-sellers are easy targets—people who want things to go down, especially things that you own, must be bad people. Blaming them gives you political, financial, and rhetorical power.

Second, to the extent that people are keeping money out of the market because they are petrified of short-sellers, convincing them that less short-selling is going on (even if it isn't) is an easy way to get more capital back into the market. Granted, nothing has changed, but it's a fun superstition, sort of like sacrificing the odd virgin into a nearby volcano. Or tossing a supposed witch into a shallow creek.

The trouble is, of course, short-selling remains important. They are usually the best-informed traders in an issue, as repeated studies have shown. Their ability to bring prices in line is lost, or at least muted, and that can make subsequent price moves even more wild.

The Big Picture's Barry Ritholtz from last night:

Here is tonite's theater of the absurd SEC headline:

SEC intends to temporarily ban short selling, but it's not clear if the commission has approved the move. Cox is briefing congressional leaders. Separately, the government is seeking congressional authority to buy distressed assets.

This is nothing short of a total panic by people who have no clue what they are doing. And to think, I mocked Russia for being a nation run by market commies.

This is the ultimate bailout attempt, which will have repercussions far, far beyond our imaginations:

1) We suffer a loss of Market Integrity; The US is now a Banana Republic

2) Blatant market manipulation: this is nothing more than an attempt to force markets higher;

3) 60 days prior to a presidential election? This is a none-too-subtle attempt to influence the elections—especially coming on top of the Fannie/Freddie bailout;

4) The coming pop will create a huge air pocket, ultimately leading to us crashing much lower;

5) Expect a huge increase in volatility—upwards first, then down;

We Are A Nation of Morons, led by complete Idiots, making us complicit in our own self destruction.

Lastly, Bloomberg interviews prominent Fed historian Allan Meltzer, who takes a dim view of the government's bailout plan for financials in total:

Federal Reserve historian Allan Meltzer said U.S. government efforts to cleanse financial institutions of troubled loans shouldn't be financed by taxpayers.

"I certainly don't think this is the taxpayers' problem, said Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh. "This is not a place exactly with a great big surplus that can afford to do these things. This is social democracy at its worst.