With the British financial markets in meltdown, most of the blame has attached to speculators. In a desperate attempt to be seen to be doing something, the Financial Services Authority has reportedly banned short selling of stocks in “disorderly markets.” In other words, shorting a stock in a normal market is fine but when prices start falling rapidly, the practice will be banned.
This is a foolish, knee-jerk reaction that attempts to have it both ways. For clear explanations of why short selling is an important market discipline, conveying valuable information especially in difficult markers, see here and here. To sum up, the author of the second piece, Andrew Lilico, says, “Let me say this overly frankly: curtailing short selling would be a really really stupid idea, pandering to the most incoherent rantings of incoherent, nay ignorant anti-capitalists.”
As Hans and John have demonstrated repeatedly below, the dead hand of government is responsible for most of the market distortions that have led to this crisis. A regulator in the UK may have just made things much worse, and potentially caused the end of London as one of the world’s great financial centers.
UPDATE 7:40pm: I was unaware that the US had a similar regulation in place until 2007. Andrew Stuttaford argues that it was a good thing.