speculators

Best Way to Curb Irrational Exurberance?

by Fred Smith on July 28, 2009

in Deregulate to Stimulate, Economy, Precaution & Risk, Regulation

Zachary Goldfarb, a Washington Post staff writer, discusses (p. A10, “SEC Moves to Limit Short Sales of Stocks”) this SEC proposal – sympathetically.  The article is naïve – buying the complaint of “High-profile Wall Street executives” that short sellers “played an outsized role in crashing the stock values of several major financial services companies.”  Now, it is certainly true that when an asset value is falling, some will anticipate further declines and sell short – just as many will anticipate that an asset whose values are rising will rise further and buy long.

But in politics, as elsewhere, while success has a thousand fathers, losses are orphans.  Thus, many clamor for curbs on short selling, but there are few calling for curbs on those betting on things still going up.  That is we critique irrational exurberance but we penalize only rational prudence.  The story betrays this bias wonderfully in a telling quote: “The SEC [proposed rules are]… making it more difficult for speculators to pounce on a stock when it is already declining sharply.”  (italitics mine).

Imagine SEC rules designed to make it more difficult for speculators to pounce on a stock when it is already increasing sharply!

When markets boom, politicans take credit.  When markets tank, politicians blame the speculators.  Unfortunately, this bias means that Congress may further cripple the market’s ability to stabilize, to ensure that all information positive as well as negative reaches the market price.  Suppressing information is a bad deal – in civil societies and in the market.

Financial Regulators Not the Answer

by Iain Murray on September 18, 2008

in Economy

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.