Comment: Short selling bans smack of panic and don't work

If the steepest market fall since the South Sea Bubble hadn’t scared investors silly, today’s shorting ban will.

For those of a certain age, the rules curbing bets against share prices in 2008 were one of the most desperate “they did what?” events of the crisis.

Up there with the collapse of Lehman Brothers or Bank of America’s rescue of Merrills.

But while these are troubled times for sure, they aren’t that bad. Smaller banks could go bust but the giants of Wall Street aren’t crashing as they did back then.

Which is why this ban on shorting troubles me. It gives the impression that we are in a 2008-style death spiral when we’re (probably) not.

Worse still, if it’s intended to keep share prices up, it probably won’t work. In fact, there’s plenty of evidence that it doesn’t prevent shares from falling.

Rather, bans mainly serve to crimp shares’ liquidity, widen price spreads (making it harder to buy and sell) and increase price volatility.

How does that benefit anybody?

Shorts may manipulate their positions to force companies into “real” crises, but that’s only in a tiny minority of cases.

Overall, as profs writing on 2008 for the Harvard Law School Forum on Corporate Governance concluded: “Future observers will look back at this shorting ban with the same kind of wonder economists reserve for Nixonian price controls and other similarly fruitless and costly government interventions.”

Seems it takes policymakers longer than academics to learn from their mistakes.