Economics

Short Sell Shock

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As someone who had been saying for the past few years that things like Nixonian wage and price controls would be considered beyond the pale in a world that, I thought, understood and appreciated some basics of free markets more than it did 35 years ago, well, it's a good thing my jaw has dropped so much on the past week's news that I have room to fit a lot of crow.

Well, my man Mises always said that some interventionism always created the impetus for more and more interventionism, and this month could be fruitfully dedicated to the old Austrian's memory.

It shouldn't have, I know, but the short-selling ban on financial stocks took me by surprise. An observation from Arnold Kling on this matter:

How can short-selling destroy a good company?

The simple answer is that it can't.

First of all, short-selling can't force down your share price. Short-selling only forces down your share price if buyers don't emerge to defend your share price.

Banning short-selling cannot protect a bad stock. If nobody is willing to buy XYZ at a price higher than $.02 a share, then the price at which XYZ will trade will be $.02 a share (or lower). It doesn't matter whether you have short-sellers or not.

What drives stock prices down is the lack of people willing to buy them at the higher price. If the company has sufficient value, there will be sufficient buyers.

Megan McArdle, while agreeing in theory, thinks Kling underestimates the potential dangers of short-sellers:

If short-sellers flood a market, they can overwhelm the buyers, especially when you have a massive credit contraction in the markets.

Stephen Bainbridge also has a good, thorough list of reasons why this ban is stupid and will be of no particular help in solving the problem of massive sky-high piles of bad debt.