We have this idea that the US economy is based on the free market system. The SEC’s new rule against naked short selling for certain companies and entities sure puts paid to that belief.
In short sales, an investor borrows shares of a company, sells them, and hopes the stock price later drops before he has to pay back the shares. It’s a classic instance of selling high, buying low.
In naked short selling, the investor doesn’t borrow the stock first. Less risk, so more reward — if the stock does fall as expected.
The rule has already raised a chorus of complaints from financial services firms that aren’t on the safe list. It also is probably not the right way to restore stability to the market. Granted, the horse is already out of that barn, but the best way the SEC and the Fed could have stabilized the market was to have put the brakes on the bubble in the first place. But oh no — we have a free market, right? No market interference here.
Gretchen Morgenson of The New York Times has a trenchant article on just this topic. She writes:
HERE is a question: Might not the routs, which inevitably follow the manias, be less painful if things were not allowed to get wild and crazy on the upside? Might not the American people be better off with regulators who curb market enthusiasm — whether in the form of errant lending or voracious, ill-considered deal making — when it reaches manic levels, to protect against the free fall, and the bailouts, that ensue?
Since the Fed has no problem with regulating some of the markets some of the time with rules that only apply to certain companies and certain investors, why not drop the pretense of the free market completely and create different regulations that are designed to do exactly what Morgenson suggests — regulate on the upside too?
If that is unpalatable, then when a Bear Stearns, a Lehman, or a Freddie and a Fannie look like they are failing, let the free market take its course.
Comments
Whalefish Says:
July 22nd, 2008 at 11:00 am
Everything is one the universal cause and affect with the psychosocial attributes the wheel turns and we the wee grains of sand take what we can get. It’s the evolution of the race the nature of the beast that pushes the individual into the market after being vanquish from the Garden of Eden after the ice melted and forced a change.
Hence forth the ice is melting once again and the market is overheating the atmosphere and we hear the politically speaking of global warming?
The ethics of the market seem to be problematic as the separation and fair play of Kant and Cristo portentous at best.
Tim Walker Says:
July 23rd, 2008 at 1:03 pm
I’m with you all the way on this one, Patrice. I see these (formerly) big, rich companies “suffering” after their enormous binges and I’m prone to say, “Let ‘em swing.”
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