Out of Control Policy Blog

Short selling the rules of the game

One of these things was done by a socialist country in the past two weeks, can you guess which one?:

  • Banned a legitimate use of personal money (short selling stock)
  • Nationalized two mortgage lending firms
  • Nationalized an insurance company
  • Proposed buying mortgages in default from irresponsible lenders
  • Shut down stock market when trading looked to be in a full collapse, and stopped trading again when stocks surged back too fast
  • If you've been following the news this week, then the last one will be unfamiliar for New York City's Wall Street. Russia stopped trading earlier this week on its stock market after it plunged 17% in one day, Monday's drop in the Dow Jones was about 5%. Ironically, after it opened the markets back up again Russia decided to shut them down a second time as their stock market gained momentum too fast.

    Nevertheless, this whole list of government activity smacks of socialism and has treated capitalist principles as only good when things are going ok. While all these actions by the U.S. government are a violation of our trust in them as protectors of our free economy, the ban of short selling by the Fed, Treasury, and the United Kingdom, is nothing less than undeniably despicable. It is now illegal for me to put $5 down on Morgan Stanley going bankrupt, much less trade in the vastly complicated shorting market.

    Essentially, this ban would be tantamount to Vegas limiting bets to only on a team winning outright and forbidding betting against the spread. Sure you could still gamble and make money, but it would strip away a legitimate way of "investing" your money, one that has no real bearings on the teams playing the game. People short selling stock wasn't really hurting companies, it just hurt confidence which effected the buy/sell ratio and that has the potential to hurt companies (like knowing everyone is betting you'll lose the game might damage your self confidence, but wouldn't necessarily). Short sold stock was toying with industry confidence but it wasn't taking capital away from firms. The governments action: undeniably despicable.

    Banning short selling, which ironically is how many of the struggling firms like Morgan Stanley made their billions in the first place, is a failure of government and manipulation of the markets. In a free market the government is supposed to set up the rules of the game and nothing more. They are not to be a player in the action. Now, not only has the government suited up and run onto the field, they have also changed the rules mid-game. In sports we would call that cheating.

    Anthony Randazzo is Director of Economic Research

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    Comments to "Short selling the rules of the game":

    Joe | August 13, 2009, 2:44am | #

    The problem is you're not betting with your own money. Also, the large investment firms also have a good idea when everything is going to tank, and guess what? They game the system by building bubbles which they know cannot last. And when things go south, the smaller mutual funds cannot play the short sales game. Only the rich can. This is unethical. We're changing the rules because the general public is becoming fiscally educated. Our founding fathers warned about bankers running this country, and we the people are taking it back, whether you like it or not. This 'socialist' diatribe is getting old.

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