Banning Terrorism

I have a nasty feeling that Christopher Cox watches Jim Cramer. Today, Cramer started waxing conspiratorial about the dastardly types who would be so unpatriotic as to sell investment-bank stocks:

"It could be financial terrorism. What a great way to take down America. It’s a financial national emergency. There’s someone who wants to bring down capitalism. No one’s listening to me! To ban short selling is wrong. Unless you have reason to believe that it’s a force which would use physical terrorism which is using financial terrorism."

And lo, later that same day:

The Securities and Exchange Commission took its most aggressive assault against bearish stock bets by stating its intention to issue a temporary ban on short-selling.

This is not a good idea, see Paul Kedrosky and John Jansen explain; they will be joined by many others soon enough. Justin Fox attempts a weak defense ("a bear raid on a bank or securities firm can become a self-fulfilling prophecy"), but the fact is that a ban on short selling isn’t just a bad idea in and of itself, but it will also have very little practical effect. If you want to bet that a certain stock is going to fall, there are lots of ways to do that (like, say, buying put options), and the Law of One Price will take care of everything else.

I think that what the anti-short crowd largely fail to realise is that you don’t need any sellers at all for the price of a stock to drop. If a stock price is falling, that doesn’t need to be because lots of people are selling at any price; it’s just as likely to be because no one is willing to buy at a price similar to where the stock was trading yesterday. In a bear market, the key people to keep an eye on aren’t the sellers but the buyers: it’s the buyers who are the price-setters, and when they go away — as they’re liable to do, in times like these — stock prices can plunge dramatically even when there aren’t any shorts at all.

Of course, no one’s interested in the details of market dynamics right now: much better to point fingers and Take Decisive Action. At least that way, if the market continues to fall, it’s harder for other people to blame you for being asleep at the wheel.

Still, I’d love to see what would happen if Osama bin Laden were to release a video claiming credit for all the recent market turmoil. If Cramer is right, that alone would be enough to cause a massive stock-market rally, no?

This entry was posted in stocks. Bookmark the permalink.