What drop in the market? Just legislate that prices will
Topics: Regulation
25 Sep 2008
From: Ervan Darnell
I have been downplaying the significance of the mortgage crisis as a
necessary correction to inflated expectations of real estate values.
That doesn't account for political overreactions that will make the
situation worse. The most obvious example of that is that we are likely
to suffer an economically naive Obama presidency as a consequence (and
even if you like his non-economic policies, his benefiting from this
correction is the wrong reaction).
But Bush isn't doing very well now either. The evidence for that is
coming in every day. After the previous post on the $700G bailout, the
Dems want to use it as an excuse to regulate CEO salaries[3], yet
another price control. The cost of the bailout will go beyond the
initial purchase price into political harm. Then, I see this today:
> SEC temporarily bans 'short selling' in 799 financial stocks [1]
>
How much dumber can you get than that? Short selling is a good thing as
it brings the price in line with reality sooner than later, and many
other useful benefits. The SEC is now trying to deny economic reality,
as if that will fix things. Like any price control, it cannot work
(they already had a shorting ban on Fannie Mae [2] and that obviously
failed).
This case is quirky because they didn't prohibit selling, only short
selling.
Nor did they prohibit option trading[2]. So, they haven't done much,
but merely the trying is worrisome. What will be next?
There are two other negatives that will follow:
1) More rent seeking, as the list was arbitrary. Companies now know to
lobby Congress to get their shares listed or delisted from the "no
short" list. The corruption possibilities are mind boggling.
2) Less reliable markets. If investors don't know when their market
position becomes illegal to clear, they cannot invest as safely. Yes,
the ban is only on new shorts, but if you have a spread position with a
planned short to clear it, you just got screwed. How can you invest
when one leg of your strategy can be broken at any time by Washington whim?
[1] http://latimesblogs.latimes.com/money_co/2008/09/sec-temporarily.html
[2]
http://www.fool.com/investing/general/2008/09/23/the-short-sale-ban-is-a-fiction.aspx
[3] Nancy Pelosi on the 9/23/08 News Hour.
_______________________________________________
Ragnar mailing list
Ragnar@ragnar.kelvinist.com
http://ragnar.kelvinist.com/mailman/listinfo/ragnar
Home