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If you don’t know what to do, ban short-selling

German chancellor Angela Merkel joined the ranks of Western politicians who blame short-sellers for market woes. On Wednesday, the German government acted unilaterally to impose a temporary ban on “naked” shorting – that is, selling shares and bonds that are not owned or borrowed. Specifically, the ban is on sovereign defaults swaps, eurozone government bonds and certain German financial stocks.

Banning short-selling – whether naked or not – is misguided. It’s shooting the messenger of bad news. In Merkel’s case it turned into an outright cock-up. Taking such a step unilaterally angered other European Union members, and furthered rumors that the eurozone was on the road to break-up.

Europe’s economic problems run much deeper than speculation. Politicians grasping at cheap populist gestures like short-selling bans are only trying to displace attention for their own cluelessness about how to deal with the crisis. As the Financial Times noted, “Investors now fret that Berlin would not have acted unless it knew something the markets did not. It would be ironic if this misdirected measure had the effect of summoning up the very wolf pack it sought to defer.” Today stocks were down, partially attributed to Europe’s political divisions.  

For more on why bans on short-selling are misguided, see my earlier post here.

One Response to “If you don’t know what to do, ban short-selling” Leave a reply ›

  • One thing is certain…a ban on naked short selling is not a ban on traditional selling, so there's only so much government intervention can accomplish if investors get spooked and run for the hills

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