19 September 2008


The relevant regulators in the US and the UK have both now indulged themselves in the ultimate in knee-jerk reactions.

They've banned short selling in a wide range of stocks. Just to be clear: they haven't banned "naked" short selling, or "abusive" short selling, or closed any loopholes on the existing regulations that govern the practive.

They've banned short selling. Full stop. This is the logical equivalent of prohibiting pessimism.

Here's the SEC's press release.

And here's the counterpart from the other side of the Pond.

I have long believed that the history of the United States breaks down into a series of distinct equilibria. Leaving the colonial and revolutionary eras out of account, there have been three republics.

The first began in 1787 and lasted a little more than 70 years, then collapsed into a period of turmoil and civil war.

The second began in 1868, with the enactment of sweeping new amendments that made in effect for a new Constitution. This second republic lasted about 60 years. It, too, collapsed dramatically.

The third republic was up and running as of 1937, when Roosevelt's court-packing plan induced the Justices to acknowledge sweeping new interpretations for the Constitution. It is this third republic that is now crashing in upon us, and the ban on short selling is a sign of that.

You WILL BE CHEERFUL about stock prices. Washington (and London) command it!

The next logical step is a ban on any trade whatsoever at a price lower than the preceding trade on that asset. Unless, maybe, the asset in question is made out of hydrocarbons, in which case that might be reversed.

A hypothetical television commercial comes to mind.

"Crazy country. We'll sell you appliances. We'll make up prices. We'll order ourselves about like we're in a Three Stooges short. Crazy country. Our rules are ... INSAAAAANE!"

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Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.