In Defence of Short Selling

I have an op-ed in today’s AFR arguing against the ban on short selling, which is reproduced over the fold (text may differ slightly from the edited AFR version). 

Richard Heaney from RMIT provides the other side of the argument on the same page.  Heaney concedes that banning short selling makes no sense if the market is behaving rationally, but questions ‘whether the equity market is behaving rationally at present.’  I would argue that you need to be consistent in your choice of behavioural model.  It makes no sense to argue that the same investors who were rational one day are suddenly irrational the next.

Macro Man, channeling A E Houseman, puts the case against short selling restrictions more poetically:

Smart lad, to turn the other cheek
And hide as regulators seek,
A culprit for the tempest’s wind
And those that profited and sinned

By selling as the tide went out,
Revealing who was left with nowt.
No more, your selling of the banks
Neither the Brits’, nor else the Yanks’:

Now you will not swell the rout
Of long investors getting out.
The emperor’s new clothes can stand
Unmolested by your hand.

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posted on 23 September 2008 by skirchner in Economics, Financial Markets

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