Today the NYSE and NASD offered new rules on short-selling, often blamed for the market plunge. That view is so pervasive that even Jon Stewart has been hammering away at the evils of short-selling.
But short-sellers are not evil, John Berlau writes in a blogpost today for reasononline.com. If more people had paid attention to the shorts on Lehman Brothers, Fannie Mae and Freddie Mac, much of the disaster may have been averted. Jim Cramer does a major mea culpa on short-selling during his public flogging with Stewart earlier this month, further perpetuating the short-selling-is-evil meme.
Unfortunately, Cramer seems to have influenced Stewart and his writers to spend more time bashing shorts. On a Daily Show episode a few days after the Stewart-Cramer confrontation, correspondent Samantha Bee lampooned the supposed evils of short-selling. Her segment featured a CEO who likened short-sellers to people who take out fire insurance on certain buildings and then burn them.
Short selling is certainly a factor in the market decline but is far from a primal cause. The old uptick rule, which said short-sellers can only short a stock on a move up in price, certainly put brakes on downward movement. The SEC killed the rule in 2007 and investors have been clamoring for its restoration help limit volatility; in the fall of 2008, the SEC instituted temporary measures to curb short-sellers. On April 8, the SEC will take a fresh look at the uptick rule and figure out how to re-write it for today’s decimal-based marketplace. Reuters also says the commission is considering circuit breakers for individual stocks. But changes in rules for short-selling won’t do much if investors don’t feel Treasury and the White House have viable plans to restore this nation to economic health.