We are in the mode of dumb panic policymaking.
I wake up (jet lagged) and read that the SEC is considering a temporary ban on short-selling.
Ok - just because this is quick-off-the-mark and the SEC hasn't thought it through I thought I might do a little thinking for our pals in Washington.
Last I looked when I was short a stock the broker borrowed the stock (yes, Virgina you do get a borrow) and sold it. They then had cash.
That cash was not available to me - it was pledged to whoever provided the stock to remove or reduce the risk that the stock won't be returned.
That means it is generally available to the broker (who will generally lend me the stock from their inventory or margin or prime broker clients).
Now there are a few hundred billion of short-sales out there. Probably more than normal - but a lot in almost all markets.
And those short sales produce cash balances of a few hundred billion, most of which are available to Wall Street brokers.
If you ban short-selling those balances will taken away from Wall Street brokers.
That would be rather unpleasant. Last I looked the debt market was skittish and was hardly going to replace that money.
So I conclude that the SEC in their "infinite wisdom" are going to stick the knife into Wall Street and bankrupt the lot of them. For political optics. So they can be seen to be doing something about short-selling.
Its one thing to blame short-sellers for political effect. It is another thing altogether to risk the collapse of the financial system on some dumb-ass policy put up in a panic by incompetent bureaucrats.
Sometimes I worry about America.
PS. I am aware of the limitations on the availability of this cash to brokers. That limitation however differs by such things as the jurisdiction of the client and the arrangements between client and broker.
I am also aware that the SEC does not wish to force short sellers to buy back existing positions - rather just stop putting new positions on. However the effect will not be dissimilar.
If someone can quantify the end effect on broker liquidity I would love to see the model.
But in summary: this is a darn big move with huge financial implications being discussed by the SEC in a panic after meeting with a few congressional officials just before an election. And on the face of it, it will exacerbate the financial crisis.
That is not how policy should be made.