Have Short-selling bans helped?

Riksbank has this short research notes section called economic commentaries. I was reading this short note on short-selling Maria Strömqvist. She works for their financial stability dept.

In this short note she explains:

  • basics of short-selling,
  • the policy responses of various countries on short-selling in this crisis (see this)
  • Sweden’s response to short-selling (did not ban it despite pressure from banks)
  • reasons given by people for banning short-selling in the crisis
  • manipulation is not the same as short-selling (though ex-Lehman ex-chief thinks they are same)
  • Finally, Short-selling is an important part of efficient financial markets (yeah they still believe in it) and should not be banned. It helps in  arbitrage and is quite useful to push prices lower when they are not rightly priced.

I don’t know but short-selling is always a puzzle with me. It is rarely used in good times and used extensively in bad times. If rational investor theory is to be believed it should be opposite but fin markets work on the herd principle. And this time when US/UK banned it, who have advocated it all along I knew something is terribly wrong about the way we think about short-selling. Textbook explanation is fine but reality is a lot different.

This paper is a good primer but is too text-bookish.

This paper reminded of another paper by the same authoron hedge funds. In that paper she defended hedge funds sayng they have not caused the crisis and are actually quite useful for efficient markets (again). Recently, Sweden was in news as its finance minister said hedge funds and PE firms are not to be blamed for this crisis.

So, Sweden is emerging as one country which has dared to go different in this crisis. Its policy docs, policies still favor all that efficient market talk. This is exactly what finance people love. I read somewhere (can’t locate the link) that it is pitching itself as the preferred destination for international finance etc. But it has been hurt pretty bad in this crisis as its banks had lent heavily to East European region. I r’ber reading the stuff from Riksbank as the crisis set in, saying we will not be affected, have robust fin system etc. I hope it has learnt the lessons.

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