Thursday, September 18, 2008

Short selling ban was a necessary move

Private companies are not subject to short selling, yet private companies are bought and sold every day and poorly run private companies fail all the time. Public equity markets are slightly different, in that they are designed for capital formation and the spreading of risk (the ownership of a company is spread among many shareholders.) However, short selling is a practice that can be and often is, abused. Extraordinary times demand extraordinary measures and this was necessary. There will be the critics who say that this harms the public equity markets by reducing liquidity. Don't believe them. Watch the volume explode and watch how the publicly traded markets function in a more "normal" fashion, encouraging risk taking at a time when it is sorely needed. It's just a shame for Bear Stearns and Lehman Brothers and their employees that this didn't come sooner.

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