One of my favorite free-market economists, CNBC’s Larry Kudlow, writes that it was a “terrible idea” for SEC Chairman Chris Cox to ban short selling in an effort to keep the stock market from sinking even lower.
Short selling, or trading stocks in such a manner that you are effectively betting that the share price will decline, provides a balance to traders who (all too often) put too much faith in corporations’ own friendly reporters and media releases. In Kudlow’s words, short sellers “keep the market honest,” preventing stock prices from inflating past their realistic worth.
In a broader sense, even a relative economic dilettante like myself knows that banning short selling, even for a little while, is an improper government intrusion onto the market and a general betrayal of free-market principles. Once, back when Chairman Cox was Congressman Cox, he was a staunch defender of those principles, a solid Friedmanite. It’s becoming apparent why John McCain was thundering for Cox’s ouster yesterday.
Click the link above and read Kudlow’s post, including his assessment of what Cox should have done. An UPDATE addressing a bigger question not addressed above follows below the break.