Chris Cox’s Terrible Idea

The decision by SEC Chairman Chris Cox to ban short selling is a terrible idea. It is an encroachment on free-market principles. In extreme, the absence of short sellers would inflate stock market upturns, probably into bubbles. Short sellers keep the market honest. I know many in the short-selling community and most of them really do their homework. They are skeptical about puff pieces on companies and they are properly cynical about corporate press releases.

Why Cox is doing this is hard to fathom. He is supposed to be a free-market disciple of Milton Friedman and Art Laffer. It would have been much simpler and much more constructive if Cox restored the so called up-tick rule, where short sellers only can play after a share price has ticked higher. Some academic study apparently informed Cox that the up-tick rule was unnecessary. But virtually everyone who operates in the stock market disagrees.

I’m okay with banning naked shorts, where the seller doesn’t even have to take possession of the borrowed stock collateral before the sale. But a complete ban is just a terrible idea and sends all the wrong signals about government interference in the market.

As much as I agree with Paulson’s new RTC-type agency, which is what I call a smart regulatory move, I disagree with Cox’s action, which is an incredibly stupid regulatory move.