22 May 2008

Does Short Sale Regulation Cause Bubbles?

[I]n volatile markets, defined by a wide divergence of opinion on a new event, the bears sit on the sidelines and the bulls buy -- leading to a buying frenzy. Why do the bears sit on the sidelines? It is hard to short.

One of the reasons it is hard to short is government interference (which was recently reduced with the repeal of the up tick rule] . . . Government should get out of the way of shorts--let the market devise cheaper ways to short (not the modern ultra short ETFs) and we might have fewer bubbles.

From here.

While I don't necessarily agree, and the post is a stray throught attacking an issue of massive economic importance, it is empirically and theoretically well motivated and deserves greater attention.


Michael Malak said...

It's also impossible to short in an IRA online brokerage account.

Andrew Oh-Willeke said...

Good point. Indeed, given the amount of money tied up in retirement accounts, quite conceivably, a more important point.