Free market forces are routinely given great credit as wise and omnipotent. That is, so long as asset prices are rising. Once the inevitable price corrections begin however, there is typically outrage and demands for government intervention to step in and save us. This common pattern was evidenced last week as the SEC announced vague new emergency restrictions against short-selling. This initially prompted a short-covering rally in stocks that is likely to fade out again over the coming days and weeks.
As Spencer Jakab points out for the Dow Jones Newswire today in The mother of all short squeezes may end badly:
“The fact that the initial results were spectacular, particularly for financial stocks, shouldn't be too encouraging. Consider what happened in April 1932, at the depth of the worst-ever bear market. Upon the announcement of a cumbersome new rule that required written permission from each shareholder before a broker lent out his stock, the Dow Jones Industrials rallied 3.51%. By the time the rules were instituted weeks later, the short covering was over and the slump had resumed…
An extreme example comes from Pakistan where the local SEC responded to a stock slump last month by banning short selling and limiting daily price declines to 1% while allowing them to rise by 10%. The initial reaction was a massive 8.6% one day rally followed by 15 straight days of slumping prices amid extremely low turnover, the worst such period for that market in several years. As rioting investors stormed the Karachi Stock Exchange last week, the rules were rescinded.”
As I have said before, things are not bad or dangerous today because I say so. Things are bad because 'we' have made them so through years of systemic abuse and poor planning.
As Jim Grant wrote in the Wall Street Journal this past weekend in “Why no outrage?”:
“Today's bear market in financial assets is as nothing compared to the preceding crash in human judgment. Never was a disaster better advertised than the one now washing over us. House prices stopped going up in 2005, and cracks in mortgage credit started appearing in 2006. Yet the big, ostensibly sophisticated banks only pushed harder.”
Wall Street and big banks have not made billions over the past few years because they are smart and nice; they have done so because they are largely sociopathic and greedy to the point of self-destruction. Unfortunately through wanton collusion, they, and the masses, have now engineered our economic downfall– again.
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