Europe instituted a ban on short-selling stocks today. This is a decision made out of panic, and without analyzing the consequences. For those of you who don’t know what short-selling is, I’ll explain. An investor can borrow a stock and sell it immediately in the hope that the price will go down, when he or she will then purchase it. European leaders seem to think that because the investor is betting that the stock price will fall, this behavior makes the market fall without good reason. This is completely false. The investors have to buy the stock after it falls, so they actually give it support. Short selling is a legitimate market practice, and it helps to keep modern markets stable.
Unfortunately, European leaders are in such a panic to finance their debt that they are strangling the financial markets through regulation. Accountability and transparency are excellent results of regulation, but actively removing trading instruments can only hurt the markets. Financial markets are in turmoil not because of short-selling, but because of major sovereign debt issues. Leaders are attempting to fix the problem by treating the symptoms rather than actually resolving the root issue. If policy makers can remove their heads from the sand and make real progress in solving the credit crisis (and that means considering unpopular solutions), then everything else will fall into place: the markets will stabilize, employment will rise, and the overall panic atmosphere will dissipate.