Shorting the Free Market

The invisible hand gets slapped when stocks go down

The Securities and Exchange Commission’s move to damp short selling earlier this week is yet more proof that the market-is-God Bush administration is losing its religion.

While the SEC’s order only limits so-called “naked shorting”, which is already against the rules anyway, there’s no doubt it’s scrambling to do whatever it can to staunch the bleeding in the financial industry and this is meant to chill short sellers and others who see more room to drop. Washington, of course, is also vilifying hedge funds and other investors for manipulating the price of oil, as if there isn’t a rational basis for it being so high (like the weak dollar, worries about new supply and soaring demand from developing countries, the usual fears about the Middle East). And the SEC intends to chill information trading in the markets by saying it will investigate rumor-spreading, which is sort of like investigating farmers for spreading manure.

As The Wall Street Journal says today in a good Ahead of the Tape column, our supposedly free-market-loving government in Washington is signaling that “Some free markets are apparently freer than others: The price of oil is free to fall, while the stock price of a bank is free to rise.”

Here’s how The New York Times today describes what’s going on with the SEC’s move against short selling, which the Times notes is essential to functioning markets:

Quietly people suggested the S.E.C. was struggling to appear effective after looking asleep at the switch after the collapse of Bear Stearns, an S.E.C.-regulated firm whose demise was largely managed by other regulators. Others took a broader view.

“It’s 19 issuers that form a large part of the backbone of the American financial system,” said Jay G. Baris, a partner at Kramer Levin Naftalis & Frankel. “The S.E.C. is attempting to stabilize trading in these shares so as not to cause panic.”

The press hasn’t done a tremendous job of countering the political claptrap out of Washington about “speculators.” The Journal in so many words puts the issue in perspective. But reporters ought to make clear that every investor in a market is essentially a speculator, not just those who make bets we don’t like.

What the reporting and analysis is missing here is that “free” markets have always needed a regulatory framework to function properly. Absence of adequate supervision of financial markets led to a bubble in one sector, just as, one could say, absence of a public energy policy led to a bubble in the other. The press hasn’t quite caught on to the idea that if government doesn’t regulate before the fact, it will have to do so afterwards. That’s what everything from the mortgage bailout to the Bear Stearns sale amounts to. It’s kind of like fixing your car at 60 miles an hour.

Washington had its free market cake. Now it has to eat it. The media ought to do more to help remind it—and readers of that.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.