It is certainly possible that I am "curve-fitting" here, that there are other reasons for the exceptional changes in both level and shape, for the period shown. Extending the chart of volatility to the right will not, however, argue against my case -- the rise in volatility following mid-2008 is huge. It appears that there was a general upward trend in volatility as the exceptions to the various ETFs were being granted from the mid-1990s on, but I have not yet dug in to that data. I am rather trying to make the point that, in light of the points raised in the first two parts of this article, it is worth looking again at whether the decision to eliminate the rule has proven useful to the broadest population of market participants. I believe it has not, and I believe that the rule should be reinstated.
I don't believe the rule will keep the stocks of bad companies up, nor will it protect against excessively high valuations; markets will still go up and down after it is reinstated. The ability to profit by correctly taking a negative view of a company's, prospects -- or the market's, for that matter -- by shorting securities will not only remain, but be improved as investors again discriminate between individual companies. The rule is simply one tool, similar to regulating the extension of credit or the dissemination of material nonpublic information, which should be wielded for the "greater good" of continuously functioning capital markets.
The rule will provide a balancing force, a counterweight, to factors that might otherwise grow to permanently impair the effectiveness of our capital markets. In its absence, the possibility is very real that the markets may soon suffer damage from which recovery over any practical horizon becomes unlikely; there is no reason as compelling to have eliminated it.
I think everyone has noticed that things in the capital markets haven't been working out all that well since the rule was eliminated. Considered next to TARP, TALF and stimulus plans, reinstating the rule looks cheap -- and given the certainty surrounding the implementation of those other remedies, it's easily worth the shot of risking the possibility that it won't work. The rule should be reinstated.
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