Kass: Leave the Short-Sellers Alone

This commentary originally appeared on RealMoney Silver on Aug. 12 at 8:45 a.m. EDT.

Four European countries are banning the short-selling of stocks in their markets to try to halt the precipitous plunge in value of troubled European banks, a step that some experts say could intensify fears and ratchet up risks of another financial crisis.

Belgium, France, Italy and Spain have decided to impose a temporary ban on short-selling, beginning on Friday, according to a statement from the European Securities and Markets Authority released Thursday evening, after markets had closed....

The ban on short-selling carries echoes of the 2008 financial crisis, when the Securities and Exchange Commission temporarily banned short sales in the U.S., a move that resulted in a brief rally but ultimately did little to arrest the market's free fall....

In France and Spain, the ban on short sales will last for 15 days, and will only apply to stocks in the financial sector, according to the Globe and Mail. Belgium will ban short sales on four financial stocks for an unknown period of time. It was unclear which stocks the Italian ban would affect, or for how long it would be in place.

A spokesman for the U.K. Financial Services Authority told Bloomberg that Britain has no plans to ban short sales.

-- The Huffington Post, "Italy, France, Spain, Belgium Ban Short-Selling in Order to Protect Markets"

Yesterday the U.S. stock market rallied, in part, on the announcement that several countries in Europe were imposing a ban on selected short-selling. (This morning, there are rumors of an even broader short-selling ban in Europe.

A September 2008 short-selling ban in the U.S. failed miserably (as the market's drop actually accelerated after it was instituted) and will likely fail in Europe now.

Such short-selling bans smack of desperation; they are artificial, interfere with natural market forces and are anti-free market (though typically instituted by free-market policymakers). Bans are ineffective Band-Aids that often raise red flags, may result in investors selling their longs (as bans make them nervous) and reduce the cushion of potentially latent buying from short positions put on.

As I have written recently, what should be clear in looking at the dismal U.S. and eurozone economic numbers in the first half of 2011 and in the falloff in confidence is that there is a pressing need for outside-the-box, creative, hard-hitting, thoughtful and pro-growth fiscal strategies. Our country needs (among other things) a series of Marshall Plans aimed at reviving the housing market (and denting the shadow inventory of unsold homes) and an aggressive fiscal strategy that will generate jobs growth. But, given the partisanship observed in the debt-ceiling and budget circus, how can investors be confident that these needs can be met, especially as we are closing in on the November 2012 elections?

Instead of hard-hitting solutions, we get short-selling bans.

It is almost laughable, but the poor state of our world's economic affairs makes it sad.

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