Naked Shorts

I hate to agree with The Wall Street Journal editorial page about an economic policy issue, but I think they’re right to slam John McCain’s idea that failure to curb short selling is responsible for the crisis. Totally randomly, this is something I wound up reading a bunch a while back because I read Mark Cuban’s blog to see what he had to say about basketball and he did a bunch of posts on the topic.

But suffice it to say that if you’re the CEO of a company, there are no circumstances under which you’re going to want to say something like “our stock value is declining because I’m mismanaging the firm.” But if you are mismanaging the firm and your stock value is declining, there will be short sellers in your midst. So blaming the short sellers is an appealing option. Consequently, this practice becomes controversial. But it’s a kind of pseudo-controversy — lots of people complaining about it opportunistically, few people focused on the actual policy. In policy terms, the sort of curbs McCain was urging (and that apparently now have actually been adopted) don’t make any difference. As Arnold Kling says, there’s no way for short-selling to force your stock price down unless there’s nobody willing to buy your stock even at its new, lower price. And if that’s the case then that — the fact that nobody wants your stock — is the problem, not the short-sellers. A stock that nobody wants to buy is going to run into serious trouble sooner or later.