Short-selling: problem or solution?

Wouter Bos
via WikipediaOne of the more happy moments in the current financial crisis was for me when the Dutch minister of finance Wouter Bos had to admit he had not clue about many financial constructions he looked at when he had to approve the sale of parts of ABN-Amro to the now state-owned Fortis Bank a few years ago. I was happy that I not alone in losing out on many details here. In the end the purchase of the ABN-Amro bank proved to be one of the reasons the previously healthy Fortis bank could not manage the current crisis.
A few weeks ago the same minister Wouter Bos - and many other ministers of finance with him - banned short-selling of shares, telling us that this practise was partly the reason for the financial mayhem were are in. Obvious, the financial regulators in China did not ask the Dutch minister for advise, as they see short-selling as a way to keep the crisis out of their country. Reuters noted also the contradiction with moves in Australia, Singapore and Taiwan:

The commission [CSRC] said, "The launch of margin trade and short-selling is an important step in the reform and development of our capital markets, and will inject new vitality into the securities market."
China has been considering since 2006 starting margin trade, in which investors borrow money from brokerages to buy shares, and short-selling, where they borrow stocks from brokers and sell them in the hope of buying them back later at lower prices.
Its launch of the reforms has been delayed by massive market volatility: a bull run that boosted the Shanghai Composite Index .SSEC sixfold between mid-2005 and last October, and then a bear market which took the index down more than 70 percent.

Just a guess: the world will remain clueless for a while.

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