On August 12, financial officials of France, Spain, Italy and Belgium imposed a temporary ban on short selling. The move is meant to stabilize equity and financial markets after a violent rout has sent European bank shares to their lowest levels since the credit crisis of 2008.
So, will this "muscle-flexing" measure save the financial day?
Well, in his business bestseller Conquer the Crash (now in its 2nd edition), EWI president Bob Prechter addressed the familiar tendency of mainstream leaders to condemn -- in a downtrend -- the very same practices they condoned when stocks were going up.
"In a bear market, bullish investors always come to believe that short sellers are 'driving the market down,' when in fact, the decline is almost entirely due to selling from within their own over-invested ranks. Sometimes, authorities outlaw short selling. In doing so, they remove the one class of investors that must buy. Every short sale (except when stocks go to zero), must be covered, i.e. the stock or derivative contract must be purchased to close the trade.
A ban on short selling creates a market with no latent buying power at all, making it even less liquid than it was. Then it can dribble down day after day unhindered by the buying of nervous shorts. Like all other bans on free exchange, a ban on short selling hurts those whom it is designed to help."
This New York Times business bestseller is as relevant today as ever, and the 2nd edition gives you a lot of valuable additional information on how to survive and even prosper in a financial crisis.