Posted Monday, July 23, 2012, at 8:45 AM
Probably the worst way to restore confidence in the Italian economy is to have financial regulators adopt a panicky ban on short-selling in the stock market.
It is true, yes, that short-selling drives down stock prices, so in some kind of very short-term way, by preventing people from shorting an asset class you can forestall a decline. But that's clearly not a durable practice. It's very logistically difficult to short-sell single-family, owner-occupied housing in the United States, but that hasn't prevented a large decline from the 2005 peak. A stock market, with or without curbs on short-selling, is a much faster moving beast than any housing market has ever been. And as long as the Italian economic outlook looks bleak, the Italian stock market is going to get battered. Amateur hour policymaking doesn't help.