Thursday, September 18, 2008

The current financial crisis explains ... [Updated]

... why I'm not a libertarian. While I do think that a smaller federal government is a good idea, particulars do matter. One particular concerns market regulation. Yesterday the Securities and Exchange Commission issued some new rules regulating naked short selling. I consider this a good thing, although I also accept that such rules and regulations can be improved upon over time. Sometimes that means abolishing them altogether. But I wonder if getting rid of the Glass-Steagall Act was really a good idea....

The goal ought to be to have a well-regulated economy. I stipulate that well-regulated means no more regulations than necessary, but an unregulated economy has problems all its own.

Added: Perhaps we need to consider some form of curb on institutions so that they don't reach TOO-BIG-TO-FAIL size. Such institutions ultimately privatize rewards while leaving the public covering the risks. Free markets aren't supposed to work like that.

Update: On Friday the SEC temporarily banned ALL short selling of 799 financial stocks, in an effort to bolster confidence.


Robzilla said...

Banning short selling isn't an answer. The Community Reinvestment Act lead to a lot of high risk lending practices which now speculators drove up. Let them fail!

Icepick said...

anning short selling. They're banning naked short selling.

From the SEC press release:

"In an ordinary short sale, the short seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions."

And sadly we can't let all of these firms fail, and if we let the wrong big firms fail that will drag down the whole damned thing. We are in serious danger of landing in another depression. Given the liabilities that the government already faces in Medicare and Social Security recovery would be very difficult.

Icepick said...

Robzilla, I just read that the SEC has temporarily banned all short selling of certain financial stocks. I'm not sure if that's what you were referencing or not, but I was't aware of it in my first response. Sorry for any confusion.