If a new paper[1] published in a report from the Federal Reserve Bank of New York is correct, the answer is sobering. In recent months, a group of Fed and independent economists have analysed the impact of the short selling ban that was put into place in the US during the financial crisis of 2008, between September 22 and October 8 that year.
Those 2008 conditions are not necessarily identical to those currently prevailing in the eurozone. But the conclusions from the research are clear; these economists do not think short selling bans work. For there is precious little evidence that the ban in US markets truly halted share price declines; on the contrary, the impact was (at best) neutral, they claim. However, the ban hurt market mechanisms, as liquidity dried up.
The Fed paper argues that it was probably not the ban which propped up financial stocks, but the improving policy fundamentals; most notably, during this period, the Troubled Asset Relief Programme [TARP] was being developed, and boosting investor confidence. And this view about the mixed impact of the ban is further reinforced by what happened in 2011; during that period of stress, stocks which were "subject to short-selling restrictions [actually] performed worse than stocks free of such restrictions".
Might this persuade the Spanish and Italian leaders to rethink their controls? Don’t hold your breath. After all, there is far more political antipathy towards the markets – and speculators – in the eurozone than in the US; short selling is thus an easy target.
But if nothing else, the Fed paper underscores a crucial point; namely that when a crisis strikes, it is fundamental policy measures that tend to drive bank shares (and investor confidence), not short-term controls. Eurozone leaders would do well to remember that; particularly given their failure, thus far, to produce anything as convincing at that US TARP plan.
[1] 'Market Declines: What Is Accomplished by Banning Short-Selling?', by Robert Battalio, Hamid Mehran and Paul Schultz - view
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