May 16, 2008
Bubbles: Free the Shorts
The Wall Street Journal today has a wonder front page story on developments in the study of financial bubbles. (Justin Lahart does a marvelous job) The problem is in the recommended solution by the new scholars: More government interference. A better solution that fits their findings? They discovered that in volatile markets, defined by a wide divergence of opinion on a new event, the bears sit on the sidelines and the bulls buy -- leading to a buying frenzy. Why do the bears sit on the sidelines? It is hard to short. One of the reasons it is hard to short is government interference (which was recently reduced with the repeal of the up tick rule; Cramer and other want the rule back). Government should get out of the way of shorts--let the market devise cheaper ways to short (not the modern ultra short ETFs) and we might have fewer bubbles.
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