Shoot the Messenger: Spain, Italy Ban Short Selling of Equities

When markets expose on the errant ways of the political system, the mechanical reaction by politicians has always been to shoot the messenger.

From the Bloomberg,

Spain and Italy moved to ban short- selling of stocks as prices dropped and the euro traded below its lifetime average against the dollar on concerns about the European Union debt crisis.

Spain’s stock market regulator, the CNMV, said it was banning short selling of all stocks for three months, amid “extreme volatility.” Italy’s Consob said its ban, scheduled to last a week, was introduced on some banking and insurance shares because of the “recent performance of stock markets.”

Today’s bans echoes decisions in August of last year by France, Belgium, Spain and Italy to temporarily ban short selling of financial stocks in an effort to stabilize markets after European banks, including Societe Generale SA (GLE), hit their lowest levels since the credit crisis of 2008…

The Spanish prohibition also covers over-the-counter derivatives, the CNMV said. Market making activities are excluded from its measures.

The underlying hope of politicians has been to reverse the lessons of the famous legend of King Canute who commanded sea waves “to advance no further”. King Canute tried to show “his flattering courtiers” that his power meant “nothing in the face of God's power”

The modern version is that politicians hope that by pinning or diverting the blame on the markets, and through edict or fiat, the basic laws of economics can be overturned.

Spain’s Bolsa de Madrid Index

Dow Jones Italy Stock Index

Note the article says, “Today’s bans echoes decisions in August of last year by France, Belgium, Spain and Italy”, yet both the charts of Spain and Italy, in spite of the last year’s ban, has been trading much much much lower than when the attack against the markets had been implemented.

As I previously wrote,

1. Bans hardly have been effective. Instead they are mostly symbolical as the “need to be seen as doing something”

2. Regulators react almost always too late in the game (which means that their markets may be at the process of nearly bottoming out.)

3. I would further add current policies have clearly or overtly been in support of the banking system and the stock market.

4. This only validates the theory that the policy direction of governments and global central bankers has primarily been anchored upon the Bernanke ‘crash course for central bankers’ doctrine of saving the stock market.

5. Importantly, applied policies have been meant to preserve the tripartite cartelized system of the welfare state, central banks and the crony banking system.

Except for #2 which does not seem to apply today as events seem to exhibit accelerating deterioration, everything else seem pertinent

I would further add that such bans are, in reality part of the price control mechanisms employed by desperate and frantic politicians that only aggravates the imbalances of the system.

Doing the same thing over and over again and expecting different results has been the stereotyped reaction by political authorities everywhere. Yet as one can observe, politicians never really learn, which is why we should expect the crisis to worsen. Also, this shows how politics has been mainly about short term fixes and the struggle to preserve of political entitlements. Someone once defined this as “insanity”.