The following is an excerpt from Sean Goldsmith of Stansberry and Associates who makes a great point about the ban on short selling. Â Governments will vilify anyone to take away the focus from themselves and those who they are in cahoots with.
“The problem with this partial ban is it will simply redirect short sellers’ efforts. Instead of shorting the troubled banks directly, they will look for other banks with heavy exposure to Italy, Spain, and France. Short-selling expert Jim Chanos, founder of Kynikos Associates, explained other consequences of the ban.
“EU policy makers don’t seem to understand the law of unintended consequences,” he told Bloomberg. “The vast majority of short-selling financial shares is by other financial institutions, hedging their counterparty risks, not speculators. The interbank lending market froze up completely in October to December 2008 – after the short-selling bans.”
In other words, banks are constantly lending huge sums of money between themselves. And they sell short shares of banks they’re doing business with for protection. If they can’t hedge their risks, the banks will stop lending money.
