Money, Markets, and Democracy by George Bragues

Author:George Bragues
Language: eng
Format: epub
Publisher: Palgrave Macmillan US, New York

As if all that were not enough, securities regulation has completely failed to fulfill one of its original purposes. When the legal framework was built in the 1930s, the prevailing assumption was that 1920’s bull market reached unsustainable heights due to the combination of a plethora of culprits. Among these were excessive margin lending to investors in addition to pump and dump schemes. Blamed, too, was the painting of stocks in pollyannaish strokes by investment bankers, stock brokers, and corporate executives, not to mention the operation of investment pools in which individuals would combine to rig the price of a stock. By containing all these, securities regulation was supposed to prevent mania and crash sequences from recurring. Obviously, that has not happened. Partly, this is because government regulators have little incentive to appear as worrywarts and wet blankets by spoiling the party when markets are bubbling higher. Not only that, standing athwart a raging bull market requires a contrarian frame of mind, a willingness to go against the crowd that only a few human beings are capable of mustering. It is hardly to be expected that such rare souls will be concentrated in government agencies.

Other notable regulations that arose out of the 1929–1932 bear market included restrictions on short selling. This is the attempt to profit from a decline in the price of a stock. More the province of sophisticated and active traders than ordinary investors, this type of trade is executed by selling shares first and then buying them afterwards. Those who first hear about short selling immediately wonder how one can possibly sell shares that one does not already own. To sidestep this dilemma, the shares are initially borrowed from someone who owns them, a service performed on behalf of the short seller by their broker. The borrowed shares are then immediately sold. Later, the shares have to be returned, which the short seller hopes to do by buying them on the market at a lower price than that at which they were first sold. If this happens, the short seller earns the difference; otherwise, they lose money. Even before Roosevelt came into office and the Pecora commission became a political force, short sellers were made the villains of the market’s relentless descent in the early 1930s. President Herbert Hoover continually railed against short sellers, alleging that they were “destroying public confidence” and engendering “discouragement to the country as a whole”.74 Short selling restrictions eventually came in the Roosevelt administration when the SEC instituted the uptick rule. This only allowed short selling at prices that were higher than that at which the stock previously traded. Heeding the counsel of economists, the SEC finally abolished the uptick rule in 2007. Still, it imposed a temporary freeze on short selling of financial stocks in 2008, as did a number of other countries in a bid to stem the financial tsunami. Naked short selling, in which the shares bet against are not borrowed, was banned in 2004 by the SEC and continues to be illegal.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.