Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Regulation by placebo

This is a very nice phrase that I picked up from SEC Commissioner
Kathleen Casey’s speech
dissenting from the short selling rules that the SEC introduced
recently:

But this is regulation by placebo; we are hopeful that the pill
we’ve just had the patient take, although lacking potency, will
convince him that everything is all right.

Casey’s speech itself was a bit of political grandstanding
and was in the context of an SEC vote that went on predictable party
lines. I am not therefore inclined to take the speech too
seriously. But the phrase “regulation by placebo” very
elegantly captures a phenomenon that is all too common in financial
sector regulation all over the world.

Securities regulators, banking regulators and other financial
regulators have this great urge to be seen to be doing something
regardless of whether that something is the right thing or not. The
result is often a half hearted measure that does not stop the wrong
doing but convinces the public that the evil doers have been kept at
bay.

Regular readers of my blog know that I am against short sale
restrictions in general. At the very least, I would like short sale
restrictions to be accompanied by corresponding and equally severe
restrictions on leveraged longs. If you are not allowed to short a
stock when it has dropped 10%, then you should not be allowed to buy a
stock (with borrowed money) when the stock has risen 10%. Market
manipulation is done far more often by longs than by shorts!

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: