When the latest market squall hit the eurozone last month, the governments of Spain and Italy responded with a time-honoured defence; as panic mounted, they banned the short-selling of shares in banks, in a bid to shore up confidence.
One month later, it might seem as if this achieved some respite; eurozone stocks have stabilised, as the European Central Bank has pledged fresh support. But is there any evidence that short-selling bans have any long term effect? Or can they potentially make a bad situation worse?
If a new paper published in a report from the Federal Reserve Bank of New York is correct, the answer is sobering. In recent months, a group of Fed and independent economists have analysed the impact of the short-selling ban that was put into place in the US during the financial crisis of 2008, between September 22 and October 8 that year.*