Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Wed, 03 Mar 2010

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!

Posted at 18:58 on Wed, 03 Mar 2010     View/Post Comments (3)     permanent link