How not to steady the markets

The Pakistan stock market recently dropped off a cliff so the government banned short selling for a month then pumped $446 million into the market. They also decreed that prices could not fall more than 1% a day. This of course forced the market up.

Traders there no doubt were overjoyed by this gift of free money and immediately went long too, riding that money train up. Then, when the ban on shorting is lifted, they’ll go short again. What will the government have accomplished by this? Not much that I can tell. Instead they might have made things worse.

This is an instructive example of why clueless governments should probably not try to clumsily intervene in markets. Joe Lieberman, who wants to ban speculation in oil futures, are you listening?

Odd, isn’t it, that no one wanted to ban speculation during the dot com boom or when real estate prices were zooming up?

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