All those who heralded last week’s move to stop short selling of financial shares on both sides of the Atlantic wanted to believe that short sellers were responsible for the market fall, and thought a regulatory change could stop it.
Yesterday showed how wrong that was. Wall Street plunged another 3%. Markets can and do fall because holders of shares lose confidence in the financial world and want to get out. Markets can fall because holders of cash see no reason to invest it in shares. Those forces were always the main ones driving these Stock markets down this year, and they remain the main ones following the regulatory bans.
There is no quick or easy regulatory fix which will stablise the markets. The markets now are mainly driven by the actions of governments and Regulators, especially those of the USA. It was the decision to save Bear Stearns, Fannie and Freddie which limited declines. It was the decision to let Lehmans go that undermined confidence and started the big further falls. It was the decision to bail out banks with distressed debt which led to the huge rally – along with some short covering following the regulatory change – and it is worry over the bail out package that led to yesterday’s sell off.
The world’s financial markets are dependent on the US Treasury Secretary and on what Congress makes of his Bill. In that sense government is very important. What markets are waiitng to hear is how much money will be committed and on what terms. Until they know that it is difficult to establish sensible values for shares.