With politicians everywhere blaming hedge funds and short sellers for the financial crisis, I guess it was only a matter of time before short selling was completely banned. Over the past week, gradual steps have been taken to make it harder. First naked short selling (selling a stock without even borrowing the paper so you could cover having to buy it later) was banned. Then the US banned all short selling of financial stocks on Friday. Everyone else followed. And now the Australian market has banned all short selling, fearing an avalanche of overseas investors swamping the Australian market.

I’ve been trying to work out all week what I think of short selling. On balance, I agree with this pundit, Douglas Kass, in the FT. Short selling didn’t cause this crisis, it just made it happen faster. But there are a few problems with short selling, particularly if you don’t have to disclose – there are huge motivations to create negative rumours if you have a short position. And they are easier to believe than positive rumours. But I doubt that short selling was solely responsible for Macquarie Bank’s 50% bounce in stock price this last week – there would have been plenty of genuine punters out there terrified that it was next.

So in normal times, the sensible thing would be to enforce the rules (many of which already existed) against naked short selling, and require disclosure. But in today’s panicked state, with enormous volatility being exacerbated by shorting, there is a real risk that a company will go under because the higher volatility, magnified by the availability of short selling, puts them under some key ratios for a short period of time. So I’m reluctantly agreeing with the short selling ban. Not a sensible long term decision, though.

And I think that those listed fund managers and banks which, over the last year, have taken steps to stop lending their own stock, because it encourages the short sellers have been purely acting from self-interest – a well regulated market does include

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