Short selling is a major vehicle that's widely used by prudent investors to reduce their risk and hedge their investments against the very dangers that we see all around us today. By making it more difficult for investors to hedge in those stocks, the authorities are merely compounding the problem: If investors cannot sell short financial stocks, they will sell short something else as a proxy for financial stocks, including companies in other sectors that remain vulnerable to a credit crisis and a recession. Alternatively, if investors feel those proxy hedges are not adequate, they will simply resort to outright liquidation of their securities, making the next stock market decline that much worse. Clearly, the SEC cannot repeal the law of gravity. And no matter what they do, the government cannot stop investors from selling.
