By the time all this carnage is over, the markets will be blamed by the politicians…and most people will believe them. But it’s the politicians, not the bankers who are to blame. The greedy bankers will be the scape goats. The politicians blamed the short sellers for the banking shares collapse. So they banned the practise of short selling…they are idiots. Since the short selling ban, the shares of the banking institutions have fallen by more than a half…who can politicians blame now?

Short selling actually works to prevent collapses in the stock prices. Here’s how it works. As a short seller, I bet that a share price will fall. The share price falls and I cover my position by buying the share back. All the short sellers who buy the shares back provide support for the stock price and ordinary people see the rally in the stock price and decide to hang on in there.

Now, since short selling has been banned, the stock price goes down, there is no short covering rally to stop it, the share price doesn’t bounce, it’s just keeps going down and down and down. Ordinary people get spooked and instruct their mutual funds to sell. The funds sell. There is still no short covering and the market continues lower. This becomes a self reinforcing panic. Everybody sells everything. The markets plummet at unheard of speed. This is the direct result of banning short sellers. The governments told us that the greedy speculators wouldn’t be allowed to drive the prices down any more…they were banned from profiting during the panic. Phew…the stocks shouldn’t go down any more now that those greedy short sellers are barred from their immoral activity…right? Wrong! The result of the short selling ban has been that stock markets have put in their worst week EVER….in history…almost as soon as the government banned short sellers. Now, no one is buying anything and the floor in this market cannot be seen….that’s how far we are above it.

Of course, the governments will tell the public that its a good thing they banned the short sellers or it could have been much worse. Again, most people will believe them. But those who understand this causal relationship won’t believe the politicians. The politicians have caused this market rout. We know, because it didn’t happen until they started to interfere…and very soon after they interfered, the worst week in history ensued.

Then they will blame YOU…the public. They will likely put in measure the limit the downward share movements or even worse, as many countries have done, they will close the market. Anyone would think that the politicians are deliberately trying to crash the markets! Everything they do adds to the crisis. The market worked perfectly, until politicians get involved. It looks like they will kill it eventually.

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This was the threat that Henry Paulson and Ben Bernanke delivered to congress to try and squeeze the bailout through the tightest of holes…and they failed the first time. With a little elbow grease, some palm grease and a noose to scare people with, they got it through the second time. Phew bill passed, the market won’t fall 3000 points. Wrong again!

What does it mean that the markets caved in anyway? 

It means that the markets don’t like the bill, and more money from the US taxpayers will be needed to throw at this problem…but that won’t work either. Ben Bernanke and Hank Paulson were surprised by the problem when it came up. It was on their watch that these banks ran up the huge exposures to subprime. The allowed it to happen. The market basically has zero confidence in them. The public has even less confidence in them. Why the American Public is sitting by and allowing the very people who allowed this to happen in the first place try to fix the problem is beyond me. Why don’t the Congress and the Executive get put these idiots out to pasture?

Look this is the problem. The markets are working fine! Lots of companies made lots of mistakes…they go out of business….why is that a problem? Strong companies, who didn’t do lots of stupid things, come in a buy up any parts of the failed businesses that are worth money. It’s quite simple really…it’s a survival of the fittest. You mess up, you go broke. Simple. The market decides who messed up by sending their stock prices lower. It’s called price discovery. If no one is prepared to pay $10 for an asset….guess what? It’s not worth $10! Do you see how that works? But the toxic debt that the US tax payer has just been saddled with couldn’t be sold on the open market for the prices that the banks wanted to sell it for. Why? Because it’s not worth what they are asking! The market says it’s worthless. Listen, I have an old pair of socks….I want to sell them for $1m. Will anyone pay that? No…they aren’t worth that much money.

Let the banks go bust…let capitalism do it’s job…sure it will be rough for a while, but it will be faster and less painful if we let people and companies who made mistakes pay for them by standing up and answering to the market instead of crawling to the taxpayers.

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Tags: Ben Bernanke, Henry Paulson, Markets, Money Markets, Shares, Stocks and shares