Next time they'll shoot the messenger too

In September of 2008, just after the collapse of Lehman Brothers, the U.S. Securities and Exchange Commission (SEC) banned short-selling stocks of financial companies. The objective was to bring up the prices of those stocks which at that time were in a free fall.

The critics were pointing out that prohibiting short sales will decrease the liquidity of the stock market and that, more generally, thinking that outlawing bad news makes them go away is just silly.

Was the ban a success? A recent paper by Alessandro Beber and Marco Pagano claims otherwise; here's the abstract:

Most stock exchange regulators around the world reacted to the 2007-2009 crisis by imposing bans or regulatory constraints on short-selling. Short-selling restrictions were imposed and lifted at different dates in different countries, often applied to different sets of stocks and featured different degrees of stringency. We exploit this considerable variation in short-sales regimes to identify their effects with panel data techniques, and find that bans (i) were detrimental for liquidity (...) (ii) slowed down price discovery, especially in bear market phases and (iii) failed to support stock prices, except possibly for U.S. financial stocks.

Even some regulators agree with these conclusions; former SEC chairman Christopher Cox said

Knowing what we know now, we would not do it again. The costs appear to outweigh the benefits.

But I would bet that the lesson hasn't actually been learned. When the next big crisis hits, short-selling will be banned again. In times of financial emergency, there is enormous pressure on the government to "do something," and shooting the messenger is an easy way to appear to the public as if you were, in fact, doing something.