Lessons From Pakistan on Banning Short Selling

The chart above (click to enlarge) of Pakistan's Karachi SE-100 Index (data from Global Financial Data) shows what happened when short selling was banned on June 23: a huge but brief 1,300 point rally for three days, followed by a slow 3,250 point market collapse, a drop of more than 26% in less than three months.

HT: James Reynolds

See related article in today's WSJ "Short Sellers Keep the Market Honest" and see a similar chart on Dealbreaker

Update: Banning short-selling is a way of buying time -- but if the mooted RTC II isn't up and running very quickly, the stocks which went up today are liable to go straight back down to where they were -- and, probably, further, given that each successive stock-market low is lower than the last.

It's surely no coincidence that the short-selling ban was unveiled at exactly the same time as politicians started talking in public about a huge government bailout fund. The problem with the fund is that it will require time-consuming legislation to set up, and time was the one thing which Morgan Stanley, in particular, didn't have.

And so the short-selling ban is a stopgap measure, designed to artificially boost stock prices until Congress can get its act together and throw a few hundred billion dollars at the market in a more substantive attempt to stop it from imploding.