Of market interventions and unintended consequences - 20081207

The government interfering with the free markets always ends with the opposite result of what was the government was originally trying to achieve. This is the law of unintended consequences.

So I have been watching this interview of Bill Ackman with Charlie Rose. I really like Bill Ackman and really respect him a lot. He is very bright and it is always worth listening to him when he makes public statements. You can wath the interview on YouTube. He says a lot of interesting things in this interview (and also a few things I strongly disagree with), but what really stroke me was this unintended consequence of the ban on short selling that the government's regulation body, the SEC, imposed on the market participants overnight a few weeks ago. I am not a hedge-fund manager so I hadn't seen this unintended consequence of banning short selling:

The rules of the game were changed midstream. I think if the government had said: "Look, we’re going to phase out short selling over a period of time", it wouldn’t have been disastrous for the industry. But if you have investors who commit to their partners to stay balanced, they don’t want to be more than a certain amount long versus the amount that they’re short. You lose the ability to insure yourself. Short selling is really a form of protecting yourself from the market going down. By taking away that very important tool, managers got imbalanced. They were actually forced to sell their long positions. [emphasis added]