Update:

It’s so much easier to ban something than actually prosecute the people who commit fraud, for which there doesn’t seem to be the will. Nonetheless, on the whole, I think banning naked short-selling is right. I’m less certain about CDS, for which there is a legitimate use.  In other words, I don’t think you need a separate ban of CDS (if someone is trying to sell another slippery instrument in the market, this ban could be a way of getting rid of a competing financial instrument). What you need to do is prosecute fraudulent short-selling under fraud statutes, under which it should already be listed.

Update:

A further note. The article takes aim at naked short-selling because it is “gambling.” Well, that shows the government doesn’t even understand the correct rationale for its own ban. Naked short-selling shouldn’t be curtailed because it’s gambling. One might as well ban all short-term investments on that count. Naked short-selling is fraud. And it’s not so much that it should be banned; it’s that people who engage in it are acting fraudulently and should be prosecuted for fraud.

ORIGINAL POST:

I missed this yesterday. The NY Times reports that Germany has released a draft law that has expanded the ban on naked short-selling from selected bank stocks to all stocks primarily listed in Germany, to government bonds issued by euro countries, as well as to credit default swaps.

It’s amazing that these practices aren’t already illegal under fraud statutes. However, it remains to be seen how effective enforcement will be.

Lack of enforcement rather than lack of regulation is the problem.

The hedge-fund industry isn’t going to be happy about it.  Watch for financial commentators to

a) Confuse this with a ban on short-selling or speculation itself and

b) Equate this with “government regulation” tying up free enterprise.

It’s neither. It’s protection of property from fraudulent attacks on it, just the same as protection of identity from theft or protection of legal tender from counterfeiting.

Talking of counterfeiting, though, maybe those governments could now come up with a ban on the dilution of currency.…Something tells me that will never happen.

Here’s the NY Time piece:

“The draft law, released Tuesday by the German Finance Ministry, expands a ban on so-called naked short-selling to all stocks that have their primary listing in Germany, as well as on government bonds issued by euro countries.

The law, which will take at least until September to win passage in Parliament, would also ban naked short-selling of the euro, and enshrine a ban on use of so-called credit default swaps to bet against European government bonds.

U.S. regulators have effectively banned naked short-selling of stocks since 2005. The practice involves a short-sale, or bet against a stock, without first holding shares of the security.

All the measures aim to curtail investors who are perceived as little more than gamblers, as opposed to companies who use financial instruments to protect themselves against currency swings or other risk.

“Turbulence in the markets for European Union government bonds and the volatility of the euro have reached a new dimension,” the text of the legislation said. “Certain transactions that threaten the stability of financial markets should be forbidden.”

Mr. Schäuble has expressed frustration that financial market regulation is moving too slowly, and said that he hoped other countries would follow Germany’s lead.”