Short selling ban exposes gap between American, European market attitudes

STEVE CHIOTAKIS: Earlier today in Europe, France, Belgium, Spain and Italy prohibited traders from the practice of short selling. That’s where people are allowed to make money betting on falling stocks. What does that decision mean,and how will it play around the world? Randall Kroszner is a former governor of the Federal Reserve System. He was there in D.C. from 2006 to 20009. He’s now on faculty at the University of Chicago Booth School of Business. Professor, good morning.

RANDALL KROSZNER: Good morning.

CHIOTAKIS: Let’s talk about the short selling ban that was implemented today in Europe. What does it say about the European debt crisis — and how it’s affecting banks there?

KROSZNER: Well, I think there are fundamental concerns about — and legitimate concerns about the stability of the banks because they have so much exposure to the sovereign debt. But short selling bans don’t address those fundamental concerns.

CHIOTAKIS: Do you think it’s going to help — I mean, obviously, you say no.

KROSZNER: The studies that have been done on short selling bans in the past have shown really no improvement in firm share prices, and generally, an increase in volatility. It’s really more of an attempt to blame someone rather than the fundamental factors.

CHIOTAKIS: So more pointing fingers there, right?

KROSZNER: It’s pointing fingers rather than admitting blame that is a legitimate problem here — the risk of sovereign debt.

CHIOTAKIS: What about here in the U.S.? It’s said it’s not going to implement a similar short selling ban. So, does it reveal anything about differing attitudes?

KROSZNER: I think it is a difference in attitude. I think there’s more understanding that short-term market movements, or short-term practices don’t address the fundamental issues. But you do have to remember both the U.S. and U.K. did put in some short term selling bans in October 2008

CHIOTAKIS: We do remember that quite well. Former governor of the Federal Reserve System, Randall Kroszner. Thank you so much for your time, sir.

KROSZNER: Thank you very much.