Could Chris Cox Elect Barack Obama?

Carol Platt Liebau
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Posted: Oct 10, 2008 11:53 AM
It's hardly rocket science to observe that, at this point, every time the markets spiral down, Republicans suffer politically.  What's frustrating is that some of it has been totally unnecessary -- a result of apparent poor decisions at the SEC.

A major reason for the market convulsions we've seen is the elimination of the "uptick rule."  As Evan Newmark noted on the Wall Street Journal's blog back on July 17, here's what that means:

The uptick rule requires that every short sale be transacted at a price that is higher than the price of the previous trade. The intent of the rule is buy time for the stock and force short sellers to pause before transacting.

Without the uptick rule, stocks are susceptible to “bear raids” in which shorts overwhelm a stock in huge surges of selling that intimidate buyers from stepping in. This creates a panic that can spiral ever downward.

That's exactly what's happened.  Note that the uptick rule was put in place in 1938.  It was eliminated by the SEC a little more than a year ago -- and that's an enormous benefit to hedge funds, which have little stake in the market's upward performance and make money merely by speculating about what the market will do -- but a huge detriment to everyone else. 

What's more, there was no reason not to extend the temporary ban on short selling of financial companies.  But the SEC removed the ban yesterday.  Again, it worked for the hedge funds -- which make money through speculation alone.  But it drove the markets down again yesterday by allowing the hedge funds to engage in an orgy of short selling, and thereby only deepened a sense of concern, despite the worldwide rate cut -- which, rationally, should have buoyed the markets.

Other experts have pointed to the SEC's lax enforcement of disclosure rules and regulations, and failure to enforce accounting standards.

Make no mistake -- the SEC hasn't created this crisis.  But its missteps and errors are exacerbating the pain, panicking the markets, and creating an ever-more-hospitable political environment for Barack Obama.