Causing the problem

The SEC looks to restore confidence, by which they mean "higher stock prices":

U.S.securities regulators will consider four proposals to restrict short selling, a type of investing blamed for accelerating the severe downturn in financial services stocks, the chief of the Securities and Exchange Commission said on Monday...

It won't work. It doesn't even matter which of the four possibilities they choose. It doesn't even matter if the rule they finally implement is a good idea. We have long passed the point where the confidence the government is trying to restore via symbolic action* is undermined by the changes in rules they are making. What they have created in their panic to find just the right set of rules is an environment where no one can have confidence because no one knows what the government will do tomorrow. Those banks who escaped TARP will not be very inclined to take TARP II money, no matter how good the terms. They cannot trust the government to keep the terms for more than a few weeks**. Likewise, traders have no confidence in markets where the government is constantly trying to fix prices higher.

But as I was writing a paper on the 1918 Carmen Strike, I just had to laugh. Not only was the strike almost completely a result of government meddling in the economy, it was almost exactly the same kind of meddling we are doing today, just in food instead of financials. The strike was caused primarily by food price inflation, which ran between 40-200% in the 30 months before the strike, depending on what article it was. If you absolutely had to have it, rest assured it closer to 200% than 40%.

While reading the Mar, 1918, newspaper, I noticed a funny thing about the Food Administration, a wartime agency that tried to control the inflation through increased production and more efficient distribution. They implemented one rule (the 75% of a 90% basis rule) that, in the middle of a wheat flour shortage, idled half the mills in Kansas City because they could not cover their costs. Of course they quickly repealed the rule. Then they had to extend a different rule that allowed for bakers to use 50% rye flour instead of wheat flour because they discovered that most areas of the country did not have access to the mandated replacement for rye flour, which was a replacement for wheat flour, which was in shortage in no little bit because of their other stupid rules. Then the county food administrator had the audacity to complain in the paper that little old ladies were breaking the 50-50 Rule and selling contraband bread at church bazaars. This was all within about a 6-day period in March.

If you were a food producer, how much confidence would you have? Would you consider it a good time to build a bigger mill? To hire a bunch of people? Of course not. It doesn't matter what the rules currently are; all that matters is that they are constantly changing. The result is usually the opposite of what the government is ostensibly trying to accomplish.

* And Jim Sinclair (whom I greatly respect) notwithstanding, the uptick rule is a symbolic action. It never made the market go up, nor does its lack make the market go down. If you want to control short sales, then simply demand that a borrower of securities get permission from a lender of them before they can be sold short. That's the only honest way to short the market anyway.

** Now they know how the Indians felt, I'll bet. Except they were never forced to walk across half the country carrying all their stuff on their backs.