Should We Ban Short Sales in a Stock Market Crash?

Few things are more predictable than loud demands for regulatory interventions to stop speculation when stock market prices plunge: In these days, as in any recent stock market crash, we hear politicians and commentators inviting regulators to enact interventions spanning from stock trading suspension to a short sales ban. In the past, stock market regulators typically bowed to such demands: Banning short sales is almost their Pavlovian response when faced with a widespread drop in stock market prices.

Over the last 20 years, unfortunately there has been no shortage of crises, so that we have had the opportunity to observe

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