European authorities are considering a ban on the short-selling of financial stocks, just as U.S. authorities did in 2008. Short selling is the practice of selling stocks you don't own at today's price, with the expectation you can buy the stocks at a cheaper price on the delivery date, putting the difference in your pocket. Although it is very dangerous and definitely not recommended, it is a way to make money when stocks are dropping. However, it can become a self-fulfilling prophecy. Because short-selling is public information, other investors can see more people shorting a stock, increasing doubt about that particular stock, increasing sales of that stock. Sometimes, short-sellers can force the stock price down in this way and make a great deal of money for themselves.
The bond vigilantes are now circling European banks, like they did Bear Stearns and Lehman. If one big bank goes down, it will be very ugly for Europe. It will also be ugly for the U.S. but not nearly as dramatically. We have used the past three years to improve capitalization of our banks, much more so than the Europeans have.
Letting Lehman fail was a terrible mistake by the U.S. Hopefully, the European authorities learned a lesson from our mistake.
This is the dark side of globalization. There is no place to hide from problems elsewhere in the world. Our stock market is trying to react to the American economy but keeps getting pulled down by Europe, just like we pulled the European makets down in 2008.
