Today there was more news about curbing short selling in the equity market in the United States. The SEC today moved a step closer toward imposing much tougher constraints against short sellers. Lawmakers have put a great deal of pressure on the SEC to make these moves as they now take the position that short selling fed the financial catastrophe that we currently are in.

I believe that bringing back the uptick rule and making short selling a more regulated practice is a good idea, but I believe that the SEC and the system as a whole needs to make sure they don’t go over the top. The goal should be to stop any kind of possible manipulation of prices, but not to stop stocks from dropping in general. The market is better off if stocks are allowed to settle as they should based on short seller bets versus buyers rather than artificial rules holding up a stock’s price for quite some time.

It is true that short selling could have contributed somewhat to the financial trouble that many of the banks have had, but to act as if it is the main problem is being completely ignorant. The banks were engaging in practices that were not reasonable whatsoever and they ended up paying the price for it. The goal should be to foster an environment where a firm understands the risks associated with huge amounts of debt, and works for long-term growth rather than a quick meaningless jump in their profits.

Short selling didn’t get us into the mess we are in today. We need to make sure that as a society we don’t try to place blame where it doesn’t belong. Short selling needs to be reigned in, but it also must be understood that in a free market prices should set themselves appropriately over time.