Why Short Selling Makes the Market Go Higher

In an effort to support the markets, the SEC banned short-selling. Clearly, however, their efforts failed. MISERABLY.

Now, I WILL admit that without this rule, most financial stocks (regional banks, insurers, hedge funds, mortgage REITs) would be lower. The market as a whole, however, needs short selling. Furthermore, a rebound in stocks IS NOT POSSIBLE while this rule is in place.

Why?

Beyond the "let efficient markets determine the proper price" theory, a number of more technical explanations exist:

First, investors such as myself who maintain large short positions in the market refuse to take long positions without the ability to accurately hedge our risk. With the implementation of the short-sale ban, the Government is preventing those who purchase assets from protecting them. Would you ever buy a house without insurance? What if the Government said you're not ALLOWED to buy insurance? YOU WOULDN'T BUY THE HOUSE. The bottom line is that without the ability to mitigate the risk of their holdings, investors are discouraged from taking long positions (thus preventing the flow of capital into equity markets).

The second theory relates to the pricing of assets and investors perception of valuation. Without short selling, investors realize that asset prices are being kept artificially high, so why would anyone go long when they know the ban will expire and force stocks down?

My solution?

The SEC should apply the filing rules to both long and short positions. Investors holding more than 5% of a company's shares short should have to disclose their position. Also, stop with the temporary banning stuff...you're just delaying the inevitable.