Financial Services Bill

I think that that is more or less correct. I am not absolutely sure what the effects of the new clause would be, to be frank—I am not absolutely sure that its authors are sure what its effects would be—but I am pretty confident that they would be disastrous. Even as a probing new clause, I do not think that it is near the target that the right hon. Member for Birkenhead mentioned as justification for it. There is a second, more general justification for the introduction of measures to restrict short selling, which is that it can encourage panics and irrational behaviour. Of course, as I have pointed out, that is just as true in a long market. Is that not what we have always seen in the long markets? These are the booms before the busts—the Mississippi scheme in France in the early 18th century, the South sea bubble, the bubble in share stocks in the interwar years and the bubbles that we have had more recently. To stop the bust, one must find a way of stopping the boom. Stopping the boom is an extremely difficult task, too. In other words, creating market stability is, in my view, probably a very difficult, if not impossible, task that Governments should address with very great care. After all, was it not this Prime Minister who told us about 160 times in this place alone that he had put an end to boom and bust? He gave us the most spectacular boom followed by the most spectacular bust in living memory—at least, apart from in the memory of those who are old enough to remember the late 1920s and early 1930s. The problem with booms and busts is that they are monetary phenomena. They are normally driven partly by loose monetary conditions, in one way or another. Although this more general issue goes well beyond the remit of the new clause, it is worth pointing out that the Government are trying to do something about it through counter-cyclical capital requirements, for example, and a number of other measures. They are considering the development of macro-prudential tools that are designed to attenuate the virulence of the cycle. That is a very difficult task, however, and they are realising just how difficult it is as they take their ideas forward, not least because the law of unintended consequences usually applies. There is legislation to bear down on disorderly markets, but of course that is not a ban on short selling, but a ban on all selling and buying. The most common measure—although, again, it has been rarely used—is to close a market temporarily, when it is felt that a meaningful price cannot be established. One of the problems is that it is increasingly difficult to achieve that in a globalised world in which grey markets operate. There is one last argument for action on short selling for which I have a good deal of conceptual sympathy, but I am afraid that the new clause goes way beyond what is required. In any case, I think that the necessary legislation for emergency action is already on the statute book. I am talking about circumstances in which a disorderly market can trigger a sharp increase in systemic risk and risk a breakdown of the whole economic system. I think that the recent temporary ban on short selling was imposed to prevent that from happening. It was based on the argument that the protection of the wider public good is an objective that overrides all others for a period of time, but was it of any use? With the benefit of hindsight, can we say that we got anything back in return? The chairman of the Federal Reserve has already said on the record that he would not impose the temporary ban again. The FSA and the Government have been much more circumspect about saying that it did not work, and I shall be interested to hear what the Minister has to say about that in a moment. However, the prevailing view among a good number of insiders—I know a few of them—is that more harm than good was probably done. In that respect, it is worth looking again at what was said in the lecture to which I referred a moment ago. Troy Paredes covered his back a little, but he is one of the world's leading experts on this subject and, before new clause 8 is considered seriously for the statute book, we need to consider what such people are saying. He said:""With the benefit of more but still imperfect information, the decision was made to terminate the ban a few weeks after its implementation. Speaking personally"—" this is him covering his back—""it became apparent that the ban did not stabilize the markets but did result in inefficiencies and other market dislocations and disruptions. In short, the benefits of the ban did not materialize but the costs clearly did."" I have not looked in great depth at the specific issue that Dr. Paredes addressed, but it would not surprise me if, having done the cost-benefit analysis for ourselves, we were to reach a very similar conclusion. The SEC has retained rules that penalise so-called "naked" short selling—that is, when the short seller does not deliver the securities within a short period after the sale transaction date. However, it is worth reminding ourselves that most forward positions in the spot market are covered, and that they are not so-called "naked" short or long positions. The plain fact is that we have all benefited enormously from the development of forward markets and financial innovation over the past quarter century. That is not a popular view to articulate at the moment, because we have just suffered from a spectacular failure in the markets, part of which is attributable to the derivatives market. If new clause 8 were implemented, the inevitable consequence would be that we would lose the long-term liquidity and benefits that come with these markets. The idea that we could do without those things is not one that we should seriously entertain. I very much hope that the Government do not support new clause 8, and that the Minister is courageous enough when he replies to explain the merits of short selling, as well as the disadvantages.