Free market forces are routinely given great credit as wise and omnipotent. That is, so long as asset prices are rising. Once the inevitable price corrections begin however, there is typically outrage and demands for government intervention to step in and save us. This common pattern was evidenced last week as the SEC announced vague new emergency restrictions against short-selling. This initially prompted a short-covering rally in stocks that is likely to fade out again over the coming days and weeks.

As Spencer Jakab points out for the Dow Jones Newswire today in The mother of all short squeezes may end badly:

"The fact that the initial results were spectacular, particularly for financial stocks, shouldn't be too encouraging. Consider what happened in April 1932, at the depth of the worst-ever bear market. Upon the announcement of a cumbersome new rule that required written permission from each shareholder before a broker lent out his stock, the Dow Jones Industrials rallied 3.51%. By the time the rules were instituted weeks later, the short covering was over and the slump had resumed...   more »