What the SEC Really Did on Short Selling

The Federal Reserve's decisions to offer credit to its 18 primary dealers -- and to extend these credit facilities to Fannie Mae and Freddie Mac, complementing the recent Treasury proposal for authority to back their debt and buy their equity -- are highly unusual. Because they break with the norm that markets should decide which firms fail and which succeed, both the Fed and Treasury proposals are intentionally limited in duration. But if policy makers want to return these firms to the discipline of the market, the lessons of the recent turmoil will have to be quickly taken to heart. Already, heeding one important lesson, both the Securities and Exchange Commission and the Fed have strengthened liquidity and capital tests for the firms we regulate. Another central lesson is that financial institutions, which depend on... [read full story]