I have two questions. When did the concept of short selling on the stock market first appear in practice? What would happen if we passed a federal law that prohibited short selling?
I can't precisely answer the first, but I can say it's been around since at least the nineteenth century (in the U.S.).
As for the second: the SEC actually prohibited short selling on sixty or so bank stocks back in late October- November of '08. They still gyrated around despite that 'safety net'. I remember watching Fannie Mae one day when it dropped 50% in minutes. That was during the time when the short-selling ban on it was in place.
I point this out because it shows that a buyer's strike plus seller's panic can give you a hair-raising drop without any short sellers at all. Granted that it would be rare - I only remember one - but they're also rare with short selling permitted.
This is an EXCELLENT explanation of what happened -
http://elainemeinelsupkis.typepad.com/money_matters/2008/09/elaine-meinel-8.html
Many don’t believe it was the Glass-Steagal repeal, written and proposed by the Repubs and signed into law by Clinton only after the repubs gave him and the left carte blanche with the Community Reinvestment Act. I believe BOTH were the beginning of our downfall. Both parties worked together against us. Read up on Citicorp Ruben. Gore, Udalls etc who piled millions into the EPA etc. How they’re so lauded today is beyond me.
The Clinton administration was one of our worst admins. Carter started the CRA but the Clintons took it to a whole other level along with the EPA and Education Dept - the latter was given to us by Carter. When the Clintons got the banks well...