Trying to resolve the stock market crisis by banning short selling is like trying to cure cancer with a couple of aspirins, says emerging markets expert Irwin Greenstein.

But that’s what regulators around the world are doing, with little success.

Next in line for the ban is Hong Kong. So if you have money in hedge funds there, you could be in big trouble. China, meanwhile, is introducing short selling on its exchanges.

This from Irwin:

Regulators around the world are tightening the noose around the scapegoat de jour, short sellers, with Hong Kong now ready to kick out the chair from under them.

The Standard reported today that Hong Kong is ready to impose the ban, which could take effect immediately. That means if you have money in Asian hedge funds, you could find yourself in some real trouble.

Other Asian countries such as Singapore, Japan, Taiwan and South Korea have temporarily banned short-selling activities completely. China’s long-standing ban on short selling never reached Hong Kong, but that could change imminently.

In Asia, and the rest of the world, short sellers are seen as the scourge of financial stability. Their job is to bet against a security, in effect fanning the flames of negative sentiment that drives down prices.

Now, Asian hedge fund and ETF managers are sitting on pins and needles to see if Hong Kong joins the ranks of short-seller vigilantes.

According to The Standard, word of the plan emerged after Hong Kong’s Securities and Futures Commission warned on Tuesday it was prepared to crack down on illegal short sales as the market situation became unstable.

The agency said it was prepared to “implement more aggressive measures in the event that any abusive short selling is identified.” Punitive actions would include market-wide controls, as actions against individuals or companies.

The current proposal by the Securities and Futures Commission is a follow-on to the existing ban of so-called “naked” short selling, which allows investors to sell stocks short without previously borrowing the stocks for settlement.

Whether or not a ban in Hong Kong will work remains to be seen. So far, the bans in other markets seem to have a negligible effect. It’s like giving a cancer patient a Band-Aid and a couple of Aspirins.

Symbolically, the squeeze on short sellers may make for good politics. But witch hunts are good sign that the world has gone mad.

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