Evidence of Soros' Reflexivity Theory

Germany has banned naked short-selling of securities in a move that was swiftly declared, catching other Euro partners off guard. The words Merkel used to defend this action are evidence for George Soros' reflexivity principle, in which markets feed on themselves to go too far. You can see this in the Reuters story "Germany declares solo war on speculators".

In the fourth paragraph:

"Merkel told Germany's parliament EU leaders had to ensure markets could not "extort" the state any more and the bloc would introduce its own financial transaction tax or levy if the Group of 20 nations failed to reach a deal in June."

While the description of the markets could be wrong, and explained as a leader's perspective on the markets, the underlying concept is a strong statement of the belief by German officials, from direct observation of the markets, that the marketplace will go too far on its own, with real and malevolent effects on the economy at large.

Although the tendency at the political level is to blame "someone else out there," as though speculators always seek to tear down countries for profit in preference to any other vice, it is clear that the danger perceived is real. That the danger is caused by collective economic behavior is a fine point. If legal action can defuse the potential for economic damage, then the state is correct to act by inserting obstacles in the path of the meltdown dynamics.

It remains to be seen whether the selected mechanisms will create the desired effect. The immediate reaction in Europe was to increase selling to reduce risk exposure, just in case the German government had inside information that the market participants weren't privy to. Still, the point remains: The short-selling ban is motivated by a desire to cut reflexivity short.