The great Benjamin Anderson once wrote that prices should be permitted to “tell the truth,” but apparently people at the Securities and Exchange Commission have decided that the Big Lie is the better course of action. The Big Lie is that stock prices should be held artificially high at any costs, something the SEC is trying to do by banning short-selling.

NEW YORK (CNNMoney.com) — The U.S. Securities and Exchange Commission took what it called “emergency action” on Friday and temporarily banned investors from short-selling 799 financial companies.

The temporary ban, aimed at helping restore falling stock prices that have shattered confidence in the financial markets, takes effect immediately.

Short sellers borrow stock with the aim of selling it, then buy it back at a lower price, hoping to pocket the difference. The commission said short sellers add liquidity to the markets during normal conditions, but recent unbridled short selling has contributed to the recent tailspin in the stock market.

“The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” said SEC Chairman Christopher Cox in a statement. “The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets.”

The last line is a howler worthy of Paul Krugman’s twice-weekly missives in his New York Times column. The SEC is not “restoring” equilibrium; it is preventing equilibrium.It seems that policy makers are making the same terrible errors committed by the Hoover and Roosevelt administrations during the 1930s. (The Daily Kos, a popular Democratic blog, is calling for a “New New Deal.” Frankly speaking, we are not rid of the old New Deal.) The government wants us to believe that the real problem is falling prices, so if the government can prop up prices of assets by any means, then it is doing us a favor.

Remember that Carl Menger wrote in his wonderful Grundsatze that “all things are subject to the law of cause and effect.” Indeed, Menger’s words live here; falling prices are an effect, not a cause. Short sellers and others who are helping to drive down asset prices are restoring the markets to their natural equilibrium, not preventing it. Unfortunately, the SEC is channeling Hoover and FDR, and they are preventing the economy from recovering.