It's my ball and I'm not playing anymore. That was the message delivered last week by German chancellor Angela Merkel as she stormed away from the markets, taking her ball with her.

Banning short selling on selected stocks and government bonds is a very short-sighted move on her part. In protecting her precious banks she is risking their long-term future. She has worked out what is now obvious to the rest of the market. The European banking system is reliant on the survival of the PIIGS. What was once risk-free sovereign lending to Ireland and our friends in the Med is now looking like so many piles of paper blowing in the wind. Trillions of euro of sovereign debt will either be debased through inflation, or default. Either result threatens her precious banks. Holding up the share prices will not change this fact.

The financial markets that she and the European Union are targeting are the same financial markets that are funding the deficits of almost all European governments. Banning short selling is fine in theory but very bad in practice. Running off with the ball to play by yourself is not a good long-term plan in football or the financial markets. To have a good game of football you need lots of teams and players. To have a functioning market you need lots of traders and speculators.

Speculators and hedge funds provide a vital service to any market in which they operate. They provide liquidity, and this is like the oxygen we breathe. It allows buyers to find sellers and sellers to find buyers. Liquid markets operate in a free and open manner and accurate prices are more likely to be discovered with this type of market. Markets that operate only on the principle of genuine need tend to look a lot more like the local village market, with an orderly procession of trades but no real volume. If you need to sell into this type of market, you often can't find a buyer at any price, and buyers are equally likely to be forced to pay too much for assets. The result is that people choose to stay away.

To get a vision of a market that operates like this you only have to look at the Irish property market. Property buyers and, in particular, homeowners were forced to pay too much for property because there was a limited supply. This drove up prices to unrealistic levels, creating the bubble. People felt forced into owning their home by social and cultural pressures, and we now have the destructive influence of negative equity and mortgage defaults. If this market had short sellers, the liquidity of houses for sale would have been much higher and price rises would have been less steep. Speculators could have taken active positions against the Irish property market and this would have pricked the bubble much earlier in the cycle.

There is no liquidity in the property market at the moment, again because of the lack of speculators. Many properties have no bids at any price and this is partly to blame for the freezing of the entire market. You may not like the true market price that the speculators' liquidity would generate, but it is the truth and it will be found out in the end. That is certainly the lesson that can be taken from the Irish boom.

The banks tried to hide their problems and lied about the assets, but the speculators found them out. The banks' shares were driven to their true value, which was zero, before the government stepped in to save their friends and banned the short selling of Irish shares. This temporary ban is still in place because the result is still zero for these shares.

Governments seem to fear the power of the market because it is a direct challenge to their sense of power and entitlement. In the land of government-think, freedom is fine once you don't use it to challenge the power of government. This is not freedom and it is beginning to look like power-hungry Western governments seeking to hang onto the last vestiges of their status. The last defence of European governments is to ban and regulate the free market on which they built their wealth – a classic case of cutting off your nose to spite your face.

There are plenty of places around the world where you can play football or allocate your capital. If Germany and Europe want to remove themselves from the match and play by themselves, it will be a slow demise. Capital, like water, will find its own path. Governments will not be able to control it. The genie got out of that bottle a long time ago.

Let the banks deal with Ghost Estates

The problem of ghost estates and half-built developments has a simple solution. The banks that financed them should be forced to deal with them and complete the building works to a safe standard. It is clear in these cases that the developer is out of money, and the bank has an obligation to step in even if it costs money. Pretending that nothing is wrong is selfish denial.

Funding a building project and seeking to profit from it, as the banks did, carries obligations. Health and safety regulations should be brought to bear on the banks. Let's not wait for a serious accident before taking action on this. Maybe those pension top-ups could be diverted to people with a real need.