2008-11-02guardian.co.uk

The public's refusal to acknowledge that traders and fund managers have also suffered during this spell of market turmoil means the market players are unlikely to feel compelled to offer much sympathy to the public's plight in return, sympathy that many commentators are demanding be extended by the City on an almost-daily basis.

Indeed; the public doesn't seem to realize that (legitimate) short-selling serves a similar function in markets as brakes do on a car. They keep the market from getting ahead of itself to the upside, and in addition, stabilize it to the downside (since shares must be bought back after they fall), providing a smoothing effect. It is no coincidence that markets have fallen more and been much more volatile since short-selling came under attack worldwide.

Yes, there is illegitimate short-selling, but the core practice is definitely needed, as it allows investors to make bets that companies are overvalued without having to already be owners of the shares. In fact, the illegitimate (naked) short-selling is entirely the responsibility of regulators, who turned a blind eye on the practice for years. They only swore to enforce against it when the money center banks themselves came under attack (of course).

Amidst all this turmoil, public officials have exploited public ignorance of the usefulness of short selling and the distinction between legitimate and manipulative forms of the practice, leading to blanket bans and other forms of intimidation. It is an extremely useful form of scapegoating, made all the more ironic by the far more severe problems at banks (how many public dollars have had to be committed to rescue hedge funds?). The unfortunate result has not been and will not be improved capital markets, and general prosperity. -apk



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