Short selling is a beneficial process that allows anyone to participate in the market’s evaluation of share prices. So long as contracts are enforced, even naked short selling can be a beneficial process that allows the quickest possible adjustment in mispriced stocks. The government’s recent efforts to “protect” nineteen favored firms from naked shorting will do nothing but raise transaction costs. Beyond that, it provides a sobering hint of future, more significant innovations in federal government support for particular financial giants. FULL ARTICLE
Source link: http://archive.mises.org/8389/short-sale-restrictions-are-an-exercise-in-naked-power/
Short-Sale Restrictions Are an Exercise in Naked Power
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Leaving aside our tangent on banking, those of us seeing this reposted at LRC need to give props to Prof Murphy for his prescience. We can not be certain whether the naked short prohibition was part of some grand master plan. But plan or no plan, it turned out to be a small step on the way to more outrageous interventions.
The problem with FRB’s is NOT fraud, provided everyone knows that what they are promising is not true. If a depositer knows he might not get his money back, but is offered an interest payment for taking a risk, then I don’t think there is fraud, per se.
Nobody would deposit money at a zero or a negative interest rate (equivalent to paying a warehouse fee) if they thought there was still a risk of losing their money. This would happen only if the alternatives were riskier still, for example, hiding a $1 million in cash under the bed.
But the most important issue with FRB’s is that of legal tender. This is what makes FRB’s truly evil. If we didn’t have to be forced to use the same medium of exchange as the FRB’s then we could avoid the risks associated with holding onto the currency of an FRB (from inflation).
Equivalent in damage to legal tender laws is government bailouts. Both of these use force to make people participate in risky investing and that is the key issue. As always, follow the force.
A very detailed, very thorough explanation of the mechanics of illegal/manipulative naked shorting is described here:
http://counterfeitingstock.com/CS2.0/CounterfeitingStock.html
This is an incredibly confusing and difficult concept to grasp, but it is worth the time.
Short selling is fine.
Some naked short selling is arguably fine (for liquidity)
Illegal/manipulative naked shorting is absolutely insidious.
I can’t believe this R Murphy is able to post such rubbish on the Mises Inst blog. Naked shorting creates phantom, counterfeit shares as noted by many writers. Do these shares vote? What did the buyer get? Obviously not what he expected any more than with counterfeit money or forged art. Undermines the whole system and any writer stupid enough to support such mayhem should not be respected by anybody. One wonders though what kind of inducement encouraged Murphy to do so. Commissions maybe, grants maybe. Professor of what? Who knows. Waste of time.
canbyte,
I tend to agree with you. There should only be one owner and one vote per share at any given point.
At the same time, it is fine to sell something that you don’t have yet, as long as it is identified as such to the buyer.
In that sense, I think Bastiat’s question above is pertinent: each market comes with a set of rules, and if I can choose which market to participate in, I can pick one that offers stricter rules if I want. What prevents this today? Does the state have monopoly power over new markets?
Finally, I am intrigued as there seems to be a very interesting market design and technical problem here. As a software engineer, I can’t help but imagine there should be a way to automatically find willing lenders, reserve the shares, make digital claims and contracts, etc. using a secure protocol. It all seems solvable.
There are many laws or implications before we can buy or sell house in a short sale? . Experts say that the damage that the foreclosure do to your credit is the same with what short sale can do.
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