Short Sell Shock
Brian Doherty | September 19, 2008, 1:52pm
As someone who had been saying for the past few years that things like Nixonian wage and price controls would be considered beyond the pale in a world that, I thought, understood and appreciated some basics of free markets more than it did 35 years ago, well, it's a good thing my jaw has dropped so much on the past week's news that I have room to fit a lot of crow.
Well, my man Mises always said that some interventionism always created the impetus for more and more interventionism, and this month could be fruitfully dedicated to the old Austrian's memory.
It shouldn't have, I know, but the short-selling ban on financial stocks took me by surprise. An observation from Arnold Kling on this matter:
How can short-selling destroy a good company?
The simple answer is that it can't.
First of all, short-selling can't force down your share price. Short-selling only forces down your share price if buyers don't emerge to defend your share price.
Banning short-selling cannot protect a bad stock. If nobody is willing to buy XYZ at a price higher than $.02 a share, then the price at which XYZ will trade will be $.02 a share (or lower). It doesn't matter whether you have short-sellers or not.
What drives stock prices down is the lack of people willing to buy them at the higher price. If the company has sufficient value, there will be sufficient buyers.
Megan McArdle, while agreeing in theory, thinks Kling underestimates the potential dangers of short-sellers:
If short-sellers flood a market, they can overwhelm the buyers, especially when you have a massive credit contraction in the markets.
Stephen Bainbridge also has a good, thorough list of reasons why this ban is stupid and will be of no particular help in solving the problem of massive sky-high piles of bad debt.
andy | September 19, 2008, 6:58pm | #
chicagotom:
it's interesting that you site a wikipedia article on naked short selling and, in particular, quotes from david rocker. why?
http://www.deepcapture.com/a-bad-day-for-criminals-and-the-journalists-who-love-them/
http://www.deepcapture.com/5000-words-about-an-obscure-bad-newswire-reporter/
just a couple of the posts on david rocker... the gist of this guy's lack of credibility:
"In a lawsuit filed in 2006, Fairfax claimed that this group of short sellers – Steve Cohen, David Rocker, Jim Chanos and Dan Loeb – conspired with Morgan Keegan to manufacture false, negative research about Fairfax."
not to mention, an ENTIRE CITY in utah was not allowed to edit wikipedia because of overstock's attempts to reveal evidence of naked shorting on the page devoted to it. wikipedia covered this up, not-so-subtly:
http://www.deepcapture.com/the-tale-of-slimvirgin/
http://www.deepcapture.com/the-final-word-on-gary-weiss-and-wikipedia/
and basically all of www.antisocialmedia.net
this crime goes deep (hence "deep capture") and none of these guys would allow a message board and especially not something as widely accessible and viewed as a wikipedia page to tell a story different than their own.
i hope, instead of writing off me and the deep capture pages, that the writers, editors and readers of reason will actually take a look at what they have to say and see how well documented it is. hell, bloomberg even covered the issue:
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vIrfhgQPAJ1s.asf
and to jp:
it might be a "short-lived event," but so is a 9.0 earthquake. lots of things don't hold up through crumbling stock: they lose their ability to get credit (see: when a reporter falsely claims that bear stearns line of credit from goldman is cut shortly before bear stearns collapse, source: http://www.deepcapture.com/did-a-cnbc-reporter-help-destroy-bear-stearns/) and are seen as horribly mismanaged and can't recoup. mismanagement might be true in some cases, but as you'll see in the bloomberg video, a lot of the companies targeted and victimized by naked short sellers are otherwise well-managed.
Kevind Delaney | September 21, 2008, 3:37am | #
I am not surprised that the public has little knowledge of shorts. I am really surprised that libertarians have so little knowledge of property rights, and that so many libertarian rags support the coersive practice of short selling.
Short selling involves selling property that does not belong to you.
Short selling is the creation of a regulatory regime. A property owner would not willingly allow someone to sell a claim on their property without some form of coercion.
Shorting directly hurts property owners by increasing the float of stock against their company and effectively decreasing the market value of their firm. A company that would have a market value with a PE of 10 with minimal shorting would only get a PE of 8 in a market with heavy shorting.
A decade ago short positions were relatively small, and most people held shorts for a short duration. In the last decade we've seen a dramatic change in the way that the market views shorts. Hedgefunds, and other large investors, are taking out short positions equal 30% or more of their portfolio. In our new market, we see that even healthy companies have 30% of their stock held short.
We can see the result of this state change in the large number of firms that are pulling their stock off the market and the dry up of IPOs as developing companies no longer see selling stock on the open market as a viable funding mechanism.
Instead of asking the question: Should shorts be regulated? Ask the question: Would a property owner allow a third party to short his home? Would Ayn Rand allow a secondary publisher to short "Atlas Shrugged." Imagine if a person sold 10k pirated copies of the book when it was released, then legalling up a few years later by buying used copies of the book a few years later.
I would think the Libertarian view would be that shorting is a taking created by a coercive market. Property owners would only allow the taking when coerced by the regulators of the market.
I am really surprised that libertarians are screaming about the coercion that is involved in a market that allows shorting of stock.
Kevin Delaney | September 22, 2008, 4:35am | #
johnl,
Did I say the shareholder lending their stock was coerced?
The definition that there is no coercion if you can find a willing party in a scheme seems a bit absurd.
The guy pointing the gun at the teller is doing so of his free will; therefore a bank robbery is not coercion.
According this view, a dictator who willfully loots from the people is not coercive because the dictator is looting willfully.
I suspect one could find a willful participant in any action every labeled "coercive." If your definition is that an act is not coercive if you can find anyone willfully engaging in the act; then I would say no act is coercive.
In the case of shorts, everyone but the rent-seeking shareholder and the shorter suffer from the short by an increase in the float of the stock which effectively devalues the stock.
The coercion comes because a regulatory regime demands that, for a company to trade shares on the open market, they must allow the shorting of the stock.
Shorting is a creation of a regulatory regime.
Historically, most investors considered the taking nominal ... one might see it as a tax that brokerage houses collect as part of the trade. In recent years, the takings related to short selling have become substantial as hedgefunds and certain private investors develop strategies with substantial short positions.
BTW, there is a whole slew of coercive schemes designed to concentrate benefits on a few and costs on the many. Those who receive the benefits almost always accept the benefits willingly.
