It is an insane idea, of course. Forbidding short selling means that the only legitimate speculation in the markets is that securities will go up. Even if the basics in a company are lousy. Even if its products are obsolete. Or its marketing has gotten little response from the public. Or its brilliant CEO has a brain tumor. Or there's up-and-coming and defter competition. Or your company's executives -- investment houses, banking institutions, mortgage makers, loan packagers -- don't know much about what they have packaged. Or, finally, these executive have, at the very best, been involved in happy-go-lucky fraud. And self-enrichment: Alan Fuld, who did know how precarious Lehman Brothers was, took home last year $45 million. Do not cry for him.
The prices of AIG, Morgan Stanley and CitiGroup and the other former high-flyers are right now worth where they are actually priced. If the short sellers forced recognition of these values they were doing the work of truth-tellers, like doctors who expose a drug that does not work anywheres near as well as its maker claims.
But, of course, short sellers also cushion the market from going too far down by what is called "covering." This restores a kind of equliibrium.
Short sellers keep the markets honest -or much more honest than they otherwise would be, A market without them would be like the 17th century Dutch market that sold black tulips at the equivalent of $50,000 a stem. In those days, sometimes one tulip would be exchanged for a house. Who ever knew that you could get high on
tulips?
By the way, what S.E.C. chairman Christopher Cox has put forward is a ten day ban on shorts. He doesn't even have the courage of his stupidity.