The Ethics of Short Selling

Is short selling ethical?

How much price discovery really occurs because of short selling?

Short selling occurs in margin accounts. What happens to credit expansion and credit contraction as short selling occurs?

Is short selling at the margin a run on the bank at the expense of legitimate shareholders to the enrichment of the short sellers?

Will the markets appropriately readjust to the emotional movements caused by runs on the bank?

Well, here is my opinion.

The benefit of short selling is the motivation that occurs on companies whose business models or ethics are questionable.

Most short selling is speculation.

Speculation is good when it enhances, or has a chance of enhancing, economic well-being.

Otherwise, speculation is bad. It has no economic benefit. Where speculation occurs in a credit based economy, the chances for credit expansion or contraction result from the gamesmanship of the combatants. Most of us don't play the game, so our livelihoods are left in the hands of the speculators. Most of us should not be speculating. We live in a world of specialization. It is not realistic that a majority of us can be good at speculating. The great thing about specialization, is that as we all work, produce and trade with each other, we are all better off. The so-called market economy. But when the actions of a few, impact the majority, like they do with speculation, intervention needs to take place.

In our current economy, where our economic well-being is built on a mountain of debt and inflated capital, short selling has the potential to collapse wealth as runs on the bank take place.

Short selling will allow so-called strong hands to buy equity at bargain prices after the collapses take place. Stronger companies will pick up business and capital. The strong will get stronger and the weak will get weaker. The inherent risk is the same one that is strangling our current economy. Too much money and wealth is being concentrated in too few hands, resulting in a propensity of that money to be hoarded in savings types of accounts. More money and wealth needs to end up in the hands of those that have a higher propensity to spend.

I guess I would support the following:

Naked short selling should not be allowed.

The manipulation of shares of stock, such that they are not available to be borrowed for short selling, should not restrict derivatives of those shares from being available for legitimate short selling.

When short selling causes a run on the bank, so to speak, a government equity or sovereign fund should be available to mitigate the action, so that the people in general have a competitive opportunity with those short sellers that are trying to monopolize equity positions.

At times of inappropriate economic stress, like with the Hunt Brothers trying to corner silver, or with a run on the bank, so to speak, the rules should be changed to protect the public against monopolistic activity.

With monopolistic price tendencies, such as in the oil markets, government activities should be available to mitigate the economic stress.

I guess that I am still favoring a sovereign US fund to compete with the Hedge Funds of the world. This fund would be owned by the people, managed by the best advisers in the world, for the benefit of the people. This fund would help fund the entitlements that will be increasing as time goes on. This fund would act as an endowment to fund America's needs, so as to mitigate the amount of funding that comes from taxes. Taxes tend to be a disincentive to work, whereas, wealth creation tends to incentivize us to work.