I Eat Bear

I have many times spoken out to say short selling should be stopped, not just for select companies, but all companies. That is not to say that I am so niave as to believe it is the whole problem with the market right now. It does however go hand in hand with many other factors, and the combination has been proving deadly to the market as a whole. And, one reason I stand so steadfastly against short selling, is it is the part of the equation we can fix easily enough, just by halting it altogether.

The other big issue here, is we have HUGE hedge funds, and virtually all of these not only process short selling (legally or not), but they also have LARGE volumes of stocks. Enough in many cases, of a single stock, to have significant price control on the stock, even if just for a short period of time. Combined with short selling strategies, a short period of time is all they need. Buy the short, when they have the stock, then dump the stock in volume, to force the price down. The short becomes a self-fulfilling profecy.

So, the issue becomes fairly clear to me. Very simply, hedge funds, and investment institutions should be banned from ALL short selling activities. It becomes quite clear that we can not limit them from owning stocks, as collectively, that is what the fund is designed to do anyway.

Shorting stocks, is basically options trading anyway. So, why not regulate it so it is truly a useful market tool, like it was supposed to be in the first place. It got it's origin from the commodities markets, where companies truly needed to fix prices in the future, because the needed the resources to be gauranteed to be available, and to get higher/lower prices (depending on if you are a buyer or seller) for a specific item. So, the simple regulation needed, is if you need to be in this kind of a market at all, you must show proof, by taking possession of the item, or producing the item. No, I am not saying it has to be EVERY time, as that is not what the hedge is all about either, but a significant amount of the time. And I would make that a fairly high percentage, like 75% of the time. So, very simply, option traders have to register for a specific commodity, as only they can be option traded (all other options trading is banned), and they must show proof of intent to supply, and/or buy the commodity in question.

The beauty of this, is it can be uniformly applied to all businesses. Hedge funds can't do it, unless they plan to build grain silo's, oil resevoirs, or whatever, and I think that would have to be regulated to keep them out, but few would really want to. Their goal was always to make money, without ever taking posession anyway.

Now, this does not really do much about the problem that brought this market down so drastically in the first place, and to remind you, it was mortgage banks selling unsecured mortgages to unqualified buyers. Then to make the situation worse, these same instititions, sell packages of these mortgages, that can no longer be fairly priced, to large brokerages.
And, because the housing market had been so dependable in the past, those scooping up this now hideously bad debt, were insurance companies, investment banks, and funds of all kinds.

And, we are now seeing them fail, left and right. Keep in mind, they reaped in the good times, so my compassion is not high for them in the bad times. In fact, I get down-right angry about it at times. They have caused a significant unemployment problem, and have been a leading cause of large reductions in the financial funds many need for retirement, to say nothing to being a leading cause to the huge devaluation of the dollar. Yes, every time the government spends our taxpayer money for some undeseving bailout (and they are ALL undeserving, no matter how much it may need to be done), the dollar value dwindles.

Not so long ago, this country took on a war against terrorism, yet today, we are handing our American lifestyles away hand over fist, to foriegners, with every dive in the value of the dollar.
The cheaper dollar, allows them to buy in at reduced prices, reap profits, and support the terrorist activities they do anyway. We are just making it way to easy for them. No, not all foriegners are terrorist, so don't get the idea I mean it that way. But, if even ONE is, do we want to continue to make things this easy for them? We are helping them win, and I for one, want to see it halted, in any way we can.

Regulation of short-selling is a beginning. It is not a cure all. The problem is complex, and the solution will be too. But, having the government bail out businesses, is not the right answer either, as there is a significant cost to that, not to mention putting the government in places it does not belong in the first place. But, the government can, and should, make some simple rules to govern short selling, and what they have now is pitifully inadequate. That, in fact, really is what the government is for, (rather than to play who is our chosen bank today). And, the fact that they have not done so so far, is in my book, cause for heads of the SEC, Federal Trade Commision, and several others to be in an unemployment line somewhere.

Comments: View Comments |  Saturday September 20, 2008