Thursday, September 25, 2008

In defense of short selling.

Politicians are having a field day with the economic meltdown that they worked so hard to create. Typical of the political classes they create a crisis then argue that the cause was that they don't have enough power. They then propose "solutions" guaranteed to make matters worse in the long run thus creating another crisis which sets the power-grabbing process into motion once again.

In the current situation the politicians are refusing to look at how they created bad incentives to overbuy housing. Instead they want to find scapegoats. And they seem to think that "short sellers" in the financial markets are responsible for the problems there -- as opposed to too many houses being held by people who are defaulting on their payments because the "caring" politicians insisted on creating programs to sell homes to people who can't afford them. Short-sellers are the scapegoat. Selling short don't drive down the value of the stock. They are betting that the stock is overvalued. And if enough people are short-selling that is the canary in the mine and ought to serve as a warning. The politicians think it best that there be no warning that a collapse of a company is coming. They want stock holders caught unaware -- how sweet of them. The above video is a short presentation on short selling.