In Defense of Short Selling

The Securities and Exchange Commission temporarily banned short-selling of financial stocks yesterday.

Short selling is a way of betting the price of a stock will go down, and the concern is that it is becoming a self fulfilling prophesy - pushing stock prices down artificially.

But let's remember that all this trouble began with a housing bubble. And short-sellers are one way of keeping bubbles from happening.

Our colleage Alex Blumberg, has a beautiful explanation of something called "naked short selling" on our podcast. The SEC previously banned naked short selling though no one seems to think the practice was widespread.

Alex is working with us from his regular gig at This American Life (Thanks Ira!) which just won two Emmy's for its brilliant TV series on Showtime. (Read Ira's reaction to winning on the TAL website.)

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This was an awesome story - on par (although shorter)than The Giant Pool Of Money. I can't wait for the new episodes to come out!

Sent by Chris | 5:58 PM | 9-20-2008

Love Alex's stories - keep it up.
And a question: amid the chorus of support for short sellers (including Nocera's near absolute blessing this morning on Weekend Edition), I've read a few, poorly documented, suggestions that something different has happened with short selling recently. Nowadays, a crash would surely be lead by massive shorting. And there have been reports that the massive shorts that endangered AIG and other recent, sudden collapses, came from someone other than the usual big short sellers. If true, that's a big story - perhaps even "financial terrorism," as one report labeled it. What do we know about who piled on the shorts on AIG, Lehman, Bear Stearns, etc.? If (as I suspect) we don't know, shouldn't we?

Sent by Bill Chaloupka | 7:57 PM | 9-21-2008