May 26, 2009
In the long run stock prices go up and down based on underlying fundamentals, both past and anticipated. Short selling has no impact on the fair market price of a stock. Free markets work best when they are unencumbered. Let the markets decide what is the correct price of a stock.
The market conditions we've witnessed in the last year have little to do with short selling. Shorting didn't cause the housing bubble or imprudent lending practices. It didn't cause a global recession. It's true that short selling can push a stock down very fast and it's also true that short covering will cause prices to go up unnaturally fast. But in the long run, neither matters. Prices end up where they belong.
Why should there be a bias for prices going up? Should we prevent traders from buying a stock that is going up too rapidly in price? After all, that can cause harm to unwary investors who are drawn into a bubble situation. Obviously that is not sensible. But, I maintain that rapidly falling prices should be allowed to shake out naturally. Investors and traders may place an emotional value on rising or falling prices, but government has no business doing so. Please, just keep your fingers out of it. Let the market decide.