Monday, September 24, 2012

Short Sellers: The crony capitalist's enemy

There are a lot of ways that opponents of capitalism don't understand how important financial markets are to the way a healthy economy functions. They see people who sit in an office or work on the floor of an exchange as parasites on the system, instead of productive members of society like construction workers or people working on an assembly line. With a construction worker (at least when he isn't leaning on a shovel), it is easy to see the product of his labor, what he is contributing to society. Its not quite so easy to see with a stock broker or financial consultant.

But financial markets are VERY important to a smooth running modern economy. Many economists have explained how speculation helps to coordinate the use of resources and stabilize prices. During a harvest, speculators buy up grain when supplies are abundant and prices would otherwise be low. This provides the farmers with higher prices. But then the speculators save the grain for later in the season, keeping it off the market so it will be available when grain supplies would otherwise be scarce.

It is hardest too see the benefit to the whole economy of having short sellers. I myself have trouble getting around the fact that short sellers are betting on the destruction of value. Emotionally, this, to me, seems creepy, destructive, sneaky, even dishonest. But the more intellectual parts of me have to acknowledge the great good that has been done by short sellers. What they do is reveal the rot in our economy, and speed the healing process.

Take Enron for example:  regulators should have known that something was wrong, but they turned a blind eye. It was speculators who uncovered the corruption, made a big profit selling the company short, and demonstrating to the world that the company was, in fact, an empty shell. The short sellers did not destroy Enron. It was already hollowed out and destroyed. We didn't know it, yet.

What the short sellers did was speed the process by which people came to realize all this.

Without the profits available to short sellers, there is not as much motivation to do the research, take a really good look at a company's books and see if it is really as profitable as people think it is.

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