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Short Selling and Hedge Funds Should Be Banned

Posted by libhom Saturday, July 04, 2009

Halloween costume with woman dressed up as greedy rich personOur corporate media are so propagandistic that most people in our country don't even know the difference between investment and speculation. Investment involves buying a commodity (e.g., anything from a bank CD to a stock to a bar of gold) with the intent of making money on it over a long period of time based on its actual value and rational analysis of real value in the future. Speculation involves short term gambling on commodities in order to exploit or create market irrationality.

Short selling involves agreeing to sell stock at a certain date in the future in hopes that the price will go down at the time of sale. Often, the selling party doesn't even own the stock. This is such a transparent form of speculation it isn't even funny. Most forms of gambling are illegal in this country. It is illegal to start up an Internet gambling site, unless the gambling is in financial gimmicks like short selling.

Short selling tends to exaggerate fluctuations in stock prices, especially in bad economic times. Declines in the markets are pushed over to crashes and crashes are pushed over into disasters by the role of short selling in creating emotional momentum for falling stock prices.

pile of buttons that say Greed Kills

Hedge funds are vehicles for people and institutions with large sums of money to pay alleged experts to speculate on their behalf. They don't have the same public disclosure requirements as legitimate mutual funds. The bad decisions that are made by hedge fund speculators tend to be magnified throughout the economy because of the enormous amounts of money involved. Even worse, pension funds are allowed to put their money into hedge funds, endangering peoples' retirement incomes.

At the very least, you would think that it would be illegal for pensions to invest in these dangerous hedge funds. Ideally, the hedge funds would be abolished as such and the funds would be converted over to legitimate mutual funds, subject to the same openness and regulation which protect investors and, more importantly, protect the general public who suffer the economic consequences of the irresponsible behavior of the hedge funds.

hand of man grabbing flying moneyThe Securities and Exchange Commission is considering some additional restrictions on short selling. This is a small step in the correct direction, but it doesn't go far enough. Legislation to ban short selling altogether is absolutely critical to help avoid speculative bubbles. Banning the hedge fund also is terribly important.

Any person that defends short selling or hedge funds is clueless on economics and ignorant of history.

Photos: (in order)
Beau B
madhavaji
Steve Wampler

 

3 comments

  1. Pagan Sphinx Says:
  2. Good post, written in language I can understand. Thank you.

     
  3. Sandra Says:
  4. There is a DVD movie out about the whole stock market crash/manipulation story called: Stock Shock.
    Stock Shock is at amazon.com and elsewhere.

     
  5. GDAEman Says:
  6. Promoting economic literacy is a great populist tradition. Thanks for doing your part to keep the tradition alive.

     

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