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Face it, it's fun -- and a little sad -- to mock the Securities and Exchange Commission's precipitous decision to chase after rumors and shorting with a stick. I know there's a crisis, but does anyone with a brain really believe that either initiative will achieve much of anything? It's sad, of course, because the SEC has long been a great institution, as regulatory institutions go, and to see it go sniffing after rumors and rumormongers is an affront to its history and dignity. The decline of the SEC is thus a sign, as if we need another, that a more fundamental rethinking of financial regulation is called for. Alas, so far at least, that rethinking hasn't gone much beyond putting the Federal Reserve in charge of the markets and asking some wandering questions at congressional hearings.
What are the fundamentals here? The issue lurking beneath the shorting debate, but rarely discussed, is the distinction between speculation and investment. These are on the surface simple concepts, but they disguise a forbidding complexity. The key question is: What kind of markets and financial sector do we want to maximize the growth and efficiency of the real economy and insure safety and prudence? In the '30s, when the current system was erected, there was a clear bias against speculation, separating and differentiating institutional vehicles like commercial and investment banks, and tightening rules on margin trading and capital. The world today, as we know, is much more complex than the '30s; and the relationship between investment, in the sense of long-term holdings, and speculation, that is short-term trading, is rife with ambiguities.
That complexity is what makes the SEC's anti-shorting initiative so shortsighted. Shorting is a key tool of speculation; and you can probably dampen speculation over the short term, if you decide it is socially "bad," by simply restricting it. But shorting has also infiltrated all kinds of financial practices that are part of longer-term investment strategies, that is, "good" practices that we probably want to encourage. At the very least, shorting is part of hedging strategies, which, in a world of risk, we'd want to keep. Speculation plays an ambiguous role in other situations as well, though you'd never get that sense from Congress' recent oil speculation hearings. Speculators can distort markets; they can get very rich at others' expense; they may create a short-termism in the market that can militate against long-term corporation planning (though this is an example of conventional wisdom that's also not as simple as it appears). But they also provide liquidity and drive market efficiencies. They're often the smartest money around. Still, how much is too much? Can we get more of the good and less of the bad? Indeed, one of our problems when it comes to wrestling with issues like speculation and investment is that we have increasingly ceased to make a distinction between them -- and that, in the name of market freedom, we're not even sure we should encourage investment rather than speculation, through tax policy or "entrance" requirements or a variety of other incentives. In the boom years, the zeitgeist increasingly insisted that individuals should be able to play against professionals (except, of course, when they inevitably lost); in governance, speculators should have the same "rights" as long-term investors: All shareholders are, after all, alike and omnipotent (except, of course, when some shout louder than others). This planing off of differences and distinctions, in fact, is symptomatic of the rise of the market to unrivaled power over the last three decades or so. We're all just atoms in a vast market chamber. And now we will have one regulator watching us bounce against each other. These are random thoughts, not a blueprint for anything. But they're driven by the sense that we're making decisions both without debate and without an exploration of the larger context. What kind of markets do we want? What's the relationship between the financial and real economy? How much of the financial economy is purely speculative, and how much goes toward generating real economic growth? How much of this is about the growth of the financial economy, or the ability of its players to get wealthy, and how much is about the prosperity of the real economy? How much exposure should nonmarket individuals have to the markets? Every one of these questions is difficult, even intractable. Many are "political," though we've never voted on them. Now the chickens are coming home to roost. And unless we come to some sort of consensus on them, we're really just fated to keep waving away those damn chickens. - Robert Teitelman CategoriesComments
From: Joe,
we had an uptick rule that was supposed to prevent massive shorting, especially with rumors started only to manipulate a stock price by creating panic and fear in the market. the rule was taken away as the geniuses decided it wasn't needed anymore and the very thing that it was supposed to prevent - ended up happening. coincidence? I don't think so, speculators knew exactly what they were doing, and yes speculators are everywhere and if you don't think so then you're wearing blinders, practically every investment is a speculation and lastly every so called professional started out as an individual trader, what an ignorant article
Posted on:
July 17, 2008 6:20 PM
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Yo Titlemon,
The real problem is the lack of "self policing" by the market that was espoused by republican nut-jobs like you. The SEC is going after 'naked' shorting not legitimate shorting, which by the way it has already embraced. You are indeed random.....dufus.