"There is very little evidence that stock market speculation has been an important contributing factor to the present financial crisis.
Law abiding stock market speculation contributes to market liquidity, making markets more allocatively efficient.
If the SEC is to be criticized for its handling of naked short selling, the agency should be criticized for caving to political pressure to ban the practice not for having been tardy in doing so. Short selling is a key component in maintaining market liquidity and naked short selling differs but little in this regard from standard short selling: “In permissible short selling, the party owed shares is the security lender (who used to own the shares before lending them for short selling), while the party owning the shares is the new buyer. In naked short selling, the party owed the shares is the new buyer, while the party owning the shares is (still) the current owner. The buyer in both cases is the same, so the price should not be different. The only difference is who acts as the effective lender of the security: in permissible short selling, the lender is the current owner; in naked short selling, the new owner acts as the effective lender. From a price perspective, it is difficult to see how that matters.” In short, the hysteria over naked short selling is, well, hysterics.
Even if naked short selling were a problem, it is not in any way related to the present financial crisis: ” Repeat after me: The trouble is not with short-sellers. The trouble is not with short-sellers. The trouble is with an over-levered financial system built on a house of cards comprised of under-collateralized toxic paper that was applauded all the way up by “housing is the American dream” nutters who couldn’t see that vast expansions in thinly-traded credit are a path to economic ruin.”
The uptick rule provided that a security generally could be sold “at a price above the price at which the immediately preceding sale was effected, or at the last sale price if it is higher than the last different price.” It was ineffectual in regulating short selling, did not prevent manipulation, and reduced market liquidity. It was a dumb rule whose time had come and gone. It died unlamented and unloved.
There is very little the SEC could have done to prevent the present financial sector problems. Sub-prime mortgages, commercial banking practices, use of the Fed discount window, and so on are all way outside the scope of the SEC’s jurisidiction."
HT Prof. Stephen Bainbridge
UPDATE: It's too late!
