Ethics of Trade / To Regulate or Not

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Reply Tue 17 Mar, 2009 09:08 am
Good Morning,

PART ONE: SETTING THE CONTEXT: Please enter in the following assumptions for this argument:[INDENT]
  • Greed and Avarice are a part of the human race; they are unavoidable
  • The desire for money is unquenchable; there is virtually no place where a greedy person says "Ok, I've got enough"
  • The only way to stop such persons from using unethical or damaging means to gain wealth is to enforce/force against such behavior
  • The only way to even begin to stop damaging behaviors is for them to carry reliable, quantifiable and predictable negative punishments
  • Creativity in coming up with ways of making money is limitless; ethical or not, if money can be made doing 'it' - 'it' will be done
  • A primary source of acquiring wealth is trading securities on international exchanges

Conclusion: Creative ways of acquiring money using securities and stock exchanges will continue to evolve, regardless of the morals of such an act unless such acts carry predictable and dire consequences for the doer.
[INDENT] Ladies and Gentlemen,

Even while in the storm resulting from the poison practice of CDOs and CDSs, there's yet another that encourages and drives down the viability and health of international stocks; one that hasn't got much air-time. This one is called Short-Selling [1].

Example: I think that Bill's Shoe Company is going to go bust.[INDENT]DAY 1: Bill's Shoe Co. stocks are selling for $100 each, I think I can make money off 100 stocks
[/INDENT][INDENT]DAY 1: I don't have $ 100,000.00 but I can borrow or rent the stock and sell it under the agreement that I'll give those stocks back at some point.
[/INDENT][INDENT]DAY 3: I sell them at current price; Now I've got 0 shares at owe someone 100 Stock in Bills Shoes; I've also now got $100,000 in my pocket.
[/INDENT][INDENT]DAY 10: The following week the stock plummets to $50 per share.
[/INDENT][INDENT]DAY 11: I buy those same 100 stocks back, at $50 each - paying $50,000.
[/INDENT][INDENT]DAY 12: I give those stocks back to Bill's, fulfilling the rental agreement and pocket $50,000
[/INDENT]This is bad because it causes a downward spiral in prices and values. "As explained by a research analyst at University of Tennessee, Min Zhao, the SEC's lifting of the uptick rule for large stocks in the pilot "is associated with undervaluation . . . [and makes it easier] for 'predatory' short sellers to aggressively submit short orders and to manipulate stock price downward." [2]. This is widely believed to be a key factor in the initial meltdowns of key markets (Bear Sterns and Lehman Brothers).

From 1938 until 2007 this practice was effectively banned by only allowing, "... a stock to be sold short only after a rise (an "uptick") from its immediately prior price."; effectively killing any potential benefit a short-sell might give. [2]

:[INDENT] Given what we know of human behavior (above) and the widespread effects of stock trading, we're forced to choose between legal means (prohibitive) or allowing the "free spirit of the entrapaneur" to reign and not waxe 'socialist' by allowing such risky practices to continue.
[/INDENT]Which is better: More Regulation or Letting the Chips of Free-Trade fall where they may?

I think it's an important ethical issue.

References and Links:
[1] Short-Selling defined, Wikipedia
[2] Wall Street Journal; Short Selling Ban should be Reinstated, Nov 2008
Short-Selling spikes prior to US SEC curbing, July 2008
[3] World Financial Markets Impose Short Selling Ban, Sep 2008
Short-Selling: (UK) Banned, Aug 2008
(US) US SEC Bans Short-Selling on 22 Stocks along with Bailout, Sep 2008, MSN
(US) Wall Street finds a way around Short Selling, Sep 2008, CNBC
Austrailian Ban on Short Selling extended, Mar 2009
Reply Tue 17 Mar, 2009 09:40 am
My interest in this topic was sparked by last night's episode of the Daily Show. Samantha Bee did an "investigative report" into the idea of short selling. I think this destroys the entrepreneurial spirit that capitalism was intended to be founded upon. It kind of reminds me of the idea behind self-fulfilling prophecies. If enough people think a business have stocks that drop, then the value of the company by virtue of dwindling investment in the company will fall.

I think regulation should be passed to eliminate this practice, because it seems bad for economy. Sure, some people make money, but it appears to come at the expense of others and the future of companies.
Mr Fight the Power
Reply Tue 17 Mar, 2009 11:41 am
Short selling bans are another idiotic measure imposed by glory seeking politicians.

The people opposed to short selling are those that are obsessed with seeing stock indices constantly going up. Ultimately, short sellers act as a monitor for overvalued stocks, they see a stock's price is too high and will drop, they short it and make a profit. Considering the crash we have just been through, in which the bottom fell out suddenly, perhaps the ability to identify and profit from overvalued stocks is not such a bad thing.

Face it, politicians and financial investors hate negative information, that much is obvious. Short sellers are one of the sole private sources of negative information.

EDIT: This is really frustrating too. It is easily predictable:

1) Short-selling is banned.
2) Negative information on stock prices comes to a stand still
3) Companies find it much easier to fraudulently inflate their stock price
4) SEC misses all sorts of companies that would have been caught by short sellers, such as Enron, Tyco, Bear Stearns, etc.
5) Millions of investor money is lost, causing an outcry.
6) More regulation ensues, restricting market growth and causing more sources for arbitrage and scheming within capital markets, and repeating the whole thing over again.

SECOND EDIT: As far as regulation goes, I look for the existence of aggression or fraud as justification. If this doesn't exist, the regulation is the imposition of violent aggression and thus is wrong.

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