The people or businesses attacked have no chance to defend themselves. When confidence is critical, such as a marriage arrangement or in a banking business, an evil word may destroy years of confidence building effort. While I demonstrate that I am not a cleptomaniac, my chance at the job may have passed. While I demonstrate that I am not an alcoholic gambler, my fiancee may lose her patience with my troubles. While a bank demonstrates its solvency, it may be too late to stop the run. People needs protection against these type of attacks on reputation.

Being erev shabbes, it behooves to mention Chatam Sopher, a rabbi, who wrote a book forbidding badmouthing people or businesses.

This isn’t bureaucrats trying to fight financial wizardry, this is simple shoot-the-messenger politics. Bear Stearns was over-leveraged and heading for collapse. Lehman Brothers is also unsound. Overstock is crap too, incidentally. If it’s not about the fundamentals, as some of the messenger-shooters claim, then name me one single company with good cash flow and a sound balance sheet that was made bankrupt by a shorting conspiracy.

Someone on another messageboard trotted out the old “Free speech doesn’t give you the right to yell ‘Fire’ in a crowded theatre” cliché. My reply was (sans expletives) “Shouting ‘Fire’ is not just a right but a moral imperative when the theatre actually is on fire“.

I agree that short selling allows new actors to play a part in the pricing process on a stock, so that it could increase the accuracy of the price compared to some objective target. But, when you short a stock, you borrow shares from a holder & sell them to a new buyer. So, if there are 100 million shares outstanding, and 20 million shares are sold short, that means that there are actually 120 million shares held in the market. If they are $10 per share, that means that $1.2 billion has been invested, ostensibly, in the company. But, only $1 billion is actually in use by the company. The other $200 million is being used by the short sellers to capitalize some other activity. It seems like this creates a perpetual undervaluation of the actual company, since the market must continue to attract $1.2 billion worth of investors in order to maintain a market capitalization of $1 billion.
Short selling is a hard business, and market wide, it’s a fight against an ebbing tide, so maybe it’s the short sellers as a group that end up paying in the end. But, even though I can’t put my finger on it, it seems like short selling would have an depressive effect on the market even beyond its ability to “rationalize” prices.
It also seems like if there is something unfair, it is the fact that the lender of shares gets to pocket the fee from the short seller at the expense of the other shareholders, who don’t receive the fee but still have to suffer the depressive effect of creating an artificial seller in the market. Maybe it would be a better system to have all short selling be naked, with all short sellers automatically paying a set interest rate to a central fund that is paid out as a dividend to all shareholders.

http://en.wikipedia.org/wiki/Copycat_suicide

Hm, are there any suggested practical approaches to reverse this tendency of ours to shoot ourselves in the foot? In a way I think it mustn’t be that obvious to many people that these policies are bad, because then wouldn’t there be more of an outcry against such policies?