In his latest New York Times op-ed entitled "Rubio and the Zombies" (http://www.nytimes.com/2013/02/15/opinion/krugman-rubio-and-the-zombies.html), Paul Krugman links the financial crisis of 2008 to a housing crisis brought on by "risky mortgages." Krugman writes:
"For here we are, more than five years into the worst economic slump since the Great Depression, and one of our two great political parties has seen its economic doctrine crash and burn twice: first in the run-up to crisis, then again in the aftermath. Yet that party has learned nothing; it apparently believes that all will be well if it just keeps repeating the old slogans, but louder.
It’s a disturbing picture, and one that bodes ill for our nation’s future."
Hmm, "more than five years into the worst economic slump since the Great Depression" . . .
It doesn't occur to Krugman that the Uptick Rule, which went into effect in 1938 in response to market abuses, was cancelled in 2007, i.e. just prior to the onset of that economic slump. Cancellation of the Uptick Rule has contributed mightily to this prolonged downturn by enabling hedge funds to short shares, i.e. sell shares they do not own, in almost unlimited quantities, and permitting them to benefit from resultant investor panic.
I ask the indulgence of those who read this blog as I again provide the same illustrative example of how cancellation of the Uptick Rule is destroying the US economy:
Micro-cap company "X" has designed and patented a revolutionary widget. Recently, the achievements of "X" have made their way into the news, and its shares have risen. Farmer Joe, who attends night school and reads the financial news, decides to buy 1,000 shares of "X". However, Farmer Joe is unaware that Slick Eddy at Hedge Fund "Z", who couldn't care less about the merits of company "X"'s widgets, has also noticed the rise in the share price of "X". With almost unlimited resources behind him, Eddy borrows "X" shares from various financial institutions and begins to sell vast quantities into the market, causing a precipitous decline in the market price of "X". Eddy then blocks any rally in the share price by activating a computerized program to immediately sell 100 shares at the bid after any purchase. Worried by the huge downswing in the price of "X," and also concerned that at the end of each trading day "X" always goes down (Eddy often sells into the market during the last seconds of trading), Farmer Joe dumps his shares at an enormous loss ("Someone must know that something is wrong at 'X'"). Having succeeded in panicking Farmer Joe and other small investors in "X", Eddy buys back the shares at a significantly lower average price than that at which he sold them, resulting in enormous profits for Hedge Fund "Z". Eddy's bosses note his "fine" work and reward him with bonuses as the shares of "X" tumble.
Of course, there are those who will say that ultimately the stock market is "efficient", and the price of "X" will recover to an appropriate level. However, in the process we have witnessed the flow of wealth from Farmer Joe and other small investors to Hedge Fund "Z" and Slick Eddy.
Also, consider the damage to company "X", which, owing to doubt raised by the run on its shares, is suddenly unable to raise additional funds to finance expanded production of a new line of widgets, declares bankruptcy and fires its staff.
Sure, there are instances when the scientific and/or commercial progress of a company shorted by Hedge Fund "Z" is so great that Hedge Fund "Z" must buy back the shares at a higher price, but these losses are more than covered by its programmed downward manipulation of the shares of many other companies.
I would only add that it has become known to me that although financial institutions are required to "borrow" the shares that they short, many financial institutions are ignoring these regulations: "If you look the other way regarding the shares of company "X" that I borrowed and should have returned long ago, I will look the other way regarding the return of the company "Q" shares that you borrowed.
Yes, it's ugly out there, and it is high time to reinstate the Uptick Rule, before it becomes too late.
Moreover, it's not just "Zombie" Republicans who are preventing long overdue reinstatement of this rule.
As a sidenote,If I recall the m.o. of brokerages correctly,they will loan all shares held in an account,whether they are held in a cash or margin account,but the customer has the right to request that cash account shares not be loaned.I urge all shareholders to make that request.A small step,but the Uptick rule must be reinstated for a level playing field.
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