Naked short-selling is a racket where you treat shares like the banks treat cash and subject them to fractional reserve. Like fractional reserve banking it tends to involve three or more parties with each party doing things which appear not to be a hanging offense. But that if you look at all the parties as if they were one, you can see that its a straight-out violation of property-rights and a racket.
Why its worth looking at is it can throw some light onto the history of ordinary fractional reserve. And allow people to see by comparison the essentially criminal nature of fractional reserve with fresh eyes. What you would expect to happen is instead of a straight ban on obviously fraudulent behaviour , we might see regulations restricting this damaging activity to a priviledged few. We may see a sort of science of risk management with regards to this racket break out.
Andrew Reynolds is a so-called “risk management expert” in the field of banking. And yet the only reason that his alleged field of alleged expertise exists is because an activity, which is inherently fraudulent, has been hardwired into the system, protected, and subsidized.
Now we could imagine that if naked short-selling of shares became a legal, protected and subsidized activity, we could imagine the sprouting of so-called risk management experts for people to be able to cope with this other ponzi-scheme.
What happens with short-selling is that you borrow shares for a specific time period. And then you sell those shares to the market. You then have to replace the shares at the end of the time period. You are betting that the share price will have fallen and so that when you have to replace these shares at the end of the specific time period, you will make a profit. As far as the shares are concerned this is akin to a term loan. The loan is of the shares, and for a specific time period, with some sort of interest payment.
The above is a legitimate example of short-selling. And it represents clarity in property-rights. Since only one party has possession of the shares at any one time. And there is not two claims to any one share. No assumed ownership of shares is created out of thin air.
But naked short-selling is another matter. It is inherently fraudulent and it is exactly the same sort of fraud as fractional reserve banking. It also causes all sorts of harm.
Actually its amazing that its even come about. You’d think they could tag each of the shares with an individual number or something. So that no one share could be allowed more than one claimant to them at any one time interval.
The Reserve Bank doesn’t offer any overnight loaning of shares in the same way that it backs up the other racket with an overnight cash rate, selling funds at special discount rates to the banking system at the expense of the rest of us. The reserve bank doesn’t print the shares of public companies on a printing press and use these shares to buyback debt whenever the naked short-selling ponzi scheme looks like it might unravel. The reserve bank offers no such subsidy to this other racket. Hence when this behaviour unravels its like a game of musical chairs. Where you have 30 people and only maybe 10 chairs when the music stops. And because there is no government agency to print up new shares with a printing press then someone has to miss out.
What will happen whenever the music stops is that millions of dollars will be wasted in court. And the court judgement won’t amount to any natural law, it will be arbitrary. Because if the court cannot, or will not, rule that the practice is inherently fraudulent then any subsequent decision must be arbitrary and so subject to endless disputation.
Things have reached a stage in the United States where when a party cannot make good with the shares they simply issue an IOU. The choice must be made now whether to make the practice legal or not. If they decide not to they are inviting mountains of regulation, periodic crisis, day to day inefficiency, and further impetus to the whole system being dominated by a few awesomely rich cronies.