Short sellers claim there is a moral and economic worth to their trade. They supposedly keep the market honest by exposing overvalued stocks, thereby preventing “irrational exuberance” from creating stock bubbles.
If that was all there was to it, they’d be right. Stock bubbles tend to pop eventually, and when they do, the worst case scenario is that the collateral they represent implodes, the loans that the collateral enabled go into default, and trillions in debt-fueled liquidity is erased in a cascading downward spiral. And just like that, the economy collapses into a deflationary depression that makes the 1930s look like a cake walk. There are good reasons we don’t want to demonize short sellers indiscriminately, or drive them out of the market.
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