It has been long standing Republican ideology that government is the problem. One should not be surprised that when such people are placed in positions to enforce the law they do not do it. The Bush administration only enforces laws that suit it. It ignores the Constitution using fear, flag waving and patriotic rhetoric to justify things that would have been unthinkable years ago.

I find it odd why NSS was not balanced with Naked Long Buying where one could buy stocks that don't exist. Maybe it would have made the fraud so obvious that even the government hating and rule of law despising Republican officials could not ignore it.

In any case I find the concept that things that are borrowed can be sold to be rather bizarre. If I rent a car and try to sell it, I would expect to be arrested. If I borrowed a friends tool and sold it, it would probably be the end of the friendship.

While short selling may make for market liquidity short term, I doubt that there is a long term benefit to it except to market makers and those specializing in it.

There are many markets that are liquid with out short selling. The labor market comes to mind. Clothing markets don't have short selling and yet no one runs around naked. Same thing goes for food items not trading on the commodity exchanges.

Short selling facilitates the market makers and the flipping of financial assets quickly. It helps to create fast market conditions where long term investment is held in contempt because no one is committed to their investments. If investments were less liquid like real estate, people would likely not be so flip about buying a particular stock or commodity.

Volume of trades would slow, much to market makers dismay, but financial decisions would hopefully become more sound since buyers would be committed for longer time periods due to illiquidity. There would still be ups and downs as in the current housing market, but I doubt the world would come to an end or that markets would cease to function.

I would agree with Karlof on NSS. In general, some regulation and oversight is necessary and SOME authority needs to step in take proactive action as in the well-known case of overstock.com. The repeal of Glass-Steagall was another 'free market' disaster.

Stiglitz: The globalization agenda has been closely linked with the market fundamentalists -- the ideology of free markets and financial liberalization. In this crisis, we see the most market-oriented institutions in the most market-oriented economy failing and running to the government for help. Everyone in the world will say now that this is the end of market fundamentalism.

In this sense, the fall of Wall Street is for market fundamentalism what the fall of the Berlin Wall was for communism -- it tells the world that this way of economic organization turns out not to be sustainable. In the end, everyone says, that model doesn't work. This moment is a marker that the claims of financial market liberalization were bogus.

Karlof1,

I feel your pain on the naked short selling issue. As you say it's simply a case of ordinary fraud. Even the most libertarian, laissez-faire free market proponents recognize that the government has a policing role in preventing fraud. I think that part of what happened is that selling short is conceptually slightly difficult for the average person (even more difficult for politicians). Since selling short in futures markets is completely normal, fair, and integral to the central concept of futures markets, somehow it's not obvious that shorting equities is not strictly analogous to selling commodities contracts into the future. If you allow shorting of a common stock without borrowing it, it’s functionally equivalent to counterfeiting the stock and selling it on the open market.

However, I think that an explanation of the current financial meltdown is incomplete without considering the unprecedented credit expansion. In his book Money, Bank Credit, and Economic Cycles, Jesus Huerta Desoto gives an interesting historical overview of the phenomenon of boom and bust credit cycles caused by bankers using fractional reserve banking. It's been going on since antiquity and is always characterized by bankers co-opting the political system to create inflationary booms followed by busts. In fact, the current debacle is only unprecedented in its scope. The grand scale of this boom and bust seems to me like an outgrowth of digital information processing. There is no way that the bookkeeping required for the massive de novo creation of financial derivatives could have been done without electronic digital processing and storage. This issue is currently mostly framed in political terms but it seems to me that it is largely a technical problem of how to regulate fractional reserve banking in an era where the "moneyness of credit" (to quote Doug Noland) has taken money creation out of the hands of central banks.