In the crash of 1929 there was great political pressure to make short selling illegal.  Short selling is a method for betting that the stock market will go down.  If enough people do it, then the stock market will crash.  The short seller simply borrows shares from a brokerage house client, sells them at a high price and then once they have gone down, buys them back at a low price and gives the borrowed shares back to the brokerage house client.  The difference between the sell price and the buy price is the profit. For this privilege, he pays nothing to the brokerage house client.  Most brokerage house clients don't even know their shares were used for shorting.  Their mistake was that they borrowed money from the brokerage house to buy their stock and didn't read the fine print that the shares could be loaned out to be sold short.

In 1929, short sellers cheered as the market came down.  They started rumors, fear and panic just to see the market come down and make their millions.  Today, the same strategy is being used to make billions.  In many ways it contributed to the depression and caused many people to suffer, many good companies to fail, and made it very hard to raise capital.  Some say our stock market was damaged for more than fifty years.

A lot of people who profited from short selling were in power in 1929.  They did not want to see their method of making money made illegal. So they compromised.  They said:  Let's not make it illegal, let’s just slow down the pressure on selling stocks.  They instituted the "Uptick Rule," which meant a stock had to first go up an 1/8th of a point before someone could short it again.  Also, it was agreed that if the market went down 250 points then it would be closed until the next day.  We saw this happen in 1987.  Both these measures were to slow down panic selling.  They were both removed recently under the Bush administration.  As a result, short sellers have been making unprecedented profits at the expense of the American people.  The stock market has crashed and millions have been laid off just like during the depression.  How long will it take for people to have confidence in the market again--50 years or more?

Without jobs we have poverty.  Without companies to hire, we have poverty.  Without strong equity markets for raising capital, we have poverty.  When people can destroy equity markets, companies, and jobs by short selling, then we have poverty.

Proposition--Eliminate Short Selling

This could easily be done in several ways.

1) Buyers of stock must be issued stock certificates.  If the owner of the stock has the certificate in his possession, then the stock could not be loaned out to short sellers without his or her knowledge.  Most owners of stock want their stock to go up and would not give someone an incentive to bring it down by having someone short the shares.

2) Simply make short selling illegal and make the seller of any stock deliver the certificate by the settlement date.

3)  Separate stock trading from loans (margin accounts) on shares of stock.  Let banks give out the loans and let brokerage firms trade stocks.   Eliminate margin accounts at brokerage firms. When people can destroy equity markets, companies, and jobs by short selling, then we have poverty. Poverty creates a poor nation and poor tax revenue to support it.  

I am sure you are in favor of our country being strong and prosperous.  Let's enact legislation to eliminate short selling.  Let's take no half measures this time like up tick rules or closing market rules.  Let's eliminate one of the worst of our equity market problems now.  Let’s eliminate short selling.