I’m showing my ignorance of financial markets and stocks with this question, but can anyone point out to me a legitimate use for “selling short?”

It looks to me that it is simply a means to profit from a stock’s expected decline. A great way to gamble without the expense of flying to Las Vegas. Even worse, it provides motive for investors to actually work against a companies success.

Likewise, some of the remarkably complicated financial instruments put together during the mortgage crisis actually allow investors to make a profit when the mortgages become worthless, thereby providing an incentive for some very powerful financial players to actually bring this crisis about.

Is it simplistic to enact a 100% tax on the profits from any of these toxic instruments and then prohibit them in the future?

Here’s the NYT in March, 2007 saying our legislators were thinking real hard (but never actually doing anything) about tightening up on subprime mortgage regulation: http://www.nytimes.com/2007/03/29/business/29scene.html?ex=1332820800&en=e09a15f9b118d649&ei=5088&partner=rssnyt&emc=rss

The horse was out of the barn long before 2007. And the legislative roots of the deregulation go back decades.

Once housing inflation (boosted by subprime mortgages) peaked in 2005, the handwriting was on the wall. The only question was how big was the crash going to be.

It’s a truism that poorly informed investors are alternately ruled by greed and fear. The same is true for politics. The last few days have been panic time.

And the media loves to fan the flames. That draws more viewers and readers and they get more ad revenue.

Fortunately, we have more than one branch of government and things may drag out long enough in the legislature for everyone to calm down a bit.

Having the government (i.e. the taxpayers) bail out every single bad investment on the horizon doesn’t seem to be much of a plan to me.

The credit markets need some stability but investing is a risk/reward proposition. Remove the possibility of losing on a bad investment and we will continue to see irresponsible investment practices.

Check out this article:
http://www.toomuchonline.org/articlenew2006/Feb13a.html

Personally, I think the way out of this is to support Dodd & other’s demand for ownership shares (warrants) to go along with the bailout. The Swedes did pretty good with that, in terms of long term economic payback.

And then we just have to really hammer the theme of progressive taxation, getting the economy off its war footing and into a development footing (like Van Jones’ green jobs idea) and regulating like hell.

The problem is, if this crisis actually *is* averted, the Shock Doctrine folks are going to use that as an argument that it wasn’t really a big deal after all. I don’t know how we combat *that*.

This is one of those cases when I really hate to say you were right, not because I begrudge you the foresight, but because it shows just how preventable this crisis really was. Back then we were just college kids (or recent post-grad for you probably) with a lot less life experience than we have now, if you could see it, certainly others could too, and somehow they/we still failed to prevent this from happening.

But thanks for your post here too, I just recently subscribed to How to Save the World, and I’ve been finding it a very helpful resource as well. Lots of good links and ideas about things that are outside my area of expertise.

I fear you may be right about the lack of natural consequences encouraging the risk-takers on Wall St. to continue with practices that clearly put us all at risk. As Policywank says in the comment following yours, I think the consequences might have been so dire that it would have harmed even more people than deserved to be, and so in some sense I’m glad that the government is stepping in before the whole house of cards collapses, but at what point do we say “enough is enough”?

I honestly don’t know what the right response is now that the deregulation and lack of oversight has happened, and the results are as bad if not worse than we feared, but you bring up the _moral_ implications of all this and I think that’s something that the American public is ill-equipped to talk about. In our current culture, I think the “pursuit of happiness” has been literally transformed into the “pursuit of money” as an American value. For all its religiosity, American culture seems to celebrate and reward greed. I _hope_ this will reignite a conversation about what values we hold as Americans, and what the moral implications of our professed values are, but I worry that even this crisis isn’t enough to spark a serious conversation among those who don’t follow financial markets.

I think part of the problem is another thing you mentioned in your comment - the language used to discuss these matters. You suggest calling it “greed” outright, and think we should too. It’s just so hard to even read about this topic, though, because all of the financial market jargon obscures the reality. If you and I were to borrow $30 for every $1 we had in our bank account, we’d be called financially irresponsible and in debt up to our eyeballs and probably bankrupt - but when Goldman Sachs does it, they’re “highly leveraged”. I tried to write this piece in every day language in part because I think all of that jargon is deliberately meant to obscure the plain meaning of what Wall St. investors are really doing in terms that the average citizen can understand.

It’s a mess, all the way around.

Thanks again for the comment and the kind words, I’ve been a fan of your work from afar, and I’m glad to connect with you after all this time!