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01/28/2021

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Charles N. Steele

Good grief! I wonder about Glen Reynolds sanity. He thinks short selling is buy stock to cover one’s position and then selling it at a loss? Even Ocasio Cortez isn’t THAT stupid.

Economics and finance are magick to the intelligentsia, who imagine that any stupid thing that pops into their heads is wisdom, while economists must be wrong about everything.

John Pepple

So here's a couple questions. (1)On some thread, someone said that the WSB guys were going to have to sell back their shares to someone, and he implied there would be no buyers. Various people commented on this, but I was the only one to point out that the hedge funds HAVE to buy back the shares they borrowed. I hope I got that right.

(2) Since shorting is so dangerous, since potential losses are infinite, why don't we just allow people to make ordinary bets against a stock?

Charles N. Steele

Question 1. Yes, you are right. Your description of short selling is correct, and yes, Melvin *had* to buy shares to replace those they’d borrowed.

Question 2. You mean, go to a bookie and place a bet that a stock goes up or down? Why, that would be gambling! Horrors! How dare you!

More seriously, here’s a short piece that explains. In the GameStop case I think the hedge funds were speculating on a drop, not protecting a long position. Short selling could be a valuable thing in the market because if most people have mistakenly over estimated the value of a stock, someone with a contrary view can bring that knowledge into the market. Melvin’s idea that GameStop had an obsolete business model might have been (and yet could be) correct, so short selling gives them a way to test this in the market. They proved either to be inept or wrong, but only way to really know is to let the market play it out. This is the information/knowledge/ discover function of markets pointed out by Mises and Hayek. Those whose expectations turn out to be wrong hate it and call for intervention in the market. When they are big and well connected, like Melvin, then often get it.

https://www.investopedia.com/terms/s/shortselling.asp

John Pepple

Great. Thanks. They still seem dangerous to me, but whatever.

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