In his latest New York Times op-ed entitled "Friends of Fraud" (http://www.nytimes.com/2013/02/04/opinion/krugman-friends-of-fraud.html?_r=0), Paul Krugman complains that Republicans are "threatening to filibuster the appointment of Richard Cordray, the [Consumer Financial Protection Bureau's] acting head, and thereby leave the bureau unable to function." Krugman concludes:
"Right now, all the media focus is on the obvious hot issues — immigration, guns, the sequester, and so on. But let’s try not to let this one fall through the cracks: just four years after runaway bankers brought the world economy to its knees, Senate Republicans are using every means at their disposal, violating all the usual norms of politics in the process, in an attempt to give the bankers a chance to do it all over again."
The Consumer Financial Protection Bureau? A fine idea, but it's the repeal of the Uptick Rule, for which Republicans and Democrats are both responsible, which is allowing financial institutions to milk the American public and destroying the US economy.
Given the importance of the subject, I will again repeat myself:
The Uptick Rule went into effect in 1938 in response to market abuses that threatened the health of the US economy and prohibited short sales of securities except on an "uptick." As summarized by the SEC:
"Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions."
The Uptick Rule was cancelled in 2007, thereby enabling hedge funds to short shares, i.e. sell shares they did not own, in almost unlimited, immediate quantities, and permitting them to benefit from resultant investor panic in almost any given traded company.
Example: Micro-cap company "X" has designed and patented a revolutionary widget. Recently, the achievements of "X" have made their way into the news, and its shares have risen. Farmer Joe, who attends night school and reads the financial news, decides to buy 1,000 shares of "X". However, Farmer Joe is unaware that Slick Eddy at Hedge Fund "Z", who couldn't care less about the merits of company "X"'s widgets, has also noticed the rise in the share price of "X". With almost unlimited resources behind him, Eddy borrows "X" shares from various financial institutions and begins to sell vast quantities into the market, causing a precipitous decline in the market price of "X". Eddy then blocks any rally in the share price by activating a computerized program to immediately sell 100 shares at the bid after any purchase. Worried by the huge downswing in the price of "X," and also concerned that at the end of each trading day "X" always goes down (Eddy often sells into the market during the last seconds of trading), Farmer Joe dumps his shares at an enormous loss ("Someone must know that something is wrong at 'X'"). Having succeeded in panicking Farmer Joe and other small investors in "X", Eddy buys back the shares at a significantly lower average price than that at which he sold them, resulting in enormous profits for Hedge Fund "Z". Eddy's bosses note his "fine" work and reward him with bonuses as the shares of "X" tumble.
Of course, there are those who will say that ultimately the stock market is "efficient", and the price of "X" will recover to an appropriate level. However, in the process we have witnessed the flow of wealth from Farmer Joe and other small investors to Hedge Fund "Z" and Slick Eddy.
Also, consider the damage to company "X", which, owing to doubt raised by the run on its shares, is suddenly unable to raise additional funds to finance expanded production of a new line of widgets, declares bankruptcy and fires its staff.
Sure, there are instances when the scientific and/or commercial progress of a company shorted by Hedge Fund "Z" is so great that Hedge Fund "Z" must buy back the shares at a higher price, but these losses are more than covered by its programmed downward manipulation of the shares of many other companies.
It is widely thought that the elimination of the Uptick Rule significantly contributed to the 2008 financial crisis from which America has yet to recover. Why has the Uptick Rule not been reinstated? Obviously, there are powerful lobbyists from the financial industry opposed to its reenactment, which would kill this cash cow.
You think that you are "investing" in the stock market? In fact, there are powerful algorithmic forces driving the markets behavior and directly affecting the value of your shares, which have nothing to do with the strength or potential of the companies in which you invest.
Obama wants to reinvigorate the US economy? It is time to reinstate the Uptick Rule, before it becomes too late.
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