dmcmahon wrote:Lack of ability to "short" housing had less to do with the price bubble that the fact that people could buy housing on 100% margin. Require some reasonable downpayment and any bubble will ultimately be self-limiting.
Well sure, easy 100%+ financing (together with non-recourse mortgages in some places) was most of it. But if the market starts getting "too high" and no one's allowed to short there's no self-limiting process to check the bubble until the whole thing collapses. In that case if you think the housing stocks are too high, all you can do is not buy (which doesn't help to push the price towards its fair price), where as if you can short this will help keep prices near the consensus fair value.
Shorts borrowing shares from people expose them to extra risk (that, for example, the short seller's gambling schemes go awry and he goes bust, unable to buy back the shares).
This risk is with the brokers I think, who have a very strong incentive to force a short position to cover (buy) if their equity is getting too low (just like you get margin calls if you're long and they liquidate your position before the brokerage starts losing money).
Also, shorted shares would seem to create more people who'll think they "own" a stock - how then do their votes count for shareholder proxies etc.?
This does get taken care of. If your shares are in a margin account and were borrowed during a voting period, you don't get to vote. If you care a lot about your vote, you can look into registering your stock in a way that ensure you get to vote the shares.
I don't think it's possible to sell US treasuries (or any bonds?) short, and yet we have markets for them that function perfectly well. People who want to bet against the price of treasuries can do so on the futures exchange, where their short bet is matched to someone who wants to make the opposite bet, and that too functions perfectly well. Perhaps I'm wrong about bonds (in which case, now I'm really worried, as even my treasuries are potentially suspect!) - anyone know for sure?
You can short both treasury bonds and treasury futures, although the latter is more accessible to individual investors. There are plenty of people shorting bonds just like there are stocks, and as you say, the markets works fine.