Historically, bankers have caused depressions following great technological innovations

March 17, 2009

Sankarshan Acharya
Pro-Prosperity.Com and Citizens for Development

March 17, 2009

To:       Honorable President Barack Obama
Cc:       Honorable Vice President Joe Biden
Honorable Speaker Nancy Pelosi
Honorable Senator Harry Reid
Honorable Senator John McCain
Honorable Senator Chris Dodd
Honorable Congressman Barney Frank

Sub:     Historically, bankers have caused depressions following great technological innovations.   

Dear President Obama,

You correctly invoke history for us to learn from past mistakes to restructure a future in which perils of, for example, booms and busts are not repeated. 

Historically, markets have crashed and depressions have followed unprecedented innovations. 

The first transatlantic radiotelegraph passed in 1902 and the television was invented in 1923.  Following these great inventions, the stock market crashed and depression followed.

The latest technological innovations were unprecedented advances in computers and internet with terabytes of data flowing per second at super speeds around the world. Ordinary people can now own and operate desktop and notebook computers that are faster than supercomputers of 1970’s.  The current depression is unfortunately trivializing the unprecedented technological advancement.  How does a depression follow unprecedented breakthroughs in technology? 

Bankers channel the savings of people for investment in stocks of the technology companies.  Bankers see the flow of funds through the system they control.  Very few investors sell such promising stocks.  Bankers create shares for naked short-selling at astronomical prices to suck passive retirement savings of society.[1]  Bankers also underwrite shell companies in the hot technology sectors to short-sell those shares to passive investors lured through hype over new media controlled by the financial powerhouses.  Once savings are exhausted, the media floats rumors about the shell companies.  Downgrades of stocks follow.  Prices collapse.  The same investors, who were lured to buy at exorbitant prices, are forced to sell the stocks back to the naked short-sellers.  Bankers make windfalls as the households go bankrupt and the economy is depressed.        

This is why, since 2001, I have been after the SEC to ban naked short-selling, which is illegal under the existing corporate law because it artificially creates shares beyond the authorized number of shares issued by a company.  Bankers have persuaded the SEC to allow them to practice illegal naked short-selling ostensibly for hedging, but really to rob the passive investors according to my rational inference. 

If illegal naked-short selling practice were disbanded and the short-sellers were sufficiently penalized, no “robber baron” would have any incentive to create shell companies or adopt devious media hype to let passive investment funds (pension plans and mutual funds) be sucked into such companies at artificially inflated prices. 

The naked short-selling, allowed only for the market making holding companies, is a deliberate rule/system/practice designed and adopted by the indolent and unproductive bankers for self-enrichment without perseverance, as per my inference.  This deliberate design ultimately bankrupts the true innovators and effective producers of a society, and then decimates national competitiveness.  This leads to deep depressions.  When indolent and unproductive bankers land up owning either homes of productive bankrupt households or innovative technology companies, production suffers and the nation retrogresses. 

The reason for why China and India are less affected by the current depression is that the scourge/cancer of naked short-selling has not yet spread into their financial systems.

I am surprised how the SEC has continued to permit naked short-selling for market making companies even after the ban enacted by the Congress last year at your behest. 

The SEC last year banned short-selling of only financial companies, not technology/productive companies.  Why? 

Are the banking and financial companies holding massive naked short positions and so lobby for continuance of such positions with more naked short selling to depress/oppress the real producers/entrepreneurs/technologists and those investors who believe in future prospects of such companies? If they hold massive naked short positions (I believe based on rational inference that they do), they will have all the incentive to keep the productive/technology companies depressed to “punish” society, Administration and Congress until they receive trillions of more dollars printed exclusively for them to perpetuate their boom-bust cycles.  

The SEC seems to be operating weirdly because naked short-selling by financial companies provably (i) destroy technology/productive companies, (ii) ship important technologies/productions and talented entrepreneurs overseas as stock options become worthless due to price depression induced by short-selling, (iii) transfer wealth to unproductive and indolent bankers who are totally confused about their ownership of homes and companies without the utility enjoyed by homeowners and entrepreneurs, (iv) decimate wealth of households, (v) cause depression and even riots, and (vi) force governments to print money without a mechanism to direct such money to households and effective producers.    

Since the time DOW was at 14000, I had warned that the pre-Great Depression era short-selling practice should be optimally banned to avert the depression that my selfless research foresaw as looming in the horizon despite the hoopla of government-hooted GDP growth and commodity price “boom.” 

If the institutions in-charge of thinking, enacting and enforcing rules of law do fail to serve the best interests of the nation and society, then the vast majority of taxpayers will optimally disband/reform such entities by employing people who can think.  My students are not rocket scientists, but they can easily think of rules of governance that would serve the best interests of society, certainly after it is presented to them. 

I have spoken to people who have no formal education in economics or finance, but can easily grasp that the suboptimal rules of law and practice are responsible for the depression.  I have no doubt that the vast majority of Americans-not trained in economics or finance-will easily understand and demand a ban on naked short-selling and mete severe punishment, especially, to the market making holding companies if found holding massive naked short positions.   

 

With profound regards,

Sankarshan Acharya



[1]Selling borrowed shares short also violates the corporate law.  Suppose that a company has 1 million shares issued and outstanding, which are owned by investor A in brokerage house B.  Suppose that B borrows the 1 million shares from A to sell the same short to another investor C.  Then the number of shares outstanding effectively rises to 2 million shares (contrary to corporate law that 1 million shares remain outstanding) with one million issued through short-selling by B.   A may not lend the shares to B to sell short.  A may also lend first and then recall the shares that can hurt the short-seller badly.  In the case of naked short-selling, no recall is possible and so it is very dilutive.