GET SHORTY.(Selling short.)

A few years ago, the Finance Ministry of Malaysia suggested that a certain group of troublemakers needed to be punished. Caning, the Ministry said, would be the right penalty. And who were the malefactors being threatened with the rap of rattan? They weren't drug dealers or corrupt executives or even gum chewers. They were short sellers.

Short sellers are investors who sell assets (a company's shares, say) that they have borrowed, in the hope that the price will fall; if it does, they can buy the shares at a lower price, return them to the trader they borrowed them from, and pocket the difference. In effect, they are betting against a company's stock price. As a result, they have, historically, been regarded with great suspicion, and though the Malaysian proposal was novel, the hostility behind it was not. Shorts have been reviled since at least the seventeenth century. Napoleon deemed the short seller "an enemy of the state." England outlawed shorting for much of the eighteenth and nineteenth centuries. Just last year, Germany's Finance Minister suggested that short selling should be banned during crises. Across the world, short sellers continue to be seen as conniving sharpies, spreading false rumors and victimizing innocent companies with what House Speaker J. Dennis Hastert once called "blatant thuggery."

The United States, it's true, hasn't resorted to the rattan, but it still enforces a set of rules against short selling that have been in place since the thirties, when shorts were seen as a cause of the Great Crash. In a country as optimistic and can-do as ours, there seems to be something un-American about betting against stocks. That may be changing. The Securities and Exchange Commission is now proposing an eighteen-month experiment in which the most onerous restrictions on short selling would be lifted for three hundred big stocks. If the market for these stocks worked well, the old rules could eventually be lifted across the board. And it's about time.

"It's easy to make short sellers wear the black hats," James Chanos, the head of Kynikos Associates and one of the few pure short sellers around, says. "Short selling is always an emotional issue. Executives have their egos tied to the price of their shares, so when you take a position against them they take it personally." But give the short sellers their due: they're the canaries in the coal mine, recognizing problems before others do. In the past few years alone, shorts sounded early alarms about blow-ups like Enron, Tyco, and Boston Chicken; they also uncovered scams at lots of smaller companies that tried to cash in on the stock-market hysteria of the late nineties. In general, the companies that short sellers target deserve it. The economist Owen Lamont studied a group of companies that had clashed with short sellers--denouncing them in conference calls with investors, imploring shareholders not to lend them stock, and so forth. He found that the ...