Snipped from alternet.org.

I’ll be the first to admit that I have failed miserably in every foray of mine into the stock market. So, for those who know how to play the game, my hat goes off to you. With the huge loss yesterday in the market, I am wondering if it doesn’t foretell a future disaster in the making. So, with all the negativity in the country from the sub-prime market and housing taking a beating, I am concerned that yesterday may be just the beginning of a true stock market disaster. So when I came across the article in alternet.org concerning a repeat of the 1929 market crash, I just had to read it. The article is extremely well written because even I was able to grasp the dire situation that our “hyper-real” stock market is in. You may find this article will help your understanding of what is really behind this new term, but old strategy, called “naked shorting” and exactly what this means to giant hedge funds of today.

It all begins with an acknowledgment that “the American economy is a hyper-reality that has been engineered by Ph.D.s working hand-in-hand with colluding media multinationals, political officials and some of the biggest names in the business–and the banks that invest in them”. In an age in which 97 percent of stock transactions are conducted electronically, we no longer have a paper trade. Combine that with hedge funds, mortgage-backed securities, subprime loans and naked shorting, you have a scenario in which there are virtual transactions that never actually occur.

When a person “buys” a stock, then the expectation is that that stock is real. But when you have hedge funds who are betting both sides of the fence and in the case of “naked” shorting, in effect, borrow the share (they don’t really own it) to replace it later, then you have created a market in which there are more shares than actual stock. And, that’s what creates a hyper-real economy and conditions ripe for another repeat of the 1929 stock market crash.

Here is a portion of the article that explains this in more detail.

“It’s essentially counterfeiting,” Byrne added. “You’re creating counterfeit shares in the system. It works like this. In a normal stock transaction, you give me money and I give you stock. And not paper stock anymore. It turns out that there is a loophole in the system: When I come to give you the stock that you bought, if I don’t actually have any stock, I can give what is effectively an IOU. Now you never know about this unless you know the right question to ask your broker, but it’s possible that all you really have in your account is an IOU from your brokerage account from a different broker working with a hedge fund.”

It is precisely this imbalance between real and invented shares that Byrne and others argue is primed to explode the subprime collapse into a full-blown economic depression.

“There are a lot of us who think we are living on the edge of 1929,” Byrne continued. “When you consider what’s happened with mortgage-backed securities, you get the feeling these might be the first rumblings. There may be more IOUs in the system than there is liquidity, in which case the entire thing is going to vapor lock as soon as it is exposed. One of the healthiest indications of the vibrancy of an economy is capital formation. Seven years ago, America was responsible for 57 percent of IPO capital raised around the world. Now it’s down to 16 percent. A national disaster.”

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