Bruce,
I'm merely playing devil's advocate here, as I'm personally no fan of naked short selling myself.
(1) How can enforcement be carried out effectively? A lot of short sellers probably do not even know that their short positions are naked or could become naked! This IMHO is the dirty little secret of the brokerage business. A few months ago, I shorted some SPY, which is presumably one of the most liquid shares out there. A couple days later, I got a notice from my broker that they may not have the shares to cover my short position for clearing. I was like, what the heck! Weren't they supposed to have borrowed the shares when the order was executed? Turns out, the broker can "borrow" the shares to help the short sellers to open the position, then lend those shares subsequently to someone else before the position is closed! So, in theory, if the brokerage has 100 shares of the stock, it can be relent unlimited number of times to facilitate the opening of unlimited number of short positions! None of the short sellers would know that their positions were naked!
(2) Market is not a "fair price" setter, but a price discovery mechanism. So long as the issuer of "bogus shares" is subject to the same margin requirement as everyone else, a concentrated attack against a stock is just a price discovery move that invites bargain hunters' buying if the company's performance and its prospect to maintain future dividend yield is not tied to stock price like a ponzi scheme. IMHO, what the carnage last fall uncovered wasn't so much the evils of shor selling but the evils of ponzi-scheme banking built upon credit ratings that has stock price itself as a major factor.
AI
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