Shorting increases the supply of the bond or stock by offering synthetic supply. That alone is enough to depress price absent a perfectly elastic demand. The elastisity of the demand is particularly poor in periods like this where liquidity is impaired. That makes a great backdrop for the shorts. Increasing the supply by shorting also tends to increase the supply by causing fear and more selling. The mechanism (suggested by Pimco) for that in bonds may be downgrades by skitish rating agencies but the same could be said about broker downgrades. For my part, I think that shorting of securities should be banned except for market makers and then there should be strict limits on the amount and duration of the short.
For those who want to be short they could accomplish a similar position using derivatives of some type like options or futures. Then those who are engaging in that vehicle at least are doing so with others who know the rules.
Eliminating shorting of stocks and bonds directly would (I think) stabilize the price movements in securities. That would be a welcome result for investors though not for the speculators.
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