My 2c...
I view this entire incident as a massive failure of regulation.
My personal view of shorting is that it can perform a healthy function in a fully informed market. When I buy a stock that I know is heavily shorted, I use that first of all as a red flag. It reminds me to make doubly sure I have properly tested my investment thesis. Other than that, it makes me excited, as I know that IFF I am right, the share price could see a more significant increase than might be the case without any shorters. This is because the overly negative sentiment will correct at some time in the future as fundamentals start driving the share price again, as opposed to short term sentiment.
Capitalism is about the efficient allocation of sparse capital. If share prices are unrealistically high, strong short selling can have a healthy function by bringing the price back to where fundamental valuation suggests it ought to be - just like strong buying can push up the share price of undervalued stocks.
The problem is always when people go outside of what is acceptable or legal behaviour.
Share price manipulation and collusion - last time I looked - is a crime.
However, regulation without appropriate enforcement makes a mockery of any system and completely erodes trust in the system.
The problem for regulators - who arguably have been asleep on the wheel for decades, as some large shorters have gone beyond what might be considered "legal" - is that any crackdown now, on the army of Redditors, will be seen as an unjust punishment of the small guy, while the big end of town has received a free pass.
I am no legal expert, but to me it appears that what happened on Reddit is flagrant share price manipulation and collusion. My instinct would be that this needs to be stopped and perpetrators punished under the law (though half of them might not even understand the rules or laws by which share markets are governed). Otherwise, you might as well forget about having laws, if you are not willing to enforce them.
However, over recent decades, where has the crack-down on the big fish manipulators been? How come there has been little or no enforcement of regulations/law?
Well, how strong are the teeth of our regulators?
With a population that has been manipulated into viewing "TAX" as a dirty word, governments have stopped governing. Industries have ben privatised and regulators' budgets have been cut. This was sold as a "good thing", saving taxpayer money and driving efficiency...
Add to that the problem of regulatory capture, where people from the industry regulate the industry - and this applies to areas such as energy markets as well as to the stock market - then governments have essentially lost the capacity to govern.
I think the much documented lack of trust in government both in Australia and overseas has a myriad of reasons - however, the lack of competent regulation that is matched by effective enforcement is one of them.
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