Hi JoJo
Simply put, if a stock is over or under valued relative to its intrinsic worth, there are excess returns to be made and the stock will, ultimately, head back towards its intrinsic worth or fair value for that reason.
Momentum plays either up are down are a pain and there are winners and losers out of both, but they are transient and unsustainable because a share will has an intrinsic value.
At the end of the day, though, markets work best when a stock is fairly valued and allowing shorting simply increases the efficiency with which a stock returns to fair value.
In terms of your specific points:
A company that is in a period of weakness deserves a lower share price and one that is in a period of strength a higher price. The best price for raising capital is theoretical fair value. Everybody wins and markets function smoothly.
Momentum works both ways, you can't have your cake and eat it to.
They temporarily suspend the stock market during crashes. By the same logic you have applied to the banking example, we should ban the selling of shares.
If you fully own shares, you are selling them, not shorting them - but, I agree that naked short selling shouldn't (and isn't) allowed in most countries.
Cheers,
Bill
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