Politicians and columnists know who is to blame for the turmoil in financial markets. Short-sellers are to blame; and they must be anathematised.

Alex Salmond, the Scottish First Minister, last week fulminated against “a short-selling bunch of spivs and speculators”. (The Scottish National Party's press release on this outburst pointedly referred to Mr Salmond as a “former economist”, presumably on the ground that no one would otherwise have been able to tell.) Short-sellers are “loathsome individuals”, raged the Daily Express, who “take a positive delight in wreaking destruction and creating panic”. On its front page, the Mirror screamed “Greedy pig!” at the founder of a hedge fund who had taken a short position in HBOS. A Liberal Democrat Treasury spokesman weighed in: “The hedge fund wolf packs must never short British banks again.”

If this type of abusive and bestialising language were directed at, say, freemasons, it would be easier to perceive its anti-intellectual derivation. This is not politics: it is pathology. The seismic financial events of the past week have comprehensible but complex causes. Instead of inquiring into them, how much more satisfying it is to inveigh against the destructive powers of a cabal manipulating world markets. And if you think I exaggerate by invoking the hoary terminology of conspiracy theory, consider the ease with which those who condemn speculators turn to other targets. In the Asian currency crisis a decade ago, Mahathir Mohamad, Prime Minister of Malaysia, matter of factly explained the role of hedge funds this way: “Jews are not happy to see Muslims prosper.”

Much of the terminology - collateralised debt obligations, credit default swaps and the like - that has filled newspaper coverage of the credit crisis is esoteric; but short-selling is a simple idea. It means, first (and usually) borrowing a share that you do not own, from an existing holder of the stock, who receives a fee for lending it out. You then sell the share in the hope that the price will fall and that you will be able to buy it at a lower price before you have to return it. Once you have adjusted for the cost of the transaction, the difference between those prices is your profit. If you make the wrong decision, and the price of the share goes up, then you make a loss on the deal.

Short-selling is a technique particularly associated with hedge funds. These funds are, in effect, up-market investment vehicles for very wealthy private clients. They aim to make high returns regardless of whether markets go up or down.

By increasing their short positions, hedge funds can in principle profit from a falling market. It is a hugely risky strategy. If you buy a stock - that is, go long in it - then you cannot lose more than you have paid, supposing the stock price falls to zero. But if you sell a stock short and the price then rockets, you can lose a great deal more.

In the tumultuous events of the past week, short-sellers have attracted blame - and much invective - for putting downward pressure on bank stocks. The collapse of Lehman Brothers, the forced private sector rescues of Merrill Lynch and HBOS, and the near-terminal condition of the once-mighty Morgan Stanley and Goldman Sachs have all been ascribed to the influence of the short-sellers. US regulators imposed a temporary suspension on short sales of bank stocks; in the UK, the Financial Services Authority followed suit, but with a longer ban.

Regulators have the task of ensuring orderly markets. In exceptional market conditions, there is a case for throwing sand in the wheels of speculation. But short-sellers are not the cause of market instability; at worst, they exaggerate existing trends. The FSA's ban is far too sweeping and will have economic costs.

Heaven knows, there is much wrong with the financial system. But there is blame aplenty to go round. The fundamental problem is too much debt. Politicians and central banks on both sides of the Atlantic failed to constrain the credit bubble of the early years of the decade. Banks exploited their opportunity through reckless lending. Ratings agencies, whose job is to assess credit quality, misvalued some highly dubious financial instruments.

Yet, of all the people to hold to account for this wealth-destroying debacle, regulators and politicians are targeting the messengers of bad news. Short-sellers ensure that bad news is more quickly reflected in market prices. Capital is thereby allocated to more productive uses. If there had been more short-selling of Northern Rock during its ferociously irresponsible expansion based on borrowing money in the wholesale markets and lending it out as mortgages, much public money might have been saved later on.

The banks that engineered the credit mess, and shareholders who made bad investment decisions, understandably seek - literally - to pass the buck to short-sellers. It is foolish populism for politicians to take the banks' side.

Oliver Kamm is a Times leader writer and former hedge fund manager

Times Recommends

• A dose of defeat is just the medicine
• Protecting ourselves from Eurocreep
• After the summer of LUV, it'll still hurt