It is not something I understand in great detail. My understanding is that problems come about when people write cheques they cannot cash.
You borrow 100 shares from someone valued at £10 a share. Your expectation is that they will drop to £1 a share. You sell the borrowed shares for £1,000.
In scenario A, the shares do drop to £1. The cost of buying back 100 shares to replace what you borrowed will be £100. You buy the shares back and return them to the person you borrowed them from, meaning you make a profit of £900.
In scenario B, the share prices increase to £100 a share. To buy back the 100 shares will cost £10,000. When you buy back the 100 shares to return them to the person you borrowed them from, it will cost you £10,000 meaning you will lose 9k on the trade.
Again, I don't understand the cause of the recession but you can see how the above would cause problems when people don't have the money buy back shares that perform better than expected.
