Take away this hedging tool and not only do you increase risk (and thereby costs/spreads) but you also reduce liquidity.

If a stock is very desirable, and the holders don't want to part with their shares at the present price, maybe the shares shouldn't be made artificially liquid (and cheaper) by surreptitiously "borrowing" the shares without permission and selling them. Maybe you should actually have to pay the real owners more for them. Then you would "discover" the real price, not the artificially low one.

the bullion bank eventually has to unwind this short sale, buying back in the market and thereby driving prices up.

Hasn't happened yet- there are still record paper shorts in the PMs. And shorts, especially naked ones, as you know can go on forever, simply by moving the shorts back and forth before the time limit expires. Sometimes they don't even bother to do that.

And the point of many shorts isn't to provide liquidity, hedge, reduce risk, or prevent "bubbles". It is to drive the company out of business, plain and simple, so that the shorter never has to cover. This type of action is especially rampant in the explorer sector, where if you can drive the sp down enough it makes it impossible for the company to raise enough money by issuing REAL shares to raise the money it needs to survive and grow. This process is often helped along by those sociopaths we know as "bashers", whose job is to discredit, defame, attack, and hopefully completely destroy a company. This is not legitimate business, it is pathology.

In the end, it all comes down to ethics and moral right and wrong.