I as also trying to understand this.
I think what they're saying is that MtGox had more demand for bitcons than supply -- and the whole market did generally. When demand increases faster than supply, the price must rise. So by losing 80kBTC, they were in the same situation as if they had shorted 80kBTC. They benefit from the price going down, and suffer from the price going up.
And moreover, to act as a liquidity provider when the market movement isn't random, but instead most people are buying BTC which is going up, is also a money losing position -- MtGox is the only seller of BTC which keeps rising. I think this implies they were buying BTC off-exchange.
But since MtGox users are buying more than selling, MtGox doesn't have to convert their cash back into BTC -- MtGox's losses are occurring in BTC and are essentially invisible, but when they lose money in BTC, they are effectively increasing their short position.
I'm not fully seeing how the feedback loop would operate, I think you'd need to factor in MtGox's total capital, their short postion, and the market size ... I can see how their position gets worse and worse.
I can't think of any historical precedent though. The final result is kind of like the Salad Oil Swindle, but the path taken is different.
edit: maybe a bucket shop in bull market would be a similar mechanism.