Ideas for radical reform

[seabhcan]

It seems to me that it is the nature of the financial markets themselves that have caused this crisis - both by distorting the motivation of capitalism away from building capital and towards boosting share price - and by irrational overreaction when that share price starts to fall.

Until the 1970's most companies raised capital through loans rather than share price, which allowed them to plan long term. The classic example is the Boeing Jumbo jet which took a decade to develop and was funded by bank loans. Companies dependent on share prices cannot enter into such long term projects now as only short term gains are rewarded on the stock market.

The solution, as I see it, is to radically downsize the role of the share and financial markets in the world today. I would like to see mandatory time restrictions on the buying and selling of shares. It should be illegal to sell a share sooner than 6 months after buying it, and it should be mandatory to give 30 days notice of your intention to sell.

This should reclaim the stock market for investors, rather than speculators, and stabilise some of the wild irrational swings we commonly see. It would also remove the motive to manipulate the market with well timed whispering campaigns.

Too radical a plan?

[GJG]

It seems to me that it is the nature of the financial markets themselves that have caused this crisis - both by distorting the motivation of capitalism away from building capital and towards boosting share price - and by irrational overreaction when that share price starts to fall.

Until the 1970's most companies raised capital through loans rather than share price, which allowed them to plan long term. The classic example is the Boeing Jumbo jet which took a decade to develop and was funded by bank loans. Companies dependent on share prices cannot enter into such long term projects now as only short term gains are rewarded on the stock market.

The solution, as I see it, is to radically downsize the role of the share and financial markets in the world today. I would like to see mandatory time restrictions on the buying and selling of shares. It should be illegal to sell a share sooner than 6 months after buying it, and it should be mandatory to give 30 days notice of your intention to sell.

This should reclaim the stock market for investors, rather than speculators, and stabilise some of the wild irrational swings we commonly see. It would also remove the motive to manipulate the market with well timed whispering campaigns.

Too radical a plan?

Not too radial at all. Just too stupid.

If someone has goods and wants to sell, and someone else has money and wants to buy, they will almost always find a way to do so. The people who want to stop them will either give up, or make more and more drastic infringements of their liberties in an attempt to stop them.

For example, could I sell a contract to agree to sell the share at a fixed price when the legal limit expires? Could I sell the shell company that bought the share? Basically, people put a lot of time and effort into making money, and in most cases the government has no business stopping them.

If the government tries, it uses all of its time and effort trying to make people poorer, and succeeds in little else.

[seabhcan]

That is a great argument which can be equally applied to all regulation. It was exactly a lack of regulation which got us into this mess.

[A_man_about_a_dog]

I would like to see mandatory time restrictions on the buying and selling of shares. It should be illegal to sell a share sooner than 6 months after buying it, and it should be mandatory to give 30 days notice of your intention to sell.

There are far too many greedy pr*cks out there who just wouldn't be able to stick to the rules. They would find ways around the restrictions through the use of middle men or other share depositories.

A good idea but fairly unworkable IMHO.

[seabhcan]

Not bad, Seabhcan.

It's all very well for people to spout about the free market and the need to trade but, as we see, those actions can have dire consequences for a nation. It is up to governments to represent the best interests of their people. The stock markets, as they stand, represent an obvious threat. Regulation may be the way to go. We might just swap booms 'n busts for stability.
The focus, at the moment, is on the banks but the stock exchanges also deserve to be scrutinised.

I think the key is the stock exchange, because the quest for an ever increasing share price is what drive the banks to seek short term gain and risk collapse in the long term.

Why do stocks go up in companies that lay off staff? Admittedly, sometimes it is wise to lay off staff, but stocks always go up, even when layoffs are unwise. Its because stock markets reward short term gains regardless of their long term costs.

We have to find a way to correct the timescales of stock market decisions, to bring it in line with the timescales for logical business decisions.

The original idea of stocks and shares was to allow people to invest in the future of a business, not to speculate on the minute-by-minute irrational decisions of other share traders.

I don't think it would be that hard to enforce a minimum share holding time. All share trading takes place in the open in stock markets. It would be quite easy to ensure that a particular share could not be relisted sooner than 6 months after purchase. The problem of work arounds using shell companies is not insurmountable, as you could enforce the fractional time limits on the shares of the owning company in a way which discouraged reselling.

A less harsh solution would be to tax short term share selling. Say an 80% by purchase value on shares sold sooner than 1 month after purchase. 50% on 3 months dropping to 0% for 6 months.

Perhaps companies which had longer term investment plans could put a longer timescale on particular share offerings so that their plans were not punished by the market.

I think such things already exist, but are rarely used.

[Big Bobo]

Nationalise all companies on the stock exchange, how does that sound?

[Rich OC]

It seems to me that it is the nature of the financial markets themselves that have caused this crisis - both by distorting the motivation of capitalism away from building capital and towards boosting share price - and by irrational overreaction when that share price starts to fall.

Until the 1970's most companies raised capital through loans rather than share price, which allowed them to plan long term. The classic example is the Boeing Jumbo jet which took a decade to develop and was funded by bank loans. Companies dependent on share prices cannot enter into such long term projects now as only short term gains are rewarded on the stock market.

The solution, as I see it, is to radically downsize the role of the share and financial markets in the world today. I would like to see mandatory time restrictions on the buying and selling of shares. It should be illegal to sell a share sooner than 6 months after buying it, and it should be mandatory to give 30 days notice of your intention to sell.

This should reclaim the stock market for investors, rather than speculators, and stabilise some of the wild irrational swings we commonly see. It would also remove the motive to manipulate the market with well timed whispering campaigns.

Too radical a plan?

Yep. The most cost effective way to raise capital is to work out at what percentage of debt vs equity is cheapest and to finance all projects using a mix of loans and shares. Both the equity and loan capital market punish companies that are overly weighted in one or the other because of a perceived risk.

30 day notice to sell would collapse the value of share to the floor as they become illiquid. I think that there is a trader Vs investor debate to be had, but destroying the stock market is not the way to go.

[MichaelR]

You can even abolish the stock market completely. Simplest way would be to abolish the corporation as such, and change shareholders into part proprietors - responsible for their part of the company's debt with all their property. This would remove most speculators and short-term investors.

However, companies still want speculative capital, and they can easily issue corporate bonds instead of shares. You'll have a bond market instead of a share market, but apart from not facilitating hostile takeovers, it mught be just as troublesome.

[seabhcan]

Yep. The most cost effective way to raise capital is to work out at what percentage of debt vs equity is cheapest and to finance all projects using a mix of loans and shares. Both the equity and loan capital market punish companies that are overly weighted in one or the other because of a perceived risk.

30 day notice to sell would collapse the value of share to the floor as they become illiquid. I think that there is a trader Vs investor debate to be had, but destroying the stock market is not the way to go.

I can see how, if one company brought in a limit on selling its shares it would destroy its value, but it the government mandates it for all shares investors would just have to lump it. They have to put their money somewhere and if those are the conditions of the market, they would invest. They would probably look to dividend paying shares, but this would be a good thing, imo.

I don't see how such a regulation would wipe out the value of all shares if applied across the board.

[GJG]

That is a great argument which can be equally applied to all regulation. It was exactly a lack of regulation which got us into this mess.

No, it can't

There is a difference between regulating how people trade, and simply banning them from trade.

Regulation of trade is, for example, requiring petrol stations to display their price in a way that is visible to passing motorists. Typically regulation of trade seeks to redress an imbalance of power in the marketplace, so that it works more effectively.

This is not regulation of the marketplace, it is an attempt to place a barrier between someone who wants to sell and someone who wants to buy. This is basically the system that Stalin wanted to circumvent - he had rather more drastic penalties available to him - but he completely failed to create a command-driven system to produce food, and had to relent and allow farmers to have their own private plots to produce their own food.