isen.blog

If this actually worked, it would eliminate the stock market and make equity investment much less appealing. Equity in public companies would become the least liquid asset around, and of course an illiquid asset is a worthless asset. It would create huge discontinuities at the margin, as stockholders would only really care about their stock during the last quarter before the date they're allowed to sell. (You say people should consider the long term; I say they don't.) It would end corporate investment in all jurisdictions hapless enough to enact this regulation, as investors would fly to get their money into any available rational country.

Of course, this wouldn't work, not really. As soon as this regulation was mooted, all the action would move away from stocks to more-and-more complicated options and derivatives on stocks. If an investor isn't allowed to access her money directly, she'll come up with an indirect way. These instruments already exist, but they would become much more important under such an ill-advised regime. It's well-known that options and derivatives are more difficult to understand, value, and regulate than plain-vanilla stocks. So in several ways this would not be an improvement. Oh, sure, the regulatory fanboys could come up with all sorts of schemes to tie together holdings in different investments by different investors. That way lies a vastly expanded SEC, and also madness.

Reasonable people can discuss optimal levels of regulation of the financial sector. This proposal falls nowhere on that spectrum; it is a complete rejection of the market mechanism. While the American corporate directorship is certainly doing a terrible job, those most directly harmed by that incompetence are those best-placed to correct it: the stockholders. If you want to carrot-and-stick them into better stewardship of their own interests, have at it. But don't imagine that eliminating stock ownership altogether would fix anything.

I usually value your judgment, and you really opened my eyes to the issues inherent in regulator-driven net neutrality. That's why I took the time to comment on this, rather than simply flipping the bozo bit.
 

The same desired outcome could be achieved less intrusively by a tax paid by the seller based on the dollar amount of each transaction. To further fine-tune it in order to optimally disincent short term speculation the tax rate could vary according to a descending scale depending on how long the asset was held. In addition to being a much easier sell politically (there'd be broad opposition to your suggestion since it would prevent people from being able to liquidate an objectively tanking investment), the transaction tax approach would generate federal revenue. It may be advisable for the market-making specialists to be exempt from this tax.
 

Surely the biggest problem with your proposal is that for many investors they will never own enough of a company to have a meaningful impact - if you own 0.003% of IBM, what rationale do you have for investing time reading 100s of pages of financial statements, questioning management etc for a minuscule chance of affecting any stockholder vote. You would be removing the only real power small investors have, which is to buy and sell.

Management would also not have to worry so much about investors, because the investors are trapped. You might feel boards of public companies are too short-termist, but it could be worse. Management have a debt-like claim - they pay themselves a regular "coupon" every month. They have no real personal incentive to see the company doing better - just that it doesn't collapse.

I read an interesting post today on this issue that explains it better than I can:

No rational regulator concerned with substantive transparency would approve of common stock, if it were a novel investment vehicle. It guarantees no cashflows whatever, its "control rights" are so weak for most purchasers that representations thereof should be viewed as fraudulent. Empirically common stock behavior is very weakly coupled to the performance and health of the firms that stocks fund.

http://interfluidity.powerblogs.com/posts/1227385104.shtml
 

Looks like such a move will make buying stocks in the first place less likely. Smaller companies with radical-ish ideas may have smaller chance of raising capital when they go public.
 

Umm, this is a pretty goofy idea David.

I thought for a while trying to come up with a more articulate response, but in the end I think goofy is appropriate. :-)
 

Jess Austin makes my case when he says (above), " . . . of course an illiquid asset is a worthless asset."

Of course. That must be why people spend long years building up their own business, because they want a worthless asset. And an education, you can't sell it on the spot market so it must be worthless. A roof over your head? Who needs it. Goodwill? If you can't bundle it up in a derivative and sell it, what good is it?

Give me a break! It's time to abandon mindless assumptions like these -- which got us into the economic trouble we're in today -- and figure out what real value is again.
 

Let's follow that up with the same law for houses: if you buy a home, you have to stay there for five years.
 

What Alex said! After a primary-residence roof-over-your-head exception that'd cover the need to change jobs, change circumstances, etc. it is a good idea for homes 2-N, or in some tightly circumscribed cases, homes 3-N.
 

Oops! That was a joke. But I do seriously like the idea of cutting the mortgage deduction for third homes. The Democrats should start with second homes and then compromise with Republicans to third homes (or eighth?).

Too many people love the stock market to go up but hate it to go down. If you're going to have an economy that expands, you need to allow it to contract too.

Of course, the real criticism should go to Greenspan and his bubble-friendly policies. Raising interest rates instead of lowering them would allow banks to lend at steep prices during a recession.

Also, banks did not care to whom they lent, so I would propose this change to bankruptcy law: whenever an individual (not a company, unless it's a sole proprietorship) goes bankrupt, creditors have to write off 10 percent of the debt if the debtor can pay off 1 percent immediately.