The problem with the stock market

[unixronin]

The Geek with a .45 explains why the stock market in its current form no longer fosters investment.  When there is no real-world correlation between a company’s stock valuation and its actual ability to create value, when the board and the senior executives sit behind closed doors ignoring the running of the company while they brainstorm ways to game the system for their own gain and it works, when corporate execs can get rich on the stock market by running a formerly going concern into the ground, the stock market has become nothing more than a form of gambling for its own end.

Comments

[cipherpunk.livejournal.com]

To a large extent, I agree; to a larger extent, I don’t. The stock market has always been home to some of the most roguish behavior imaginable, and yet somehow it keeps on progressing nevertheless. Judging from history, we’ll weather our current storm.

That said, I think it would be a great thing if the concept of fiduciary duty could be clarified a little bit, to emphasize long–term fiduciary duty over short–term ones. When Enron was posting its huge profits and Arthur Andersen was approving each of their 11Qs, it would’ve — under current fiduciary–duty law — been flat–out illegal for mutual funds to have put their money elsewhere. The mutual funds are legally required to seek the maximum profit for their shareholders; that means that as long as you can run a short–term con game you can Madoff the system.

I’d like to see fiduciary–duty law rewritten to explicitly allow mutual funds, pension funds and the like to pass on profits if the investors have are not satisfied with the transparency of the company; I’d like to see securities law changed to allow any shareholder to have an independent audit of the company’s books (at shareholder expense); and I’d like to see prison terms for those who obstruct transparency measures.

In a sense, it would return cutthroat capitalism to the market. If IBM thought one of their competitors was cutting corners, IBM could buy a share in their competitor, hire the most ruthless accountants they could, and turn them loose on the competitor. In this environment, the economic dishonesty of other firms becomes a weapon to be wielded by their competitors.

Of course, such a proposal is just far too sane to ever get traction from Congress or Wall Street…

[randwolf.livejournal.com]

On the other hand, Simon Johnson, a well-respected and influential economist, agrees that some changes are called for. I recommend his Baseline Scenario (http://baselinescenario.com).

[randwolf.livejournal.com]

"Unfortunately, too much of the value of the stock comes from the trading of the stock itself, against the expectation that the value would increase, rather than any intrinsic value of the underlying company." is a concise description of pricing in a bubble market, whether the commodity is physical like tulips, land, or "precious" metal, or abstract like securities.

It is of course the SEC's job to regulate these practices. Several other banks and banking agencies regulate other major markets. The SEC was taken off the beat by Reagan. Management has been installed in other places that does not believe that bubbles can be prevented. Greenspan, a former student of Rand's, at one time believed that the very attempt to do so is immoral. See for instance here (http://baselinescenario.com/2009/07/24/after-peak-finance-larry-summers-bubble/). On the validity of regulation, see here (http://krugman.blogs.nytimes.com/2009/07/30/the-lessons-of-1979-82/).

We've missed the opportunity to reregulate that the recent banking crisis provided--the conservative Senate isn't ready to act yet. (Maybe we can load the Senate conservatives into a time machine and beam them all back to 1900, where they would be forward-looking.) Meantime, I don't think things are going to get better until Larry Summers and perhaps Timothy Geithner lose their jobs. I expect Summers will self-destruct. I only hope he will do so in time for a good replacement to be found.