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Except that without the secondary markets to provide liquidity the going concern mightn't have been able to get the capital in the first place.
by Colman (colman at eurotrib.com) on Thu Apr 15th, 2010 at 11:33:23 AM EST
[ Parent ]
That's Keynes' dilemma
The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except y reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is 'liquid' (though this cannot be true of all investors collectively) calms his nerves  and makes him much more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are availale to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and know very little about them), except by organising markets wherein these assets can be easily realised for money.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu Apr 15th, 2010 at 11:43:35 AM EST
[ Parent ]
Can't it be solved rather simply with a small transaction tax which changes little to the ability to go out, but limits the extent of speculative movements. If small enough, it will restrain trade but not kill liquidity completely.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sun Apr 18th, 2010 at 05:56:10 AM EST
[ Parent ]
That would kill the noise trading and program trading, yes. Which would be valuable, but would do little to restrain the wholesale delusion of a genuine speculative bubble. For that, you need targeted policies of moral suasion, precise fiscal intervention and (when the bubble is being financed by increasing debt load for speculators) narrow but heavy-handed monetary intervention.

If prices are going up, Ponzi style, at 5 % a month, the speculator will be entirely unperturbed and only mildly inconvenienced by a transaction charge of 1 %.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Apr 18th, 2010 at 06:24:31 AM EST
[ Parent ]


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