Mon Aug 30th, 2010 at 07:58:03 AM EST
Although I call myself a capitalist (whatever that means) I would answer the above question with a clear: not really!
To understand that, it is necessary to have a quick refresher on what stock and bond markets do and what they don't do.
Promoted by afew
In the mainstream media, there seems to be a belief that the stock market is the most important thing in the world. No wonder if even Alan Greenspan recently said "if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here"
However, blind belief is one thing (I was also guilty of growing up and even during my university studies) but real understanding and critical analysis is another.
Let's start with some very basic but important definitions / explanations:
I. Stock vs. Bond Market
On the stock market, stocks/shares (i.e. equity, ie. ownership) of corporations are traded.
On the bond market, bonds (i.e. debt) of corporations are traded
II. Primary vs. Secondary Market
The primary market is where stocks are first listed on an exchange, commonly known as the IPO (initial public offering). In that case one of two things happens: either new capital is raised for the corporation (e.g. to build new plants) or existing shareholders (e.g. the founders of the company) sell their shares (in which case money moves from a new investor to an old investor but NOT to the corporation). The last scenario is the important one later on in this diary.
The secondary market is where stocks are traded once they have been listed, i.e. after the IPO. There, money just passes from one investor to the next, the corporations sees none of this money! And during that process a wide variety of parasites feed on this money flow (banks / brokers / exchanges / hedge funds / etc...).
The important definition above is the primary vs. secondary market stuff. Only in the primary market do corporations get real new money (e.g to expand their factory), and then only if it is a real capital raising and not just old investors (who can also be private equity funds!) selling their shares.
The classical function of allocating capital to profitable ventures is therefore only rarely fulfilled by the stock markets!!!
Hence my remark at the beginning that we don't really need stock markets!
This might seem very trivial but let that sink in for a while (it took me all of my university studies plus the first 2 or 3 years on the job to realize the magnitude of this). The whole stock market which seems to play such a large role in today's economy, polticial decisions, etc... is really pretty much not necessary for a functioning economy! In fact, it's probably more of a liability than an asset (sic)!
In the bond market the situation is a bit different because there is a lot more activity on the primary market. Of course, often a bond is emitted to only pay back another bond or bank loan that will become due, but a lot of the time it is actually really new money which the corporations use for corporate functions such as building new plants (but unfortunately often also just buying back shares).
For me, this has several implications and further research potential:
- Stock markets are very costly (think of all those investment bankers and lawyers and regulators, not too mention free-riding and externalities...). If they only have a marginal value for society as a whole, why even bother having them?
- I checked the site of the German stock market, http://www.deutsche-boerse.de and looked briefly at their primary market statistics of the last couple of years (which, admittedly was not the best time for IPOs). The result, not many IPOs and those often not capital raising but selling of private equity funds or old investors. I know the situation is different in other countries (a lot more activity for sure in the US), but the sum of new capital going to capital raising IPOs is probably absolutely minute compared to total GDP / capital stock... Interesting research paper though...
- When I used to work for a bank I knew a couple of people how had worked on IPOs and some of their smaller companies did do real capital raising but didn't know what to do with all that money so they just parked a lot of it in their bank account (at measly interest rates)... The rest went to buying soccer tables for their employees :-)
- I bet some of the most "valuable" companies out there didn't really need the money from an IPO (e.g Microsoft, Google) for corporate used (e.g. plant / porperty / equipment / research and development). Just a hunch, but I am too lazy to search for old financial statements and look at the Cash-Flow statement to see if cash-flow from operations was enough for cash flow for investment ("real" investment like property plant and equipment, NOT purchases of marketable securities and also considering the cash already at hand!)... That would be generally a nice research paper, what were the proceeds of IPOs used for?
- If companies weren't listed on the stock market they wouldn't have to worry about all that quarterly reporting bullshit and could instead concentrate on long-term value creating projects.
I wonder how hard it would be for listed companies to slowly pull back or at least just blatantly ignore stock exchanges rules (e.g. as Porsche did in the early 2000s when they refused to report quarterly numbers). What would happen if some big Dow Jones or EuroStoxx50 company did this? How far would their stock really go down in the short term??? What would happen if an employee dividend was payed every year which was half of after-tax profits (fair 50/50 share of profit between shareholders and employees after giving the state its due in taxes?), which would be paid out in shares? Once all shares are in employee hands the company is delisted, shares scrapped (don't know how to technically do this) and the company would effectively turn into a cooperative ownership-type structure where henceforth profit is distributed to all employees? Those companies are profitable and are taxed to pay for pensions...
And last but not least: Why does it seem like no political party (whatever colour)is discussing this (or something similar) at all? Why is the moment of the crisis not being used for paradigm shifts in essential parts of our society?