What if there was no stock market?

[Astronuc]

Scott Shane has an interesting blog article on small business failure rates.
http://www.smallbiztrends.com/2008/04/startup-failure-rates.html/

https://www.amazon.com/dp/0300113315/?tag=pfamazon01-20

Figure 6.2 (p.99) from my [Shane's] book Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By. The data come from a special tabulation by the Bureau of the Census produced for the Office of Advocacy of the U.S. Small Business Administration.

Scott Shane is the A. Malachi Mixon III, Professor of Entrepreneurial Studies, in the Department of Economics at the Weatherhead School of Management at Case Western Reserve University, Cleveland, Ohio, USA

http://wsomfaculty.cwru.edu/shane/


Back in the mid to late 90's, there were a lot of IPOs for small as well as medium and large companies. Enthusiasm for IPOs diminished with the bursting of the dotcom and tech bubbles. That was followed by the collapse of Enron, Worldcomm and few other big companies.

 

[ktoz]

That's not investing in a start-up, that's donating. What will the donors have to show for it? If they were given a document showing how much they donated it would represent a portion of ownership. This essentially would be no different than issuing a stock certificate.

The idea behind the stock market is to allow individuals to invest in a company with the potential for wealth accumulation through their proportion of ownership. The concept is no different than starting your own private company to acquire wealth - except in the private company case you would own the whole company (excluding any other partners).

By depositing cash into a bank and receiving interest on your funds, you are not acquiring ownership in anything. You are being paid an interest rate for the bank using your money to do business.

The hope with investing is that your effective rate of return is greater than that of the effective interest rate the bank is giving you.

As I envision it, the pooled bank idea would be almost identical to business loans. The key difference being, that individuals would be free to "loan" to whomever they chose. There would be no central authority making those decisions. As with any other loan, the person loaning the money would expect the money to be repaid. It's not a donation.

As to the rate of return, with a 9 percent fixed rate, investors would get most of the benefits of a stock with almost none of the associated risk. It's true that this idea would eliminate the possibility of extreme returns that sometimes occur, but those extreme returns aren't doing anything important anyway. They are just preserving the fantasy that anyone can become a millionaire overnight, if they just pick the right stock. In real terms, most daily stock activity has very little to do with "investing." It's just a quantity of cash churning around between speculators.

 

[ktoz]

If the bank is paying you 9% to use your money, then they will be charging you ~15% to loan money to you for a house/college/car/whatever. There is no net gain in this model. The 8-10% average long term gains in the stock market can still exist with the bank paying you 2% and charging you 6% for your loan.

My last response touches on the "peoples bank" aspect. There would be no markup from 9 to 15 percent because the "bank" doesn't really exist to make a profit. Each investor with money in this bank would be their own loan officer and bank president, so there is no need for the bank itself to skim some off the top.

As to home loans, admittedly, that is a fly in the ointment. At 9 percent, a 30 year $250,000 loan would come to $3,316,920 or payments of $9,214 per month. Clearly ridiculous.

Addressing this flaw would require a major rethinking of home loans as basically non-profit. Haven't really thought through how that would work, but there would have to be some sort of entity that could loan money at zero interest. Government? Most other investment though could fall under the 9 percent model.

 

[OmCheeto]

My last response touches on the "peoples bank" aspect. There would be no markup from 9 to 15 percent because the "bank" doesn't really exist to make a profit. Each investor with money in this bank would be their own loan officer and bank president, so there is no need for the bank itself to skim some off the top.

Oh my god. 100,000,000 loan officers!
We'd have to hire 25,000,000 people to make sure they weren't cheating the other 200,000,00 people.

As to home loans, admittedly, that is a fly in the ointment. At 9 percent, a 30 year $250,000 loan would come to $3,316,920 or payments of $9,214 per month. Clearly ridiculous.

I think your math is flawed. I come out with payments of ~$1900/month.
Just off the top of my head.

 

[mgb_phys]

It's been done - in the 1700s they were called friendly societies and then later building societies. They used deposits of savers to fund mortgages, they were generally pretty conservative who they made loans to - the borrowers had to have been previous savers .

Then in the 1990s the savers realized they effectively owned a very profitable bank and if they got together and demutualised (effectively an IPO) they would get a share of the cash - often upto $100 each! It would also allow the companies to be more profitable by giving them access to global capital.

 

[stewartcs]

As I envision it, the pooled bank idea would be almost identical to business loans. The key difference being, that individuals would be free to "loan" to whomever they chose. There would be no central authority making those decisions. As with any other loan, the person loaning the money would expect the money to be repaid. It's not a donation.

These people already exist...they're called loan sharks.

CS

 

[stewartcs]

As to home loans, admittedly, that is a fly in the ointment. At 9 percent, a 30 year $250,000 loan would come to $3,316,920 or payments of $9,214 per month. Clearly ridiculous.

With a loan in the amount $250,000 at 9% for 30 yrs gives a monthly payment of $2,011 not $9,214. This is not uncommon. What is uncommon is the low home loan rates that we had a few years ago and today (~5.5% to 6.5% fixed rate). That was a historic low I believe. Just 10 years ago, home loans where around 8% IIRC.

CS

 

[russ_watters]

Using the NBER definition of recession then yes, we are not in a recession. However, the GDP is not the best indicator of the health of the economy. Also, if you look at the GDP per capita, it's possible that it actually decreased.

The fact is that the economy is not doing well and it hasn't been for almost a year. Whether or not the GDP declined for two consecutive months has very little effect on the pinch people are feeling. It is just a matter of semantics as to what you want to call the decline in the economy. This is far from a leap in logic.

CS

Call me pedantic, but I would prefer that people use words the way they are defined. I agree that the economy is not doing well, but to call it a recession if it isn't (and economists are not saying it is - you either misread or misrepresented your links) is disingenuous.

 

[russ_watters]

Apparently the definition of recession varies, but many economists have said that the US is in recession and has been for about 6 months to a year.

Could you cite a source for this claim, please?

 

[stewartcs]

Call me pedantic, but I would prefer that people use words the way they are defined. I agree that the economy is not doing well, but to call it a recession if it isn't (and economists are not saying it is - you either misread or misrepresented your links) is disingenuous.

The problem is that the definition of a recession varies even among economist. To say that the US is in a recession will only depend on what definition one accepts as correct.

CS

 

[stewartcs]

Could you cite a source for this claim, please?

http://recession.org/history

CS

 

[russ_watters]

The problem is that the definition of a recession varies even among economist. To say that the US is in a recession will only depend on what definition one accepts as correct.

CS

Since there is a semi-official arbiter of this, they would be the holders of the final decision. I would cede to them and in the absence of a statement from them try to use the same logic/definition that they use, while understanding that it may not be exactly right. That is why it is hasty to say we were in a recession 6 months ago: failure to meet both the criteria they use or to have an official ruling.

Even setting that aside, the links you gave as evidence that we were in a recession 6 months ago actually showed the opposite, since the numerical predictions in them turned out to be pessimistic-ly wrong. If you have any evidence that really does suggest we are in a recession (that faithfully tries to match the nber criteria), I'd be happy to consider it.

 

[russ_watters]

Here's this years' four indicators that the nber uses (keeping in mind that of them, GDP is the most important as per their statements): http://s.wsj.net/public/resources/images/NA-AR586_Downtu_20080727181214.gif

Here's where the decision lined-up for the last recession: http://www.econbrowser.com/archives/2006/08/the_2001_recess.html

The 2001 recession was problematic because the 2000 numbers were revised down well after the nber made its ruling. The nber declined to adjust the dates, so the recession is listed as having started well after most of the indicators had peaked. It was also problematic because while the other indicators besides GDP showed well-defined peaks, the GDP did not. That will be an issue for timing it this time as well (unless, of course, there is a clear-cut and significant GDP decline to come).

The GDP was down a pinch in Q4 07, but since it was up significantly in the first 6 months of 08, I would be very surprised to see a recession declared before June. http://www.usatoday.com/money/economy/2008-08-28-gdp-q2_n.htm

 

[russ_watters]

http://recession.org/history

CS

As their own front page implies, they jumped the gun on updating their timeline.

As the United States continues towards an inevitable economic recession...

Besides which, it doesn't say when in 2008 the recession "started". If a recession starts in Q4, they can leave that up and it will end up being right. But it doesn't support your (or Astronuc's) point.

[edit] Moreover, the site doesn't seem to have any actual content of its own. It's "news" section is unreferenced (plagarized) copy/pastes from news sites. It is not a legitimate source and citing it does not imply an answer to the question as the contributors to the site are not listed (thus we can't know if they are economists or not).

 

[stewartcs]

Since there is a semi-official arbiter of this, they would be the holders of the final decision. I would cede to them and in the absence of a statement from them try to use the same logic/definition that they use, while understanding that it may not be exactly right. That is why it is hasty to say we were in a recession 6 months ago: failure to meet both the criteria they use or to have an official ruling.

And that is also exactly why it is hasty to say we were not in a recession. The criteria can be arbitrarily selected based on who is selecting it.

Even setting that aside, the links you gave as evidence that we were in a recession 6 months ago actually showed the opposite, since the numerical predictions in them turned out to be pessimistic-ly wrong. If you have any evidence that really does suggest we are in a recession (that faithfully tries to match the nber criteria), I'd be happy to consider it.

The reason the numbers didn't work out to indicate a recession (again assuming one uses the NBER definition) is due to the economic stimulus package the government implemented. Everyone seems to forget about this effect for some reason - especially the news media (even some economist). Stimulus packages skew the results since they artificially inject growth into the economy (i.e. stimulate the economy). Take away the stimulus and the economy is in a recession. This was even one of the arguments used to get the bill passed IIRC.

It is not a simple matter of googling news websites for "facts" or evidence. Most of the time news websites are not reliable. However, it is a matter of understanding the economy and making inferences about the various indicators. Not simply believe what the media (or government) tells you.

CS

 

[stewartcs]

Here's this years' four indicators that the nber uses (keeping in mind that of them, GDP is the most important as per their statements): http://s.wsj.net/public/resources/images/NA-AR586_Downtu_20080727181214.gif

This is a good example of why the economy really is in a recession. If you notice, the only factor keeping the economy from a receding is the GDP. Everything else indicates that we are. Again the GDP is skewed due to the stimulus package, and is not the best indicator of the health of the economy.

CS

 

[Astronuc]

Alternatives to the stock market - if you have the wealth.

Private Placements
In recent years, a robust market has developed for private equity offerings undertaken to benefit i) private companies who wish to raise capital while remaining private, ii) early stage companies who wish to raise growth capital but are not yet ready to be public entities and iii) public companies who wish to issue private securities. Examples of the types of private placements that companies can issue include growth capital, pre-IPO convertibles, private investments in public equity (PIPES), mezzanine debt and equity, and equity offerings completed as a private placement under Rule 144A.

Goldman Sachs is a market leader in private placements and consistently offers issuers and investors innovative products and solutions. One of our most significant developments in the past year has been the introduction of the Goldman Sachs Tradable Unregistered Equity (GSTrUE) trading platform that permits our clients to issue and have an active trading market in unregistered securities.

From GS Equity Capital Markets services - http://www2.goldmansachs.com/services/financing/equity-capital-markets/products-and-expertise.html

 

[ktoz]

These people already exist...they're called loan sharks.

Kinda hard to be a loan shark with fixed lending rates and payback terms.

Responses here have been interesting and forced me to look a little deeper at the complexities. When I get some free time, I plan to write a modeling program to see how an economy would fare with this system of simple lending rules.

Bottom line, I think we have reached "peak capitalism." I don't see any evidence that "the market" displays intelligent behavior. Huge sums of money often flows toward and pools around extremely destructive ideas solely because those ideas are profitable short term.

The market is, in many ways, a living ecosystem whose sole energy source is greed. Just as we are seeking alternatives to our destructive dependence on fossil fuels, we need to seek alternatives to our destructive dependence on greed as the primary energy source for our economy. I think we could do this by designing a new economy that minimizes greed while maximizing innovation, adaptibility and sustainable, non destructive, growth.

On its own, fixed rate lending probably wouldn't be enough, but it might the first brick in the foundation.

 

[russ_watters]

The market is, in many ways, a living ecosystem whose sole energy source is greed. Just as we are seeking alternatives to our destructive dependence on fossil fuels, we need to seek alternatives to our destructive dependence on greed as the primary energy source for our economy. I think we could do this by designing a new economy that minimizes greed while maximizing innovation, adaptibility and sustainable, non destructive, growth.

Marx would be proud, but as with Marx, what you dream of is contrary to human nature and because of that, it just plain isn't possible. Humans are competitive and any economic system, no matter how you attempt to set it up, is going to reflect that aspect of our personalities. The USSR tried to set up a system where people had complete equality and did not need to compete with each other. The only reason it worked as long as it did is they were able to fool the people into thinking they were the best. People accepted the structural lack of competitive opportunity because they believed because of cooperation that their achievements as a country were unmatched. Not only did it never work (it never produced real, sustainable economic growth), once the lie was discovered, the system collapsed.

You cannot remove competitiveness from human nature, so your only choice is to set up a system that harnesses it.

And that's not even addressing the Constitutional violations such a system would require...

Bottom line, I think we have reached "peak capitalism."

When the economy turns down, pessimists sometimes come out of the woodwork and say it will never go up again. It always has before and I see no reason to believe it won't again. And up to now (we'll have to see how this one compares), periods of expansion have been getting longer and higher and recessions shorter and shallower. I believe that trend will continue too.

 

[russ_watters]

And that's not even addressing the Constitutional violations such a system would require...

Ehh, I need to back off that slightly. The Constitution does not discuss economics much, so a lot would be left open to interpretation. And I'm not sure the courts have dealt much with the question of economic freedom. Nevertheless, I think that it would be clearly against the spirit of a nation founded on the principle of opportunity to succeed to disallow success.

 

[nuby]

The market is, in many ways, a living ecosystem whose sole energy source is greed. Just as we are seeking alternatives to our destructive dependence on fossil fuels, we need to seek alternatives to our destructive dependence on greed as the primary energy source for our economy. I think we could do this by designing a new economy that minimizes greed while maximizing innovation, adaptibility and sustainable, non destructive, growth.

Good analogy, and thoughts. I agree that greed is the driving force for most economies, but too much leads to something else. At the extreme end of "greedy", there are groups who use manipulation and control for financial gains... advertising is subtle form of this, your credit report is another, and lobbying for financial deregulation is the extreme.

Once groups start controlling the government for their own financial gains, is when problems start to happen... The first thing that happens is the middle class gets poorer, and the rich get richer through inflation.

When the government needs money, they just print it (or borrow it), which devalues everyones dollars. Then you have banks who loan out money they don't even have (electronic counterfeit money?) devaluing the dollar again, creating 'false' equity, etc...

So if you do the math you'll see our whole financial system is based on devaluing the dollar, creating inflation and debt, while over inflating the value of the stock market and real estate... And the GW Bush team basically let this get out of control.. The combination of the high price of oil, and the bad adjustable rate loans, lead to the current collapse (or correction) in our inflation based system... But now they are giving money out for free, doing all they can to create more inflation in an economy that is probably inflated to the max.

So, without the stock market would we have the extreme inflation we have today? Would we have the huge financial divide we have today? No way.

 

[AeroFunk]

Ehh, I need to back off that slightly. The Constitution does not discuss economics much, so a lot would be left open to interpretation. And I'm not sure the courts have dealt much with the question of economic freedom.

Are you kidding me! The Constitution has limits on government interference in the economy, like interstate commerce clause, and the "takings clause"

As for the courts what about Munn v. Illinois, or Nebbia v. New York ?

 

[CRGreathouse]

When the government needs money, they just print it (or borrow it), which devalues everyones dollars. Then you have banks who loan out money they don't even have (electronic counterfeit money?) devaluing the dollar again, creating 'false' equity, etc...

When the "government" needs money they borrow it, not print it. Congress doesn't print money (that's the Fed).

 

[stewartcs]

When the "government" needs money they borrow it, not print it. Congress doesn't print money (that's the Fed).

Actually the Fed doesn't print it either. The Bureau of Engraving and Printing (BEP) prints U.S. currency.

CS

 

[stewartcs]

BTW the Bureau of Engraving and Printing (BEP) and the Federal Reserve are part of the US Government (executive branch).

CS

 

[CRGreathouse]

Actually the Fed doesn't print it either. The Bureau of Engraving and Printing (BEP) prints U.S. currency.

Well, yes... actually I was being rather imprecise. The Federal Reserve creates money by buying bonds. The BEP prints money but does not create money (since it sells the newly printed money). I actually intended the former rather than the latter.

BTW the Bureau of Engraving and Printing (BEP) and the Federal Reserve are part of the US Government (executive branch).

Yes, but neither creates money because "the government needs money". The Fed creates money in response to inflation and recession threats; the BEP doesn't actually create money at all.

 

[nuby]

When the "government" needs money they borrow it, not print it. Congress doesn't print money (that's the Fed).

Well, as we type here, they're printing (making) it as fast as they can. Where does the value of this money come from? This might as well be considered taxation.

 

[CRGreathouse]

Well, as we type here, they're printing (making) it as fast as they can. Where does the value of this money come from? This might as well be considered taxation.

Wait, now I'm confused. Printing money does not create new money. Are you talking about printing money (which makes new bills to replace old bills, and sometimes converts electronic money to paper money) or creating money (the FOMC buys bonds)?

 

[stewartcs]

Yes, but neither creates money because "the government needs money". The Fed creates money in response to inflation and recession threats; the BEP doesn't actually create money at all.

The Federal reserve does. That's why we have such a high national debt. The "government needed money" for things like bailouts and budget deficits which have to come from somewhere. Hence, they sell treasury bonds (i.e. issue debt) which represents something of value that can be tied to the note that they issue and the BEP prints.

Governments in general do this quite often which sends inflation through the roof. In the 1980s, Argentina, Bolivia, Brazil, and Israel experienced very large inflation rates, all over one hundred percent a year and some over a thousand due to this very reason.

A note is fundamentally only a representation of something of value (e.g. the gold in Fort Knox). It has no true value (other than the paper it is printed on). It's just easier to carry around than a gold bar.

CS

 

[CRGreathouse]

The Federal reserve does. That's why we have such a high national debt. The "government needed money" for things like bailouts and budget deficits which have to come from somewhere. Hence, they sell treasury bonds (i.e. issue debt) which represents something of value that can be tied to the note that they issue and the BEP prints.

I agree that the bailout and budget deficits are funded by debt: I said that in post #58. But this is not money creation any more than the sale of corporate bonds are. In particular, it's unlike the money creation of the FOMC.

 

[stewartcs]

I agree that the bailout and budget deficits are funded by debt: I said that in post #58. But this is not money creation any more than the sale of corporate bonds are. In particular, it's unlike the money creation of the FOMC.

Very true, and I too agree with that on a fundamental basis. Unfortunately the government doesn't see it that way. They seem to think that a promise to pay back borrowed money with interest is something of tangible value as opposed to the gold brick.

CS

 

[CRGreathouse]

Very true, and I too agree with that on a fundamental basis. Unfortunately the government doesn't see it that way. They seem to think that a promise to pay back borrowed money with interest is something of tangible value as opposed to the gold brick.

Sadly, I completely agree with you. (Edit: the agreement isn't sad, just the fact.)

 

[SystemTheory]

I've formally studied electrical engineering and commercial law, and like many here, have become something of a social philosopher.

In economic thinking there is no equivalent to a Conservation Law. The Capitalist culture of economic growth is based on the reduction of nature at the prevailing interest rate. There is no doubt whatsoever in my biological intuition that nature will eventually react adversely to the disruption of biodiversity/homeostasis. Since my body co-evolved to exist in biodiversity why shouldn't I regard biodiversity as valuable to the integrity of my being?

I know that property is conserved at any given moment of time (all wealth is owned). I know the stock of wealth increases slowly (real GDP in productions of goods and services cannot sustain 9% returns for even a few decades). So one persons financial gain, above and beyond some fixed growth rate of the real economy, eventually must come at another person's loss. Compound interest rates are based on (1) environmental destruction with an eventual natural limit; (2) a progressive inflation scheme in the central banking system; and/or (3) competition in a non-growth economy producing winners and losers.

Frederick Soddy on Wealth, Virtual Wealth, and Debt

http://en.wikipedia.org/wiki/Wealth,_Virtual_Wealth_and_Debt

Herman Daly applying Soddy's analysis to modern financial problems:

https://www.adbusters.org/magazine/81/the_crisis.html

 

[stock-market]

if there was no stock market then there would be no regulation ,and almost entire market would be in doldrums. without it you can't hope to expand or do your business

 

[EnumaElish]

BTW the Bureau of Engraving and Printing (BEP) and the Federal Reserve are part of the US Government (executive branch).

CS

Strictly speaking, the Fed is a quasi-private bank with independent policy-making powers. The "Fed system" is subject to congressional oversight, not executive oversight.

http://www.federalreserve.gov/pf/pf.htm

Re: the stock market, in a deterministic model of investment and economic growth, the equilibrium interest rate (in real terms) is equal to the real growth rate of the economy, and that's like the OP's idea of "people's bank" offering x% on all investments (net of inflation). Those models break down when you introduce uncertainty and risk.