What if there was no stock market?

[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.

 

[Simple Minded]

I'll be honest, my name says it all. I don't attest to have the education that most of you have published on this thread. I work in the financial sector and couldn't argue most of the points on this thread. The thought of a market without a "stock market" or the "communist" ideals of a constant rate (9% or whatever) versus the a free market appear to be complete.

What if we revised the question and simplified it a bit, which is ironic because that would be the basis of my new question. What if there was no centralized exchange of stock? No more centrally traded mutual funds, ETFs, or other complicated investment vehicles that are invested with 401K's, IRAs, Pension Funds, etc.

Who would suffer?

Companies could still attain capital through "private" equity and correspondingly investors could do the same; and both at market rates. Would investors become more focused? Would investment horizons become more "long-term" and less speculative (quarter to quarter)? Would companies suffer for that, or thrive? Would these Stanford Grads have difficulty raising funds for a search engine? Did they need a centralized stock exchange to get public funds for a product that was so superior at the time they issued public stock?

 

[BWV]

. The Capitalist culture of economic growth is based on the reduction of nature at the prevailing interest rate.

no, growth in a capitalist economy comes from the employment of energy, specialization of labor and technology. It is not necessarily a reduction of nature any more than a hunter / gatherer or agrarian economy is

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?

Nature is not an entity - it could give a flying f*** about biodiversity

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.

not correct because the distribution of the gains in real GDP are not, nor should they be, shared equally. If I create a cure for cancer that creates a trillion dollars of wealth in the global economy (through reduced medical costs, recovery of lost productivity etc) and I get 10 billion dollars for my effort, no one has lost

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.

interest rates are based upon inflation, risk of not being paid back and the opportunity cost of capital, nothing else. They have nothing to do with environmental destruction - pre-capitalist economies have been responsible some of the worst environmental destruction through deforestation, overfarming, overgrazing etc. A capitalist economy allows the wealth necessary to have the scientific infrastructure to even understand ecology in the first place

 

[WhoWee]

I just found this thread.

The stock market is quite different than a casino.

A casino takes your bet - and you either lose or win - then you repeat.

The stock market is a place where cash is used to purchase an equity share of stock - that is ownership - in a company. This company has been weighed and measured and held to great scrutiny by Government regulators and independent auditors. The equity investment may increase or decrease in value and might pay a dividend. If the company loses money -the investor is not required to cover loses - although the investment may lose value.

Without the stock market - it would be nearly impossible for investors to participate in capital markets.

 

[Tosh5457]

Hi

I've been contemplating various economic ideas for the last several years and lately have been wondering what is the justification for even having a stock market?

On a day to day basis, the frenetic movement of money between hands accomplishes absolutely nothing in the grand scheme of things. It produces absolutely no wealth, it just shifts it around from less savvy "investors" to those who have more of a knack for the game. For those who understand the game, it makes some of them absurdly rich for essentially doing squat. It inflates real wealth inside absurd stock valuations and creates enormous risk for people who aren't "good at the game."

I understand that a finite, healthy economy requires the free flow of money, but it seems like the stock market is a strange backwater where there is enormous churn with little overall benefit to the society as a whole.

If the enormous amounts of time and energy devoted to mastering the stock game were instead devoted to designing a stable system with high liquidity and low to zero risk, it seems like we'd all be much better off. For example, it seems like a pure bond market (with a couple of tweaks to eliminate penalties for pre term sales) would be a much better way to go.

I would be very interested in hearing why the stock market is a good thing.

Why such a social sciences sector's rat like me haven't seen this topic before, I had the same question as you in my mind

When you're speaking of stock market, you're referring to the primary or secondary market, or both?

On the primary market a company does its IPO, and raises the funds. The secondary market, which is the market we all hear about, only serves to provide liquidity to the investors who bought on the primary market. Who would buy a company's stock if it was difficult or impossible to sell it later? That would be a very big risk. But the secondary market also has influence on a company, because de-valuations on a company's stock results in a loss for important shareholders (those who vote) and that may lead to other problems I guess, but I don't know much about that.

So basically the speculators' role is to provide liquidity, and nothing else. They don't contribute to investment directly, only indirectly. If it wasn't for them (in the context of the stock market), it wouldn't be so easy for companies to get funding in the primary market. But of course, speculation brings financial instability, and that's a pretty big problem.

ON your suggestions of the bond market:

For example, it seems like a pure bond market (with a couple of tweaks to eliminate penalties for pre term sales) would be a much better way to go.

Seems right to me, but I don't know if the risk would be too big for the companies to get acceptable interest rates though. But no secondary markets, or a restricted secondary market, would also mean that cash would mostly be used to borrow, to invest or to consume. There would be no money used on unproductive "investments" like speculation.

 

[WhoWee]

Seems right to me, but I don't know if the risk would be too big for the companies to get acceptable interest rates though. But no secondary markets, or a restricted secondary market, would also mean that cash would mostly be used to borrow, to invest or to consume. There would be no money used on unproductive "investments" like speculation.

In order for a security to be registered it must meet financial reporting requirements that help investors make informed decisions. A buyer of junk bonds (that's where this conversation is heading) will make a decision based on a prospectus - a snap shot in time. Once purchased the only indicator of investment performance will be receipt of payment.