Rethinking the Stock Market
Risky startups need equity funding. Debt will not do. Interest sufficient to offset average risk bankrupts those startups which only produce moderate returns on investment. In other words, high interest rates add risk, necessitating yet higher rates…
Equity funding is expensive. Going public can easily cost millions of dollars. You can thank our nanny state for much of this cost, a cost that rises with each financial scandal and hysterical Congressional response.
If you dream of starting a business more creative than yet another strip mall pizza restaurant, it behooves you to call for a lighter burden of stock market regulation.
Conversely, if you are a liberal who despises merger mania, and the domination of a few big corporations, it is also in your interest to lighten the burdens imposed by the over-protective SEC. If you want a human scale economy, with many businesses competing for workers and customers, you need easier access to equity capital for smaller enterprises.
Sarbanes-Oxley and other heavy-handed laws encourage startups to seek big company buyouts instead of going public. And the equity they get before being bought out tends to come from wealthy angel investors, the One Percenters. The Securities and Exchange Commission protects the One Percent from competition by the rest of us.
Lighter stock market regulation is a liberal cause(!)
One the other hand, the SEC also protects small investors from a host of sleazy operators. Back in the days when corporations could float their shares to the public before going into business, the stock market was a wild and dangerous place to invest your money. Acts we now call criminal were commonplace. And then there was that stock market crash in 1929 which might have had something to do with the subsequent Great Depression…
Even if said stock market crash was not the true cause of the Great Depression, there are good reasons why conservatives and even libertarians should oppose simple deregulation of the stock market. If we go back to the Wild West investing regime of the 1920s, there is no way we will ever privatize Social Security. Retiree rip-offs are bad enough today. And we are always one pension fund looting away from a regulatory backlash that would make Sarbanes-Oxley look like Libertopia.
Effective stock market regulation is a conservative cause(!)
Cheaper, more Effective, Stock Market Regulation
We have reams of securities regulations. Corporations are required to provide mass quantities of bullet points in their annual reports, full of CYA boilerplate documenting all the ways that the financial future of the respective corporations may be less rosy than anticipated. Meanshile we have insider trading laws which stifle good financial reporting. These regulations cost millions and do a great job of paying for lawyers’ luxury cars. But do they do any good?
- Do they stop CEOs from getting paid millions of dollars for doing a crappy job?
- Do they stop vulture capitalist firms from saddling their buyout targets with massive debt, only to go bankrupt after going public?
- Do they stop hostile takeover artists from charging greenmail?
- Do they allow CEOs to take a long term view, benefitting shareholders and society in the long run?
I think not. Just read Forbes. The grand apologist for the capitalist system reports the warts of capitalism today on a regular basis.
There is an alternative to all this useless legal boilerplate and bureaucratic nitpicking: Accountability. I will provide several simple rules to ensure accountability by corporate officers and major investors in lieu of today’s useless bureaucratic nitpicking. This solves half our problem.
But there is another half: the investors themselves. With truly big corporations we can think of stocks as a commodity like oil or orange juice. It takes a really big player to manipulate such a market. But if we reduce the overhead of doing an IPO for a truly small corporation, then we create a huge penny stock market, a market ripe for manipulation by anyone with a few million dollars to play with.
Penny stock markets are a jungle now. Just read the stock market letters of the radical libertarian gold bugs like Doug Casey to get a taste. And those old school penny stocks are big relative to the kinds of stock to be floated under the new Jumpstart Our Business Startups Act. The vultures will converge once the SEC finalizes regulations for these new micropubliccorporations. This is sad, since the JOBS Act is a wonderful example of bipartisan cooperation, where the liberals recognized the value of stock market deregulation. I commend President Obama for signing it. I want it to work.
And I have a recipe for possible success, a recipe that can be summarized in two words: Negative Feedback.
This recipe can also be applied to bigger stocks and even the commodities markets to stabilize the economy and produce an investment regime which The 80% can understand well enough to plan for their retirement. Talk of privatizing Social Security could become politically feasible.