We begin with a famous Quote from George Bernard Shaw. “If all the economists were laid end to end, they’d never reach a conclusion.”
Gratitude to those Following This Blog
I am grateful that you take the time and effort to read these writings. I am grateful for the input that you give.
How to Make The Capitalist System Work
Our system creates cycles of economic prosperity, and in those cycles we create great waves of prosperity, which are inevitably followed by great crashes.
It is the next wave of prosperity that breeds confidence in our economic system, and it is the next crash that devastates so many people. The first time I personally felt the painful blows of a crash was in my forties. I remember so well looking around and wondering aloud why we had a system that economically devastated my peers.
Some lose heart and never recover. Society loses so many great minds and great entrepreneurs. If there was only some way to moderate these devastating cycles.
I realized that the cycles are man made, they are unnecessary, they are counterproductive, and they are not that difficult to eliminate.
Libertarianism
This will alienate my Libertarian friends, who believe that rules and regulations are an unnecessary evil, but these cycles and the ease in which they may be prevented, is one of the best arguments against Libertarianism.
In my December 9, 2010 blog, I documented `10 changes needed in order to rid us of the excesses of the euphoria of the cycles, and the devastation of the fall of the cycle”. Most of these proposals have to do with the control of natural human greed. Humans care for one another, but put a big potential gain in front of someone, and they invariably (in spite of their noble morals and care for the less fortunate) take the money.
Our society should be so much better, and it is not that hard to achieve this. We only need to start looking at natural emotions that are in everyone and address their ill effects, without hurting or controlling, or taking from anyone.
If you care about how to make Canada and the free world a better place, you might choose to agree with some of the changes listed in that December 9 blog that I proposed.
Readers have commented and asked that I include some additional points. The following are not included in the 10 major points, but are worthy of noting.
The Capital Markets Work on the Basis of Selling New Offerings
The investment bankers are always searching for the next big idea, or the company that needs money, or how to raise money from investors for a multitude of purposes. They make their money by creating offerings that raise money for people that need money, and selling these offerings to people wanting to invest.
When they create and sell an offering, they make a big reward, and everyone is happy.
That is, everyone is happy unless that investment drops in value. Then the Investment Banker may feel bad, or may wonder why that particular offering turned out badly, but that is where his/her interest stops. They always have a rationalization that is quickly brought forward to explain the previous failure, and then quickly change the subject to their next ‘fantastic’ offering.
Make the offering broker hold their Commissions and Broker Warrants
When an offering is sold, the sellers take their commissions and move to the next deal. In most cases, there are also ‘broker warrants’ or ‘over-allotments’ given to the Banker/Broker as additional rewards for a successful offering.
In most offerings, the people buying the offering are required to hold their shares for a period of time and not allowed to trade them until that period expires. The brokers, however, are free to do as they wish from day 1.
The incentive therefore is to sell the offering as quick as possible, and immediately liquidate the rewards obtained, then moving to find the next deal.
Wouldn’t it be fairer, if the brokers remained with some skin in the game. If they sell something to the public, they should also have to wait for a period to reap their rewards. Maybe a fairer system would require that all rewards be put in a pool for 1 year, and released monthly at the rate of 1/12 per month. Then stocks would not have downward pressure right out of the gate, as the brokers could not immediately sell their ‘reward’ holdings
The sellers would keep an eye on what they sold and get involved if it was going off the rails. The incentive to dump and run to the next deal would be moderated. The interests of all parties would be to make every offering a success.
This would go a long way to moderating the incentives to create the next big boom and bust.
The Effects of This Proposed Policy Change
It would balance the current easy access to capital against the need to have due diligence before a deal is sold to the client. Before selling something, whomever was selling it would have to take the time to figure out what they were selling. This rule should be applied to everyone in the chain of sales, not just to the guys who originally thought up the deal.
The flood of broker warrants being exercised and sold would be moderated as the sellers would think twice before hurting the market by sales whenever they felt like it.
The real effect would be that Offering Brokers, Investment Bankers and Exempt Market Dealers would have some of their own money in the offering. Their eventual profit or loss would be aligned with the buyer of the offering. They would have some money in the deal for a short period.
Sounds fair to me !
