RE: An idea for stock market reform

[Gary Dymski <dymski@xxxxxxxxxxxx>]

I am brought briefly out of ASSA-paper hibernation by the nice exchange
of David and Trond.

David's C's notion is:
>I've been thinking along somewhat different lines--although with some of the
>same ends as Trand had.  My thought was to have a limit on how much a share
>can increase in a year--say 20%.  After that the firm will have to issue new
>shares to all who want in at that price. That would mean that when a firm
>becomes "hot" it will have an enormous infusion of cash.  It would also mean
>that the value of insider information would be less.
>
>I haven't figured out whether to have any limit on the down side--if it did
>it would have to have some way to finance it--or whether the symmetry
>matters.
>
>There are probably as many or more problems with this as there are with
>Trand's but I would like to hear them.


Forcing the prices of a firm's shares on a secondary market to fluctuate within
a band of +/-20% (or so) would be a move to rein in speculative pressures.
The price would simply become stuck at the 120% level, no?  In effect, trading
would stop.  The firm doesn't see that gain, per se, unless it emits new shares
to participate in the equity-price gains; and it will be more likely to do
so in
the current system.  Issuing new equity shares would only indirectly equilibrate
supply/demand pressures in the secondary market, as auctioned shares joined
the supply available to secondary-market traders. I'm not sure this would work
out, since this is imposing a kind of quantity-adjusting (Marshallian?)
equilibration
process on markets that have engaged in price-adjusting (Walrasian?)
equilibration.
We might need reeducation camps for Wall Streeters.  The other thing is, it
would be necessary to impose restrictions on what firms could do with the money.
It is important in this context to recall the many games played with firms
that have
nurtured cash, used cash to repurchase shares, etc.

My Keynesian-uncertainty instincts have reacted to Trond's and your proposals,
but I'll have to think on it a little. Paul D. has emphasized the idea of
building
stability into the markets by, in effect, reducing the dimensionality of
uncertainty--ie,
exchange rates, exchange-rate futures markets, etc.  If he is right about
this, then
a core source of the price craziness is still out there leering at people's
efforts to
stabilize; and a quantity-adjustment mechanism could make firms choose between
limited growth and a riskier balance sheet.

I do think a lot of the price pressure in Wall St. is macro-structural in
origin these
days, and hence that a micro-mechanical proposal can only therefore get so far.
At the macro level, it's also necessary to do something about the
US-as-safe-haven/
dollar-as-reserve-currency-while-the-rest-of-the-world-starves-or-burns thing.

And in the spirit of the day, may I just mention a couple of lines from Gil
Scott-Heron:

        Peace is not the absence of war;
        It is the absence of the rumors of war,
        the absence of the preparations for war.

This from Gil Scott's 1997 CD "Spirits", in a rap/poem on the last Gulf war
and the
military-industrial complex.  Well worth the listen if you can find it.

Peace!
Gary
Gary Dymski
Department of Economics
University of California, Riverside
Riverside, CA 92521-0427
Phone: 909-787-5037 x1570
Fax: 909-787-5685
Email:  dymski@xxxxxxxxxxxx (office)
             gdymski@xxxxxxxxxxxxx (home)