RE: An idea for stock market reform

["Colander, David" <colander@xxxxxxxxxxxxxxxxxxxxx>]

I thank Gary for his thoughtful comment.

Some comments:

> 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 law would state that the firm would have to enter in and issue stock.
There would be no end of trading.  So it isn't that it would be more likely
to do so; it would have to do so.


>  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.
>
Yes, this is a good way of seeing it.
> We might need reeducation camps for Wall Streeters.
I suspect that this would reduce the number of Wall Street traders--since
the gains are lower. I would see this as an increase in efficiency in the
capital market.  They might shift into other activities--teaching or working
for firms trying to figure out what to do with all that cash.

>  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.
>
They can't use it to repurchase shares--that would violate the law of
holding the price at the limit.  They could put it in CDs, loan it out, or
buy other firms after they use all their investment ideas.  The point is
that the successful firms have an automatic way of generating capital.
There may be some games that will be played, but I haven't thought of one
that would undermine the program--I suspect I haven't thought hard enough.
>
>
> 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.
>
	Clearly, any such plan must be integrated with a reasonable macro
policy.  If there is general structural pressure on prices, then all firms
will find that they must be selling shares.  I'm not sure what this would
mean, and how it would integrate the policy with other stock markets.  Would
firms simply issue stock in a separate foreign stock market which did not
have this limit?  Or would insiders only buy in foreign stock markets?

	Gary, thanks again for your comments.