Re: regulating capital flows

[Paul Davidson <pdavidson@xxxxxxx>]

At 12:27 PM 12/18/98 -0800, you wrote:
>I won't go into details right now, but I have become intrigued with the
>use of regulations on capital flows to regulate indirectly current
>account balances (rather than calibrating the regulations solely to
>exchange rates).  Have others thought along these lines?
>
>Peter Dorman


Peter that is exactly the purpose behind proviso #2 of my 8 proviso IMCU plan

Since I will be quickly running into the 10 message constraint, let also
respond to David Colander's worry about distribution rather than volatility.

If distribution is your SOLE worry , David then just have a very
progressive capital gains tax. --rather than a plus or minus 20% target
zone.  But the trouble with both the progressive tax and the 20% zone is
that both potentially will have detrimental effects on real investment.--
and the distribution in the ensuing depression may make even more "poor".

Also David would you worry about the pension fund of some blue collar union
(or even CREF) that was "lucky " to own the financial asset whose value
went up?  Would you want to penalize them as well for obtaining an economic
rent?  Perhaps you had best adopt a Henry George philosophy  ---).

Third, in response to Trond point that "only a puny part of the stock
market buying is fresh cash drawn in for a new venture".  Of course,! But
that is just the point of liquidity in general and  organized liquid
financial markets in particular, Organized equity markets if they have
liquidity must basically be a "second-hand market" with the proceeds going
to financial asset holders and not the investing enterprise.  In fact in
the NYSE (correct me if I am  wrong Doug H.) only second-hand equities can
be traded .  Any IPO (initial public offering, or new issues) are
originally offered in the over the counter market and only after the public
holds them can they be listed on the organized exchange.

The problem, Trond, is that you have not separated out the "financing " of
new real investment from the "funding " of that investment. (In my book
POST KEYNESAIN MACROECONOMIC THEORY, I distinguish between the two. )
Financing of a new real investment in bricks, mortar and machines is
usually done via the banking system making loans to entrepreneurs in the
capial goods (bricks, mortar, and machine) producing industry to finance
their working capital production.  One this production is complete, it is
sold to the investing enterprise, who usually must "fund" this investment
by selling financial assets to the public to "capture" the flow of savings
that has been occuring pari passu with the flow of working capital that is
being accumulated by the capital goods producer.

Before deciding to change the equity markets, one must understand how and
why they function.  For classical economists it is the efficient mechanism
to optimally allocate scarce capital.  For those who believe in the
liquidity theory of financial markets, liquidity is a double-edged sword
and therefore must be handled very carefully or else you may wound the
economy mortally.

paul
Paul Davidson
Holly Chair of Excellence in Political Economy
Economics Department -- 523 SMC
University of Tennessee
Knoxville, Tennesseee 37996-0550
email: Pdavidson@xxxxxxx;
phone: (423)974-4221;    fax: (423) 974-1686
http://econ.bus.utk.edu/Davidson.html