Re: re: slowing down transactions
Reading the above two posts I'm reminded of a number of others that I've read. When you manage to beat your way through the obfuscated jargon it seems that the whole point is to allow the traders to make more money.
I didn't think I'd used any obfuscated jargon. Please tell me where I have and I'll de-obfuscate it.
The purpose of a financial market is for people to make money.
And I mean this literally. The whole purpose of a financial market is that some people want money, in order to do stuff. That stuff might be starting a new company, buildling a factory, investing in some new piece of R&D, expanding into a new market.
So they can ask people who've got money to lend them some. This is done in various ways. But that's what it boils down to. And those people lending money are taking a risk of losing it, so want a reward. You take a small risk by putting money in a bank's savings account, so you get a small amount of interest.
Or for a little bit more you can buy government debt, or a corporate bond off Apple.
Or you might take more risk and buy shares. If this is an IPO (a company issuing new shares) then you're investing directly into a new-ish company (or one that wants to expand) and probably taking more risk, for the expectation of higher rewards. Or you might buy shares in a safer bet, again say Apple. Who've had their explosive growth phase, but make nice juicy profits you can share in. In that case you're not funding investment - but nobody would buy shares in new companies if they didn't eventually have a hope of selling them. So there has to be a market in shares willing to buy (liquidity) or nobody would invest in new companies. Venture Capital takes a stupidly large risk by early investing into a tech startup - you get to own a percentage of the company. Most of the time it goes bust and you lose everything, but maybe 1 in 20 times your bet will pay off and you'll own a small percentage of Google or probably something a bit smaller but still profitable.
This kind of investment wouldn't happen if there weren't people wanting to take stupid risks to make stupid profits, like say Softbank. But also then share markets for them to sell their few successes to, so they can cash out buy yachts and fast cars. And nobody would invest in those IPOs unless they had a chance to sell their shares to ordinary low-medium risk investors (like pension funds). It is complex, and there's no way to avoid that. But it also works. Most of the time.
A lot of the people who manage the money don't actually own it. They're doing it for other people. That's our pension funds, for example. Or insurance companies. They need to make a certain amount of return on the money they're investing. So they'll invest some in boring, but safe, government bonds. And try to make higher returns with some - because that's their job. To try and grow our pension pots.
There's a concept in economics called the agent problem. Which is that the people you hire to do stuff for you have their own interests, which may differ from yours. So as a shareholder you want regular dividends and a company growing in a nice predictable manner. But the CEO might want to get rich quick at the expense of long-term steady growth, or show what a genius he is by making some flashy deals and getting on the front pages all the time. Or a pension investment manager might be more interested in his bonus than he's worried about fulfilling your cat food needs in 40 years time. This causes problems, and it's almost impossible to devise pay and bonus structures to keep these people on the straight and narrow. So regular scrutiny is required, from investors, shareholders and government regulators.
The problem being we want to incentivise them to take controlled amounts of risk in order to grow our money (if we're lucky enough to have pensions or life insurance) without going mad and risking everything in order to make their next bonus stupendously huge. A balance that is impossible to strike perfectly.
If we take away the markets, then our only route to the investment that leads to economic growth is the banks or the government. The banks are no better at it than the markets, but more risk averse, so we'd certainly lose out on companies like Google and any kind of new business that's highly innovative that the bank manager can't understand. Government has a mixed record in business investment. And again, tends to be risk averse. So government investmtent banks can work brilliantly, in both Japan and Germany after the war for example. Because they were investing in known industries to build up their national economies. But then all but one of the Landesbanks in Germany (controlled by the State governments to invest in local industry) went bust in the 2008 crash and had to be bailed out. Only Bavarias was still being well run by that point. Similarly almost all the Cajas in Spain, regional semi-publicly owned savings banks, needed bail-outs in 20010-12. And the UK has a sad history of nationalising companies and then the government running them incredibly badly - with some exceptions.
Financial markets do some incredibly useful things, with annoying side-effects. And so far, nobody has found a reliably better way of doing it - and we've had modern (ish) style banking for 600-odd years and modern (ish) financial markets for 300.