Resolving the Shortage of Equities: Other Ideas for Innovation in Capital Markets.

learning Module Resolving the Shortage of Equities: Other Ideas for Innovation in Capital Markets


Some Ideas for Innovation

Analysis of the development of the American capital market in the 1980s and 1990s, shown in the flow of funds accounts, suggests a few areas in which the 'health' of the market might be improved.

Change is inevitable; the direction is uncertain.

These areas call for innovation in products, institutions, and policy.

However, as already mentioned , any change will be and should be contested so as to ensure that the market institutions emerge stronger.

Change is inevitable, but the direction and nature is uncertain.

The ideas that follow are not recommendations of things to do but rather suggestions of what might be done and an intimation of how hard it is to effect change in capital markets.

Resolving The Shortage of Equities

Unless safe long-term investment vehicles become available in a form that provides protection of financial assets against inflation with reasonable growth of principal, the social problems of an aging society will be intensified.

So far there is little recognition that this problem exists.

Here are some lines of inquiry that might be pursued:

Clarifying Roles of Fund Managers

Although most investors have long-term goals, fund managers are rewarded and judged by short-term stock price performance.

Incorporating funds adds expense, without increasing investor protection.

The use of the corporate format for open-end mutual fund only adds expense without increasing investor protection, since there is no more need for a board of directors to supervise a fund management company than than there is for a grantor of a private trust to require a board of directors to supervise a bank trustee.

At the same time, the cost of fund management does not increase in proportion to the size of the fund, providing incentives for fund managers to try to boost short-term price performance, at the expense of long-term improvement in intrinsic value.

Some changes that might help to improve this situation are as follows:

Capital Markets In Evolution

There a many other areas for reform and innovation that might be mentioned, such as redevelopment of closed-end funds, reform and federalization of the private annuities market, industrial policy, improvements in cross-border trading, 24-hour trading with immediate settlement, and accounting reforms to deal with derivatives and complex group structures.

This final lesson calls attention to the continued evolution of capital markets — a basic premise of Capital Flow Analysis — and suggests that through the study of national flow of funds accounts, the analyst will come up with ideas of how the market and its institutions may be improved, and perhaps may be better prepared to engage in the struggle to advance the market.

The ideas for change suggested in this lesson are meant to be controversial and to stimulate thinking about market evolution, with consequent advantages, pitfalls, and opposing interests.

Institutional change, in itself, can have a profound effect on long-term price movements of market instruments, as was the case of the mass marketing of open-end mutual funds in the 1950s and 1960s.

By entertaining ideas of institutional change, the analyst is more likely to perceive when such change is occurring and anticipate its effects on underlying price trends.


Before proceeding, check your progress:


Annuities may help retirees meet income goals because:
Choice 1 Less savings are needed to sustain income.
Choice 3 Capital gains are guaranteed.
Choice 4 Marketing costs are very low.
Choice 2 Annuities require medical examinations.
The author says that 'shareholder democracy' is:
Choice 2 Of great benefit to small savers.
Choice 1 Not worth the cost to most investors.
Choice 3 A constitutional right of Americans.
Choice 4 Prohibited by the New York Stock Exchange.
In the U.S., preemptive rights to subscribe to new issues of common stock are:
Choice 2 Favored by most investment bankers.
Choice 3 Required by the New York Stock Exchange.
Choice 1 Protection against dilution of equity.
Choice 4 Forbidden by Federal law.

Learning Module: Steps in Capital Flow Analysis  learning module : completed

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