An article in the current issue of Harvard Business Review notes that there has been a ‘multi-trillion dollar transfer of cash from US corporations to their shareholders over the past 10 years’ [‘What good are shareholders?’, Fox & Lorsch]. The City of London achieved similar disinvestment. But that’s not what stock markets are supposed to be for. The money was supposed to flow the other way, from myriads of investors into new industrial, technological and business developments.
But public companies clearly no longer need to issue shares for sale on the stock market. Their funding is largely through retained profit and more and more of them are actually being taken private where disclosure and transparency requirements are less invasive. At the same time, the fast growing small and medium sized innovators on which a sustainable future depends, and which do need to acquire additional funds for future investment, don’t find stock markets a satisfactory means of raising the necessary. The fund managers and traders who control investment in stocks and shares want fast, low risk returns. But returns from SME innovators, even though they may be exciting and sustainable, are unacceptably long term.
So stock markets are not needed by mature public companies and don’t deliver to the needy SME innovator.
Prior to the 1980s deregulation, the majority of shareholders were individuals who personally took investment decisions and generally held their shares for several years. Today, the average holding period of stocks is down to a few months, and for around 70% of trades made through automated ultra-fast systems, the holding period may be only a matter of nanoseconds. Also these traders operate in what the Economist has referred to as a ‘culture of casual dishonesty’ revealed by the Barclays LIBOR riggers led by Bob Diamond. Investment for the long term in an SME green technology innovator is simply not on their horizon.
For such SMEs the alternative to stock markets as a source of funding used to be the venture capitalist, or ‘angel’ investor. But these private equity and limited liability partnership roles, now have become increasingly predatory in nature, rather than supportive. The traditional banking support, which was always conservative rather than adventurous, has evaporated during the current crisis, thereby proving the pointlessness of the massively expensive quantitative easing. Bank lending is unlikely to be revived while ever banks are dominated by their investment banking wings focused on quick profits from deliberately opaque swaps and derivatives. The only source of SME funding with serious potential seems to be the growing and resilient mutual and co-operative sector which is free from dependence on stock markets.
Stock markets now serve only to extract funding from the real economy and invest it in speculative virtual ‘products’. That has been profitable while the volatility of booms and busts were superimposed on a long term trend of continuing growth. But with the loss of investment supporting the real economy, especially the innovative growth segments, that underlying trend of growth appears already to have become one of decline. The busts may therefore now be expected to outweigh the booms and the only gains that will now be made will be from ever more obvious bubbles.
There really doesn’t seem to be much point any more to Wall Street or the City of London, except as hosts to the form of banking which has quite properly earned the epithet: casino.