Financial markets are unstable, unhelpful and often immoral. They should be kept under better control.
My disdain will be dismissed by free-market enthusiasts. For them, lively markets where equities, bonds and currencies are sold at publicly disclosed prices are clearly a good thing; they may even be capitalism at its best. Such open markets, they say, both improve economic efficiency and make society more free.
Not so; these markets are economically and morally harmful. Let me be clear. I am not discussing what non-economists usually mean by markets, the generally useful supermarkets and farmers’ markets. Nor am I debating the merits of what economists refer to as the “market” – the real or virtual place where buyers and sellers make transactions. Nor is this a screed against all of finance. Banks and insurers do not need financial markets to gather savings and make loans and investments.
My issue is with those open financial markets – particularly in shares, bonds and currencies. In each of these markets, cash is traded for something entirely intangible and uncertain: a promise of fixed cashflow for bonds, potential cashflow for shares, and potential purchasing power and interest income for currencies. The problem is simple. Because the valuation of the financial asset is necessarily unknown, there is no hard reality to restrain irrational optimism and rampant cupidity. Both flourish.
In financial markets, prices wander all over the place like escaped cattle. That judgment is supported by solid analysis. In the 1980s, economist Robert Shiller demonstrated that actual changes in the economy and in companies’ fortunes together cannot possibly explain the magnitude of share-price moves. He concluded that psychological factors – mood swings – play a major role.