This backward’s recursion principle would apply to all classes of stocks: a class H stock would be priced at the discounted sum of 50 years worth of dividends, and a class G stock would be worth that plus the discounted sum of dividends expected before selling it, and so on. But ultimately, all of these classes of stocks have value if and only if the firm pays regular dividends. At this point, we have to call into question whether these should be called “dividends” at all–since it is now an obligatory payment needed to maintain the company’s capital valuation, it should be called “interest” not dividends, and recorded as an operating expense, not profits.

My point is what you have described is just an incredibly complicated reformulation of a financial instrument already available to corporations: a bond. Essentially, Keen wants to turn stocks into bonds, so that a stock is really a debt issued by the company that has to be repaid in 50+some odd number of years with interest. We could simplify the whole thing if we eliminated all 8 classes of stocks and simply specify that bondholders have voting rights.

Have pity on the little guy!

This is similar to the way many large properties are often sold (ie you buy the company with the sole asset of the property rather than the property), although there it is about getting around stamp duties etc.

This would be even more likely if, as you say, a lot of the trading would be OTC because of the lack of volume.

–Q

And Petras, I was just thinking of ways to circumvent it myself. But yours is far more elegant!

(Hint: a liability/debt is someone else asset)

I would guess it would be possible to set up a SPV, which would buy A class shares at IPO and then issue CFDs or any other similar instrument that would allow trading in those shares without actually moving them to the balance sheet of other investors.

You can tell I used to work in an investment bank :)

I fail to see why it would prevent bubbles – I don’t see how the prospect that a share could be worthless in 50 years would have stopped the tech bubble in the late 90′s. People happily buying shares at a multi-billion valuation for a company that had never made money weren’t doing so because discounting cash flows told them that the years 51 to infinity dividends would be worth piles of money. They did it because they thought these companies would quickly dominate some market and/or because they thought they could flip to a fool at a greater price.

It would have a devastating impact on liquidity – not only because each sale of a share makes it less valuable, but also because the common shares of a company are now a series of classes (more than 8, since a class H share is also defined by its expiration date) rather than 1 identical class. This illiquidity probably also makes bubbles more likely, not less. A shared feature of both the residential real estate bubble and newly-public tech stocks during the bubble was transactions involving only a small fraction of assets driving the valuation of a much larger, illiquid group of assets. (For housing, it’s obvious that the asset is relatively illiquid. For the tech stock bubble, newly public companies had a small float, due to insider/VC ownership and lockups, so the trades of a float of about 10% to 20% of total stock were setting the price.)

Valuation of any class of shares becomes extremely complicated, because the non-expiring shares become more valuable if a company doesn’t pay dividends, allows a large number of Class H shares to expire, and then pays dividends to the now smaller remaining group of shares.

Building on that valuation point, corporate governance would be even more of a mess than it is now, due to these fights on the timing of dividends. Boards currently have reasonably well-defined fiduciary obligations in theory, even if in practice they often don’t live up to them. In this new world, what is a board’s obligation to holders of Class H shares that expire in 2013 or 2014? Is it to pay a dividend this year, being equitable to all shareholders? Or is it to delay a dividend, which benefits the vast majority of shareholders who don’t own such Class H shares?

Then there’s the regulatory arbitrage we’d get. I’d obviously much rather own a mutual fund or ETF that owns shares than actual shares, assuming that I can still trade in or out of the fund/ETF.

So, if our goal is to bring some of the worst of the complexity and regulatory arbitrage of the pre-crisis structured finance market to the equity market, while also handing dramatic arbitrary power to corporate boards, then this proposal is a winner.

That said, the volatility of the stock market frightens away many people who ought to be investing the bulk of their retirement savings in equities. You have to be able to stomach (or ignore) a 30% drop in the market, and many people simply can’t do that. So there is a long-term cost to these bubbles…

You can make whatever rules for real estate you like. If you demand a higher downpayment, then you will get a less volatile market but people will need to save for more years before they buy. If you accept a smaller downpayment, then people can buy earlier in their life story but the market is more vulnerable.

Once upon a time the standard downpayment was 20%. That helped keep prices affordable, and forced people to save a substantial sum before they could buy. If you can’t save a 20% downpayment in five years, there is a good chance that a purchase at that price would excessively stretch your finances. I would favor a return to those policies, but such a change would depress the housing market significantly (and thus this probably isn’t the best time to do it).

Also, is there any economic reason why we can’t have a similar rule for real estate?

Jubilee shares sound like a gimmick to me. Investing sensibly is by its very nature complicated enough. Any gimmicks will make the system more complicated, less flexible, and (in my opinion) ultimately less robust.