Sunday, September 20, 2009
Human behavior favors the immediate. Nobody willingly chooses to wait when an option allows instant or near-term gratification. This tendency naturally results in imbalanced systems. The recent investment market crash is evidence of what happens when short-term behavior is at odds with the medium and long term needs of a healthy economy.
To make matters worse, our tools evolve naturally in directions that mimic human proclivities, catalyzing the very natural and human obsession with the immediate. As investment securities markets are more and more influenced by and accelerated through the use of automation technologies (the computer and global communication networks), they trend naturally towards an over-valuation of short-run returns and under value long-run returns. Even if traders or fund managers start off with long-range, future-looking, wide-perspective goals, the competitive pressures placed on them simply for sharing trading facilities with companies that make money by trading on shorter and shorter time frames forces them towards similar behavior. When you are competing for money, and that money is changing hands in shorter and shorter cycles, money available for long range investments and the types of businesses and infrastructure plays becomes scarce. You either join the race towards the immediate, or you go without.
However, a thriving economy absolutely depends upon the continuous and long-range capitalization that actively supports basic science and the steady infrastructure improvements that build, promote, and maintain complex supply chains that constantly evolve towards greater productivity.
Though a healthy and vibrant economy profoundly depends upon capital fluidity, upon responsiveness to investment demand, the recent trifecta of market boom/bust cycles (energy, dot-com, and real estate securitization) has shown that revenue schemes that do nothing more than move money around can exert too much influence on the entire market landscape that shapes our national and international economies.
Three times in a row we have witnessed first-hand how second tier capitalization (business that make their money by repackaging investment risk) tend to quickly and fatally overwhelm the total investment market. These securitization schemes do better in the short term than standard capital markets because the value they trade is not directly tied to the success of the actual businesses and infrastructures that they capitalize. In market competition for investment dollars, abstraction schemes provide an artificial advantage that is impossible for real businesses to overcome.
If investors have the option of making a quick bet against market stability, an option that is not in and of itself dependent upon actual consumer or business to business demand for actual product or service, of course the capital will follow the quick and the fake over the slow and the real. This is a natural and predictable attribute of the behavior of capital markets.
So what is to be done?
There are many potential solutions and solution categories. Greater regulation of markets. Tariffs and taxes that are then redirected through government advisory boards that seek to determine the areas of funding that will have the greatest impact on future productivity. New kinds of markets and financial products that somehow reword long range investments. Public education directed towards society-wide changes in social morality and long range responsibility to future technologies and infrastructures. Switching to a benevolent dictatorship and appointing exactly the right leader with exactly the right understanding of productivity building economic mechanisms, and the will to make it so. Each of these options has deep potential for failure. Most are simply impossible or entirely romantic.
After some thinking, I came up with a plan that just might work.
Lets say the government set a Target Average Investment Period (TAIP). This TAIP (for sake of argument, lets say it is set at 'two years') would be the time delay before any investment you make could be evaluated, cashed in, or traded. It is an "Average" because you can make any number of investments but the average duration of your securities each time you invest has to be at least as long as the current TAIP setting. Some algorithm or official committee (Fed Board?) sets the value of the TAIP at some set interval (every year?) or, as is true of the Fed Rate, whenever the governing body decides the economy demands an adjustment.
In practice, what it means is this: If you purchase a thousand dollars in 1 year stock (one year 'less' than 2 year TAIP) you must offset this purchase with investments worth at least one thousand dollars in a 3 year stock (1 year 'more' than the current TAIP). An investor can offset securities purchases with periods shorter than the TAIP with any combination of investments longer than the TAIP so long as the total average of all purchases made at that time is equal to or greater than the the current TAIP setting.
In this way, securities are not simply tied to a company or fund or product, but also to the duration of the investment. If you want to partake in microsecond trading, cool, just as long as you offset those short run investments with an investments of equal value at the opposite end of the TAIP.
You don't just buy IBM, you buy IBM at duration. An investor can choose any combination of purchases (all of IBM or short term in IBM and long term in Intel). Alternatively, financial entities can be as creative as they want to be in designing investments products so long as the end result conforms to the current TAIP setting.
The government would fine-tune the TAIP the way it now fine-tunes the prime lending rate. Hell, if it works like I think it will, this adjustment will be more important and more reliable than prime rate manipulation.
Mostly, this scheme has the benefit of promoting the types of long-range investments that a strictly free market tends away from. And, it does so without restricting short range trades or the full range of trading period fluidity or investment products.