It is interesting that various hedge funds had identical leverage of about 30:1, as people found out last year. It was obvious that there must have been a specific reason for that - and there is in fact! That article ( http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=aYJZOB_gZi0I ) shows that the rules were recently changed allowing maximum leverage of 33.5-to-1 (up from the previous 26.4-to-1). That make me suspect that if the rules allowed an even higher leverage like 100:1 or 1000:1, banks would have used it too, because they could arbitrarily reduce the paper risk factor in their models to be always much less than that!
I have another comment: in a free market system, responsibility is tied to the principle of long-term ownership. If the whole financial system is run by a bunch of hired “paysant” managers scrambling to maximize their next quarterly bonus though their "own" bank may collapse next year, then this is NOT a capitalism! Also the idea of share ownership turns out to be very different from a true ownership of a company, if anybody can short that stock do death anytime or dilute it at will. Is it not curious that all the new deals from now on involve only and exclusively the so-called "preferred" shares that were supposed to be discouraged and obsoleted in the US market (*), or just deal with bonds. No large investor wants the common stock! Even the US government is getting the "preferreds" with warrants and a decent dividend, never the common stock! This creates an ominous precedent, that may in fact spell a death warrant for the entire stock market as we know it!
My take on it is that this is a classical attempt at creating a privilege loophole for the elite. They know that the shares trading at P/E>=20 and 2% dividend are a joke and cannot last! The Boomers financiers probably realized that such stock valuation might not even survive through the next quarter (they are good at short term planning!), thus they have created a new "stock" system that pays them a realistic dividend of 10% and has also much higher P/E in line with the historical 5-10, if one subtracts the common stock from the equation!
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Given the tax preferences for pensions and 401k(s), mutual funds and other intermediaries own most of the stock. Most people are not allowed to own individual stocks through their 401(k)s.
Want a real stock market? A good first start would be to abolish all such tax deferrals. Then, fund Social Security through a consumption tax. That way, you get an implicit deferral that is relevant even to minimum wage workers, with complete flexibility on where to invest: stocks, bonds, land, dump trucks, partnerships, tools, etc.
I doubt if it would have had any effect. I suspect that the problem is more fundamental: I suspect that any scheme with tax deferral or without will not work until the current "boomers" generation of managers and business "leaders" retire.
You are dealing with the inept generation of people born from late 1940-ties until early 50-ties, who believed that houses would never fall, that stock valuation of 100 (P/E) was good and real and that one can generate wealth by firing engineers, scientists and other creative "nuissance" people, ship their companies to China and make money selling financial contracts between institutions.
This is a generation of people who invented ISO9000 and believed in the virtue of following procedures but not doing anything substantial, never rewarding creativity and competing like dogs everyone against everyone.
You will see, once they are gone, everything will start working again even under the current rules!
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