Do We Need a Stock Exchange?
Occupy Wall Street is now back where the movement began, and there are even more society-shaping questions in the wild then last October. Since the housing market crash decimated our country we’ve been examining our economy from the grassroots level up to far-reaching government initiatives. We’ve seen widespread protests against dubious banks and the financial instruments which have allowed them to plunder the national wealth. But one elephant is still sitting in the middle of the room... no few have been questioning if the very logic of a stock exchange is unhealthy in the long run. Conventional wisdom says stock markets are the best way in history to generate wealth. Some maintain that this wealth does not get redistributed to the public in any significant manner. Arguments against stock markets include the cost of entry and the complexity of the rules governing transactions.
To understand the dysfunctions of the stock market, we must understand what a stock market is. As early as the 1600s the concept of shared corporate interest was cemented in modern Western civilization when the dutch offered ownership stakes in the Dutch East India Company. The basis for collective ownership, however, may have been introduced to Europe as early as the Bronze Age. Sharing risk and resources among many stakeholders is a natural infusion of the most primitive principles of human cooperation. The concept of a publicly participatory stock market, however, is a much more recent invention.
Stock markets, in their purest form, are collectives of stock brokers who form agreements to trade with one another. In theory it’s as simple as children trading baseball cards in a schoolyard, except that the cards are bought by other people and those people always expect to be able to sell their baseball cards for more than they paid. Trust in the traders is paramount. To make their jobs easier, traders with good collections decided to only trade with partners who had equally good collections, and that was the beginning of stock market as we know it. In 1792 what would become the largest stock exchange in the world, the New York Stock Exchange (NYSE), was founded by a group of 24 private brokers for the purpose of rapidly trading securities in this type of closed system. Since that time our entire economy has become entangled with stock exchanges, and the NYSE has seen no less than five crashes. Every one of these significant losses in stock market value has sent the world into a dangerous spiral of recession or depression.
Although we have survived these economic disasters, often with the intervention of government, it leaves the average person to wonder if the cyclical near destruction of exchange based economies is unavoidable. This repeated culling of the market is driven by the notion that corporations must continue to grow and profit. In fact, regulations dictate that corporate officers act toward this goal on behalf of their shareholders. Once market saturation has been reached the only option for maintaining profitability is to cut workers or offer new products and services, which often translates to buying up smaller companies. This practice has lead to the relatively small number of global conglomerates that dominate multiple industries, and this too has a theoretical saturation point.
An example of a company striving for market saturation is Bain Capital, made famous for its association with Mitt Romney. Bain owns major stakes in a number of industries with a diverse portfolio that includes Toys ‘R Us, Clear Channel, and Hospital Corporation of America. Many of these acquisitions have been punctuated with large layoffs, leaving the working families who helped to build these profitable businesses with little to show for their years of diligent labor. In January of this year the Wall Street Journal found that although Bain’s cuts to labor showed short term growth nearly one quarter of their investments went bankrupt in just a few years*.
At the heart of most venture capital strategies is the IPO (initial public offering). A private equity firm will purchase a business, make dramatic changes to its operation, including job cuts, and show rapid growth. At that point the firm will offer the stock to the public and profit from the sales of their shares. The long term sustainability of that business doesn’t matter, and neither does the job security of the people who work for them. This is how the stock market eats its own tail.
In the United States the SEC (Securities and Exchange Commission) strictly regulates the way that equity in a private business can be sold and to whom. The individuals allowed to buy this equity are called “qualified investors” and must typically have a net worth of over $2 million. The theory of this restriction is that if a small business fails the amount lost will not exceed the means of the risk taker. The practice is very different. In reality a low net worth individual will gamble nearly all of his or her life’s saving on their small business start-up without any regulation and few options for bank loans. A rich investor, on the other hand, is allowed to invest small amounts in a wide variety of private businesses with the ultimate pay-off coming from an IPO or acquisition.
After a large IPO pay out to qualified investors an unsustainable business is now the problem of the every day shareholders who purchased pieces of that business when it became available. This feeds the cycle of more layoffs and less market competition. Eventually, if there is a total systemic failure, there could be no one left to purchase shares at IPO. Sustainability is never truly considered as a factor in business finance, but it should be. Back in 2008 Business Week released an article entitled “Family-Owned Businesses Hold Keys to Longevity”* which examined four family-owned businesses which have successfully operated for many generations. The implications are that a profitable business doesn’t need Wall Street to grow or even thrive. With the goal of a company being to provide for its participants and reward those who do well for the business, a small corporation can have a much longer shelf life than a large one. Some family-owned enterprises arguably do more long-term good to the economy through employment and business to business commerce than their short-lived big brothers.
How can our nation’s unemployment be fixed without heavy subsidies to public companies and institutional investors? All indicators are that the stock market system isn’t sustainable for the working poor and middle class, but something has to be done.
One way is for us to invest more heavily in local businesses which may bring lower returns but are more consistent over longer periods of time. These smaller sustainable businesses, however, aren’t sexy to investment bankers and loans are harder and harder to come by. Many national banks who used to stand by their Small Business Administration loan programs have been bought out. Bank of America, one of the world’s largest lenders, has drastically reduced the amount of small business loans it issues to US businesses while it accelerates its lending to the Chinese economy*. The only way to break free from the shackles of the stock market system may be to encourage small local banks and credit unions to play a more active role in their community’s economy.
Some corporations are even testing the waters of small business lending. Over the past year The Boston Beer Company, maker of Samuel Adams, has been conducting an experiment in micro-loans through a partnership with ACCION. “Brewing the American Dream” provides loans to bad credit candidates seeking to create their hospitality industry businesses. The program is available across several states. This maneuver could be written off as just a shrewd PR stunt if founder Jim Koch didn’t have a history of fair-play. In 1996 Boston Beer Company began trading on the NYSE and in a groundbreaking bid to allow individual investors first crack at their stock they offered an affordable package of shares especially earmarked for non-institutional investors****. Although the IPO was considered a failure it clearly showed the company’s commitment to the public over the banking system. ACCION loans are capped at $25,000 and form a blueprint for how a cooperative system of business to business loans can circumvent the banks while maintaining the core principles of capitalism.
Microloans are just one of the ways in which the economy can shift from the control of banks. Mainstreet merchants could establish barter networks for goods and services. Energy cooperatives could create credit systems for utilities that go hand in hand with community needs. Individuals could reallocate personal money from the stock market to more tangible investments in their home town.
It’s clear that Wall Street is not the answer to our problems, but analyzing its failures can help us create a road map to a stronger future.