How to Fix the Stock Market in Eight Simple Steps by ending the “Fix.”

The following is a comment I found on Zero Hedge. It says almost exactly what I would do with the stock market as the kind of REAL corrective action that needs to happen to fix the flaws in our economy, some of which I wrote about in my book Downtime.

Since it lays out the same agenda I would lay out, I thought I’d post it here and save myself the effort of putting it in my my own words: [I’ve added a few of my own comments in brackets like this.]

by Michael Crofts

I remember when people bought shares because the businesses were profitable and paying dividends, and sold them when they weren’t. 

Now if you want to trade you have to learn a whole new language which describes nothing more than second-guessing and front-running other people’s (and computers’) trades, just to have some idea of what the feck is going on.

I think if I was in charge:

1. I would ban all derivatives based on equities, including index trackers, except for genuine pooled investments where the fund actually buys shares –  such pooled investments are necessary for small investors to spread risks. I would not ban derivatives based on commodities because the ability to hedge is important for many producers and consumers, and commodity futures markets won’t work without market makers & speculators. [I would make some profound changes in the commodities futures market, too, so it it NOT used for speculators but simply by people who need those commodities and intend to take them for actual delivery. The speculation grossly drives up the cost of legitimate business and consumer prices just so people can make money gambling. Instead, press them to make money by actually producing something of value.]

2. I would do whatever it takes to make HFT unprofitable and therefore obsolete in all markets including commodities.

3. I would ban share buy-backs unless they are paid for with cold hard cash (ie: there is no debt in the company before or after the buy-back). [I would ban them exactly as they once were banned, which included using cold, hard cash.]

4. I would ban margin trading. You want to express a view that a share is going up in price? You buy the share for cash. You want to express the opposite view? You borrow the share and sell it for cash (see below). That’s it. No other way to trade. [I would go a step further, and say you have to hold the stock for a minimum set time to avoid so many purely speculative trades. Take the market back to being about its fundamental purpose — buying ownership in a company you believe in so you can share some of its profits as an owner — the American dream or UK dream.]

5. I would take a long-hard look at market procedures and do whatever it takes to make front-running impossible.

6. I would ban zero-commission brokers because there is no way this can be a viable business without stealing trading data. [Don’t know about this one.]

7. I wouldn’t ban short trading. I would ban naked short trading, even by market makers, but otherwise I would leave it open for use. Short traders who are covering their shorts can be a useful brake on the decline of a share price. [I would just ban it entirely as having nothing to do with believing in a company and investing in it to share in its value. It is speculative gambling that plays with a company as if it is a toy and not people’s livelihoods. Companies have been destroyed by this.]

8. I would do whatever else is necessary to restore equity markets to their original function which was to enable companies to raise capital for investment. Now they are just a casino. [And that would include, above all else, reinstating Glass-Steagall to get banks largely back out of the stock market.]

None of this will be done of course. The most depressing thing about life is that a lot of solutions to problems are obvious but there is always someone with a vested interest who prevents the solutions being adopted. [And I agree with that part, sadly, most of all, but these are the kinds of cold, hard things we would do to actually rebuild our economy with solid foundations, instead of float it above its crumbling foundations with free Fed float.]

Some of my ideas might not work, and there are other ideas which might work better.

[It think it is a good platform from which to start. The problem, as he says, is that, sadly, these kinds of cold, hard solutions would be battled away by billionaires with vested interests, who always prevent real solutions because they enjoy the easy money they derive from their rigged casino and use “free-market capitalism” as the excuse before the masses and with their pocket politicians for their rigging. You see, fixing the problems is not that hard; it’s getting the political resolve to actually fix them that is almost impossible. However, these are the kinds of real solutions we need to carry out to actually build our economy with solid foundations, instead of using corporations as mere gambling chips in the casino.]

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