November 26, 2008

Some suggest that government be empowered to regulate the introduction of financial innovations, screening out those that are not sufficiently transparent or that might pose systemic risk if misused. Careful about that, writes Steve Randy Waldman at Interfluidity:

Also, consider common stocks. No rational regulator concerned with substantive transparency would approve of common stock, if it were a novel investment vehicle. It guarantees no cashflows whatever, its "control rights" are so weak for most purchasers that representations thereof should be viewed as fraudulent. Empirically common stock behavior is very weakly coupled to the performance and health of the firms that stocks fund. The only instrument in wide use more substantatively opaque than common stock is fiat money.