there is precious little evidence that shows the positive role of other forms of financial development, particularly important in the United States: equity market, junk bond market, option and future markets, interest rate swaps, etc.
Found by Timothy Taylor.
Many financial practices are designed to evade regulations or optimize with respect to them. If regulators had not been so laggard in removing the interest rate ceilings on bank deposits, we might never have seen money market funds. If interstate banking had not been so restricted in the 1960s and 1970s, then there would have been no need for a mortgage securities market. If there were fewer short-sale restrictions and looser margin requirements in the stock market, then futures and options in the stock market might not have been created. My guess is that if you were to examine why firms use junk bonds rather than equity finance, you would find a regulatory story there as well.
Back in the early 1990s, someone coined the expression, “The Internet interprets censorship as damage and routes around it.” Financial markets attempt to do the same with regulation.
RE: junk bonds versus equity financing, one important component may be that interest is deductible (even, in some cases, if it isn’t currently paid in cash), while a dividend yield is not deductible (whether or not paid in cash).
Arnold,
I’d like to see you write a book on this general topic.
Make it a series: “How the government screwed up X”
E.g., how they caused the health insurance-employment linkage and cost increases through tax subsidies. How through mandates they made it unaffordable. How through damaging the labor market they may have made it unsustainable.
This accounts for probably 90% of the money spent on transactional lawyers. It’s like trying to plan a route from point A to point B in a war zone. “This road is blocked. Avoid this stretch because it’s mined. This way is open, but you’ll have to bribe the soldiers at a few checkpoints.”