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Capitalism 2.0: Value Creation vs. Value Destruction

Posted on Saturday, Apr 4th 2009

In the Creator vs. Speculator debate, there is also the need to deal with the issue of when speculation becomes a way of value destruction as opposed to value creation.

One of the problems that we have with Wall Street compensation is that traders make money both as the market goes up and as the market goes down. And often, a tremendous amount of market manipulation is going on in the process, destroying many people’s honest, hard work.

Jim Cramer has openly described mechanisms used by hedge fund managers to manipulate stock prices. He also points out that some hedge fund managers spread false rumors to drive a stock down. In his days as a hedge fund manager, he did it too.

I have been thinking about the short-selling issue for a while, and have pretty much come to the conclusion that short-selling needs to be banned. No one should be making money if a company’s stock is going down. And especially, no one should have the incentive or the tools to bring a company’s stock price down.

The common counter-argument I have been hearing is that short-sellers keep the market in check, and prevent bubbles. My response: that is the job of analysts, to ensure that bad news, problems, concerns, etc. are reported.

And finally, the P&L is a perfectly sound mechanism to gauge company performance, unless it is cooked. And since cooking books is illegal, I believe that we have all the mechanisms necessary to keep markets in check without short-selling. Without value destruction.

And, if we prevent value destroyers from making money by destroying value, Wall Street compensation – compensation of the speculators – will also fall in alignment with those of the creators.

I know this is a controversial point of view, and I welcome debate on the topic.

This segment is a part in the series : Capitalism 2.0

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