Chapter 6: Financial Markets, Liquidity and Fast Exits
6. Financial markets, liquidity and fast exits In modern entrepreneurial economies, the development of well-organized, orderly markets for ﬁnancial assets sever the direct link between ownership and control of real capital assets. In the modern corporation, ownership is typically widely dispersed among a population that holds its savings in the form of ﬁnancial assets. Owners of these enterprises hold legal titles primarily for the expected capital gain they expect from changes in ﬁnancial market prices and secondarily for the dividend yield that accrues to them while they hold legal title. Most owners would know little about managing the real capital goods that enterprises use. 6.1 THE DOUBLE-EDGED SWORD OF FINANCIAL MARKETS For the real economy, the existence of liquidity-creating ﬁnancial markets is a double-edged sword that in good times facilitates investment in real capital goods but in bad times ‘adds greatly to the instability of the system’.1 The good edge of the ﬁnancial market sword is that the existence of ﬁnancial markets makes real investments that are ﬁxed for the community appear to be liquid for the individual. This prospect of liquidity encourages today’s savers to transfer their command of existing real resources to entrepreneur-investors who require funding in order to command real resources in excess of what their own earned claims will permit. In good times, the expectation of high returns2 associated with the possession of ﬁnancial assets encourages many savers to surrender the full liquidity of their money holdings. The result is that very large investment projects – projects...
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