That Man Again

Sorry Richard? You what?

In 2003 I co-authored a paper with Colin Hines and Alan Simpson MP called People’s Pensions: New Thinking for the 21st Century. It was published by the New Economics Foundation and attracted some attention at the time. In it we argued that less than 15% of the total amount paid into pension funds was used to fund new investment in companies or buildings, whether for commercial or public purpose. The rest was used to fund stock market and other speculation. That speculation was used to fund the City of London, the financial services industry and the excessive salaries paid within that industry which had led to the over heating of the economy of the south east of England.

We argued that this was irrational. To invest 85% of pension funds speculatively rather than to use them to create new assets needed by either the private public sector was absurd, and represented a form of institutional gambling. This we said underpinned the UK’s private pension provision, and the crisis within it because it was irrational to place people’s long term savings in the hands of those interested in short term market movements. In addition, the process was almost wholly unproductive as most new saving did not go into new investment in real things such as industrial investment but was instead used to purchase existing shares, a process that simply moves money from one financial institution to another, and from which the company that issued the shares does not benefit.

Erm, no, you can\’t be. Not really…can you? Are you seriously suggesting that a secondary market in shares (or anything else for that matter) is unproductive? You don\’t think that the market in second hand cars aids the market in new ones?

So, if IBM comes to market (or decides to issue new shares, no difference) you\’re suggesting that I should never be allowed to sell them? For that\’s what the absence of a secondary market means. Further, if IBM decides to issue those new shares, how do we know what the price is if we can\’t buy and sell the old ones?

Now perhaps you\’re not suggesting that such a secondary market should be banned, just that it\’s unproductive: but don\’t you think that enabling me to sell my investments as and when I might wish to is productive? That finding the price of those shares by others doing so is productive?

You know, I really do think that Murphy does believe these things add no value. For his suggestion for "People\’s Pensions" is that instead of investing in the stock market or anything like that, we should have pension funds which, in effect, fund PFI style buildings like hopsitals and so on, the return coming from the rent paid. As he says, these will be for 30 years or more, such contracts, and thus are suitable for pension savings.

Erm, really? But how do I get out of such a project if I want/need to? I retire early through ill health say. As the plan says, this is something that needs to be sorted out.

establishing the rules on how pensioners are paid by People’s Pension Funds, what happens if they want to transfer their funds or die before retirement.

I would make the suggestion that you could solve this problem by having a secondary market in such investments but of course that wouldn\’t work because as we know, secondary markets are almost entirely unproductive, aren\’t they?

And this man advises the TUC?



13 thoughts on “That Man Again”

  1. Tim

    You wilfully miss the point.

    I do not one minutes say that all investment should be in the mechanism I propose.

    I do not for one minute say that the existence of a market to allow an orderly ex it from an investment position is harmful.

    I do not say people should not invest in equities.

    I am saying that the equity market has been deliberately distorted by the denial of the supply of new equities that means the forced investment of pension monies into that market when there are no new assets to purchase has created an inevitable cycle of boom and bust which has been severely detrimental to people’s pension prospects.

    In that circumstance I am saying that there it is a need for a new, alternative, investment market for which there would also, of course, be a need for an orderly process of secondary sale.

    Secondary investment markets do not need to be casinos.

    There is ample evidence that in some secondary markets, such as that for some bonds, the number of trade is very limited and that does not in any way undermine the attractiveness of the primary product. I can assure you, I have done the research to prove the point.

    Maybe your problem is that you jump to conclusions without doing research. I think it appropriate to work in the alternative direction. That is why you persistently support the status quo when it is obvious that it does not work what I’m interested in creating workable solutions.

    It’s a pretty fundamental difference, isn’t it?


    Tim adds: “There is ample evidence that in some secondary markets, such as that for some bonds, the number of trade is very limited and that does not in any way undermine the attractiveness of the primary product.”

    Erm, actually, I think you’ll find that illiquid secondary markets do indeed reduce the attractivness of the primary market. You’ve noted that banks have problems in getting away CDOs these days, as no one is willing to trade in the secondary market?

    “Maybe your problem is that you jump to conclusions without doing research. I think it appropriate to work in the alternative direction.”

    I think that’s actually your problem. You try to do everything from first principles: you are continually reinventing the wheel and are entirely unaware of what brighter people, who have thought longer and in more detail, have found out about markets. No, I’m not including me in that number. Just most economists who have won the Nobel in the past 40 years. You simply don’t understand, because you deliberately ignore, what we now know about what you are trying to rediscover.

  2. If investing in buildings was more worthwhile than investing in stocks and shares, more people would do it. If 15% of investments are being put voluntarily into buildings with the other 85% going elsewhere, then presumably those who are investing this money have some idea why the ratio is as it is. After all, it is their money.

  3. “the equity market has been deliberately distorted by the denial of the supply of new equities”

    Richard, you’re going to have to expand on that point because last time I checked the City was packed with people trying to encourage IPOs and secondary offerings

    “Secondary investment markets do not need to be casinos”

    yes … I’d like a bit more explanation on that one too.

  4. Ok, time to apply my limited knowledge in these matters. Corrections welcome.

    That speculation was used to fund the City of London, the financial services industry and the excessive salaries paid within that industry

    So the financial services industry works for the benefit of those working in it. Is this news to anyone? I hope not. It’s no different to any other industry.

    Everyone is free to choose how they invest in the market: if you believe that the well paid managers add value, then invest in a hedge fund. If you prefer the John Bogle approach, buy a low cost index tracker.

    I am saying that the equity market has been deliberately distorted by the denial of the supply of new equities

    We have new equities being issued, some by startups, some by foreign companies, some more recently by the banks. How much more should we be getting?

    Why are businesses not issuing more? A preference for debt financing perhaps? Would you support making dividends tax-deductible to give tax equality between these two forms of finance?

    average annual returns from 1900, stocks come in at about 1 per cent; it is only if you re-invest dividend income that the figure rises to 4 or 5 per cent.’

    Are these returns after inflation? I think so. How well did cash or bonds do?

    Let’s ignore the startups, as they will be a small part of the FTSE-All share until they have become well established businesses, and focus on those large and mid cap companies – the BP’s, Vodaphones, Rolls-Royces etc. If they are continually issuing more equity, why would the share price rise? You want to avoid these speculative bubbles, so surely all we are left with is the dividend? Not necessarily a bad viewpoint, but then why complain about shares performing so poorly when dividends are excluded?

    The other important point is why should a business continually have to raise new capital? At some point one would expect it to be able to finance expansion, R&D etc out of its profits. Someone (Tim? Megan McArdle?) recently had a post about Worldcom(?), showing that a highly profitable business that is continually borrowing more and more money may be a good sign of something wrong, e.g. fraud.

    If you are looking for more than 1% from your pension fund

    Don’t pension funds re-invest the dividends? Or, at least what is left after a huge percentage of them is lost in tax? Returns would be higher if the tax burden was reduced, and shifted from taxes that punish success to those that encourage it (LVT).

  5. Please, Richard. Please don’t volunteer to be my accountant… ever! Have you ever considered that you may have chosen the wrong profession? Why not consider social work or perhaps politics. It’s clear that you’re not entirely comfortable where you are.

  6. Some of the investment in capital stock such as infrastructure has been little more than speculation itself. Try running that argument with the share holders in the Channel Tunnel. The property sector does not suffer from a lack of investment and the share held by pension companies has not altered much from about 6% for the very good reason that property is the most illiquid investment going. Investment grade property is experiencing a very sharp correction at the moment. If the share held by pension companies was considerably larger it would make pensioners lives very difficult as their ability to access money quickly is already restricted.

    Besides property only exists to serve needs of people and the pools of people that gather in companies – funded by in part by the stock market. No companies means no occupiers means no income stream.

    Am I right in thinking that Colin Hines is the thinker behind many Green Party policies also?

  7. Murphy carps about money going into “casinos”, which reveals his hatred of those terrible speculators and the markets they work in. Very revealing comment. As Tim said, without secondary markets for shares, or bonds, or other things, valuation of investment becomes a pig-in-a-poke. Also, surely it is up to pension fund managers, not some socialist central planner, to make the calls on what is the most suitable investments to make.

    If things like skoolsandhospitals are such grand investments over the long run – a quite debatable point – then let the fund managers make that decision.

    Richard Murphy is essentially arguing for state control and direction of investment. It makes me wonder why the late FA Hayek and all those classical liberals ever bothered.

  8. Wow! This reminds me of the good old 70s when folk like Tony benn and Eric Heffer would regularly turn up on our TV screens warning us that the stock market was unproductive investment and that all the money should be invested by the government in our wonderful nationalised industries ….so that we could wait for a year to get a phone (maybe a party-line with the neighbours if we were really lucky) in a nice attractive shade of black. And here he is trying to pretend that he has been engaged in original, evidenced-based thinking. His photos suggest that he is a man of more than 40 years of age. Surely he must remember these debates unless he really has dropped in from another planet?

  9. Despite the fact that Mr Murphy suggests that this is new, evidence-based thinking, it does bring me back sharply to the 70s when, almost every week, intellectual giants such as Tony benn and Eric Heffer would pop up on the TV and tell us that the stock exchange was starving industry of investment, that it was an evil frivolity of capitalism etc etc. the question is, where was Mr Murphy during this time? He looks as if he is older than 40 in his photos.

  10. The inanity of leftists is nothing short of mind-boggling. This Murphy guy is in rather good company, I’d think. Lenin said (and seemed to believe) that the running of a large industrial firm was something quite within the capabilities of anyone familiar with the four arithmetical operations. And Engels (in 1878!) was certain that the weapons of land warfare “are so perfected that no further progress of any revolutionizing influence is any longer possible.”

    But, under it all, there’s a rather simple market lesson to take away. And that is that there will always be those ready to step forward and furnish, usually abundantly, whatever the market seems to desire. For the present, it desires Tim Worstalls but it also craves Richard Murphys. And, until the public is smarter, better-educated, and less motivated by envy and larcenous schemes, it will pay for pouting and pandering. With Murphy, it seems his stupidity is at least honestly come by but there are others (Krugman jumps to mind) who are smart, learned, and well-placed to spread false and destructive economic information. And that’s a situation that won’t change anytime soon, if ever, and especially as long as public education (and education in general) is a leftist enterprise.

  11. Tim:

    When you’ve read Mises, you’ll understand that (just as Murphy’s a pouter and a panderer), Hayek’s a popularizer and a pussy (NTTAWWT)
    as he, himself, observed.

  12. The Murphy world view reminds me of those people who invest in gold because it has “inherent value” due to its physical nature, as opposed to those imaginary entities like shares and derivatives.

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