This Author, like most Economists and Conservatives, finds Government intervention highly suspect, with high probability of eventual damage. The only trouble with such a mind-set comes in a paucity of legislation which could actually help, because We avoid Government regulation as We would the Plague. The current development of Hedge Funds may call for a change of attitude.
Hedge Funds need high Turnover profits in order to survive, in order to pay down the margin borrowing service they engage in. This means they plunge-invest, dumping huge amounts of funds into one stock issuance or commodity until the Market price has risen to sufficient level, that they can make the necessary Turnover profit upon Sale of shares to bandwagon Investors. Commodities are exactly the same as Stock, with $40/barrel Oil selling for $57.68/barrel. The injury of Hedge Funds is clear, but how to limit the excess?
Every avenue of regulation when studied has very ugly connotations for the Market system. It is one of those scenarios where the shortest distance between two points is not a straight line, because the destruction of the environment along the way drives the desired Point further and further away. What is the desired Point? The Answer is quite simple: Stabilized Equity(read as Value) in Stock and Commodities.
Corporate value today stands as overwritten with Stock and Bonds. Hedge Funds value are far too liquid (too flush with funds) because of Margin-borrowing capacity. Is there a fundamental way to stop either practice? Yes and No. What does that mean? We cannot effectively regulate either activity, but We can effectively regulate the Equity value produced.
A Law could be passed stating total Shares of Corporate stock can only be increased by sale to the open Market. Stock Options and Stock Grants can be made to Employees, but said Stock must be bought back by the Corporation anytime Corporate Stock price lowers to level where the initial Stock Option or Grant was made, with no Dividends paid, or Tax credits received by the Corporate entity, until such Buyback is made (in the form of an exact equal number of Shares). The secret of success here lies in automatic Corporate intervention to support their own Stock price.
Commodities must be approached from a different angle. This will become an impediment to Commodity listings. Commodities will be allowing listing, if and only if they are listed with their Production Cost Estimate, Asking Price, and Selling Price. The initial Producer must supply the Production Cost Estimate which must carry through until the Commodity goes to Retailer or Consumer.
Two such laws would help stabilize Corporate stocks and Commodities, one by effective underwriting of Equity price, the other by increasing Market awareness. lgl