I understand David's point about the importance of opening up finance, but the
junk bond revolution was not a good way to do it. First, it has saddled firms
with a higher level of debt, which has increased general financial fragility and
also tends (ceteris paribus) to shorten firms' planning horizons. (Think of
Maxxam mowing down all those trees.) Second, from a social standpoint,
"democratization" via higher interest rates is less rational than actual
democratization via financial intermediaries that are accountable to the public
interest. Although far from perfect, the German Länder and cooperative banks
fulfill this function for small businesses. (I know: due to the clubbiness of
the German financial system, it is difficult to get financing for anything
really new. But this is a problem of insufficient accountability, I think.)
One aspect of this discussion that lurks behind the scenes is the debate over
the US productivity "explosion". If you think there has been such an explosion,
and that improved corporate organization and management -- spurred on by
liberalized finance -- are responsible for it, then I guess you come to one
conclusion. If, on the other hand, you think that the BLS adjustments in the
computer sector are dubious, and that it is truer to say that the US is in the
grips of a bubble economy, you come to another. I await Doug's judgment in his
new book...
Peter
David Shemano wrote:
> In response to Jim Devine:
>
> Whether Milken was operating a Ponzi scheme is an empirical question. There
> is no evidence that he was. It wasn't like Milken was raising money to lend
> money to people lending money to people lending money ad infinitum. Milken
> was raising money for entrepeneurs who either (1) had visions that Wall
> Street didn't want to touch (e.g. Ted Turner), or (2) believed that they
> could manage and operate capital assets better than present management
> (numerous lbos and hostile takeovers). As I said previously, junk bond
> financing only works, by definition, if the financing is used to generate
> cash flow sufficient to pay the interest. Some of Milken's deals failed,
> but overall they worked and the American economy was revolutionized.
> Finally, when Milken started in the mid -70s, he was the only one doing it.
> Presently, junk bond financing is accepted and generally available, which
> means that the available pool of capital for entrepreneurs has been
> dramatically increased.
>
> David Shemano
