The functioning of capital markets
Capital markets include the short-term capital markets, the money market, and the medium and long-term capital market the stock and bond market , the financial market . In addition to these markets, there is the derivatives market .
For the past thirty years, capital markets have been marked by an abundance of liquidity, fueled by the oil shocks, by the development of emerging countries accompanied by the constitution of significant reserves, by the increase in the price of raw materials.
Capital markets have been globalized, with a liberalization of capital movements more broadly. In addition, the capital markets were decompartmentalised, but with a difference in the regulation of the various markets, some being subject to reinforced standards while areas of non-regulation were organized and developed exponentially. It could only result in turbulence.
The functioning of the various markets has also been disrupted and distorted. The equity markets have lost their role of financing the company in particular by unrealistic demands of return on equity. This has contributed to a development in which companies have limited recourse to equity, which has naturally weakened them. The abundance of international liquidity led banks to seek to develop increasingly complex techniques that claimed to accumulate high returns corresponding to a high level of risk and the absence of risk.
To attract liquidity, market operators looked for doping techniques. The bubbles have followed one another, using the virtual, first with virtual companies, the dot.coms, then with virtual finance, based in fact on betting.
The financial crisis resulting from the subprimes has shown that the trend towards the development of credit markets has resulted in banks becoming less responsible, with shocking practices, such as the development of particularly profitable activities which consist in banks getting paid. to take risks that they did not want to keep off their balance sheets, to investors who were not in a position to realize the risks that were transferred to them.
The renovation of the functioning of capital markets must involve an analysis of the place of debt in the financial structure of companies, the remuneration of debt and capital and the distribution of the creation of value between debt and capital . It is necessary to define the balance sheet structuring standards and the place of the various capitals.
The renovation of the functioning of capital also requires a critical examination of information on risks and their management, and more generally of methods of market analysis and forecasting. The crisis has demonstrated the illusory and dangerous aspect of an excessive belief in quantitative economics, of the need to take into account the human aspect of markets and the structural limits of forecasting.