Financial markets are more than busy trading floors, they are an essential part of the economy.
But deregulation of equity, bonds and derivatives markets has undermined the primary objective of financial markets: to channel savings and capital to the most promising economic developments.
We now face an urgent need to re-direct capital from short-term, speculative use to long-term investment in the productive economy. For some participants, this shift is going to hurt but it is a challenge society needs to face.
It is only natural for market participants to develop their most profitable activities, regardless of the bigger picture. Markets need institutional and regulatory incentives to ensure that, as well as profits, they deliver the social and economic benefits of cost-effective resource allocation and financial stability.
Real investors share the fate of issuers: they focus on fundamental value and stewardship, and they win or lose with the success of the underlying project. Speculators focus on price movements – in any direction – and the behaviour of other speculators. There is nothing bad about this as an activity, but everything in proportion. A market dominated by speculation quickly becomes divorced from economic activity and burdens society with a poor allocation of resources.