The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

Tasks of the Capital Market and Duties of Capital Market Actors 41
4. The economic policy function of the capital and money market: the government
can make use of capital market policy and monetary policy to steer economic
activity and macroeconomic demand. 12
By increasing or decreasing the money supply, the government can stimulate or
dampen demand for shares and thus exert an influence on share prices. A rise or
fall in share prices, in turn, raises or lowers consumer spending, because individual
consumer spending depends on the individual’s net wealth. If share prices are high,
investors have greater wealth at their disposal and, ceteris paribus, they will indulge
in greater consumer spending. If the government reduces the money supply and
induces a rise in the interest rate, the effect is that share prices fall. When share
prices are falling, individuals tend to consume less because they feel worse off.
This mechanism implies that the government can use the money supply and the
interest rate as levers to influence the value of share assets and the individuals’
rate of consumption, which is influenced by asset value, and thus dampen or stimulate
the economy. The American government’s policy of easy money in the years
2002/2003 deliberately supported share prices so as to raise the value of consumers’
private wealth, as a means of propping up consumption during the recession that
followed the IT crisis of 2001. Since consumption is also a function of consumer
wealth, this increased private consumption.
In the capital market, the purpose of efficient allocation of capital is central. The
question of where capital should be invested is of the utmost importance to every
society. It encompasses the question of which projects, technologies and regions
society should invest in and which investments for the future are given consideration.
Since investors decide ex ante which development they believe to be right and
desirable, their decisions are always laden with great uncertainty. Consumers in the
market, by contrast, decide ex post what they like about companies’ products and
services, which result from decisions made some time previously, and hence they
can be more certain about which of the companies’ decisions were right than the
firms could be when they made the decisions.
A society fundamentally has three mechanisms at its disposal for arriving at decisions
on capital allocation. It can either leave the allocation decision to the banks,
or to the state’s investment decision in a centralized planned economy, or to a dedicated
market in which investors and companies coordinate their plans and their
expectations. It is obvious that a capital market as a coordination mechanism for the
allocation of capital is more in keeping with a democratic society than coordination
by major banks or by central steering of the economy. 13 Like other markets, the
12 On the functions of the capital and money market cf. PETER S. ROSE: Money and Capital
Markets. Financial Institutions and Instruments in a Global Marketplace, Boston etc. (McGraw-
Hill) 7th edn. 2000, pp. 6ff.
13 The analogy between democracy and the stock market as a democratic way of securing capital
allocation is emphasized by OSWALD VON NELL-BREUNING: Grundzüge der Börsenmoral,
Freiburg im Breisgau (Herder) 1928,p.9,andNELL-BREUNING: “Volkswirtschaftlicher Wert und
Unwert der Börsenspekulation” [Economic value and non-value of stock exchange speculation],