Dr. Constantin Gurdgiev:

The Deputy mentioned the capacity of the financial markets to generate crises. I agree with the Deputy it is tremendous, and it has been rising over time. The crises becomes sharper and sharper, and with less and less space of time between them. However, if one looks at the last crisis, it is not the equity market which caused any problem. It was caused by instrumentation in some of the liberalised markets, such as securitised paper. In other markets it was the creation of new instruments, again securitised paper is a good example, or asset backed securities or the most simple of all financial products, the bank loans. It was the bank loans which brought down this country, not the stock market. The stock market played a very little and a very tangential role in the entire crisis, as a follow up to what the banks were actually doing, because it reflected the banks valuations. Quick moves in the markets worry the European Commission. This is part and parcel of the several proposals that the European Commission put forward. One of the explicit targets of the financial transaction tax, which I mentioned before, is to reduce the volatility in financial markets. Without going into academic discussions of whether it is a good idea or a bad idea, the point is that in financial markets we can select those parts which work for us and use them to work for us. We can down-play, regulate tightly, supervise tightly and decentivise the ones which do not. With the capital market union proposal it is crucial to distinguish the long-hold equity investors - people who go into the businesses on a relationship basis, using only direct equity purchased through private equity, or through the lists of equities on the exchanges. They buy the stock of a company and hold it for three, five or ten years. In a number of countries around the world these investors are distinguished and rewarded with higher, tax adjusted returns by reducing their capital gains taxes - in some countries down to zero. There are some incentives in Ireland but they are not sufficient.

If we want to discourage rapid moves by speculators in and out of the market we should encourage long-term investors who build their relationship on an activist basis by engaging with the company, participating with advice and opening access to the markets for them. We can do that but we need to make sure the proposed union allows us to do it by incentivising those types of investors. I do not mean we should positively incentivise them in the sense of giving something to them. We should, however, level the playing field by, for example, having the same capital gains for somebody who puts money into an uncertain enterprise for five or six years as for a person who gives money to the Government by buying its bonds. I do not argue for over-incentivising investors but nor do I argue for subsidising holders of Government bonds, corporate bonds and the bonds of banks. We should support equity and debt to the same extent but this is not, unfortunately, part of the proposal.

The question was asked whether capital markets investors were risk averse. They are risk averse because all human beings are risk averse. The only ones who have a risk preference are those who go to Las Vegas and play Russian roulette and they do not last very long. Investors in the markets do not pursue a risk-free return but they do pursue a risk-adjusted return. We should bear in mind that SMEs generally imply higher risk because they have higher rates of default and fewer assets, at the time of default, to be captured to compensate investors. An investor in equity has the lowest priority when it comes to the liquidation of an enterprise which fails. That is yet another asymmetry in the relationship between equity investors and debt investors. Whether we like it or not the markets are the most efficient way to decide these things. If we were to follow the Deputy's line and take money away from people to invest it we will trigger even bigger risk aversion - what is known in behavioural economics as "loss aversion" - which is when people run for the hills with all their money and there is nothing to capture and nothing to invest.