Facebook and Wall Street

Today, the Wall Street Journal has two noteworthy commentaries on the recent news of the private capital raise by Facebook.

The first, by the opinion page editorial board, is called "Friending Private Capital"* and it asks the question "Why submit to Sarbox if Facebook can raise money without an IPO?" The authors make the case that fewer companies want to go public in the United States of late, due to the exponential increase in regulation enacted by Sarbanes-Oxley and other laws since the dot-com implosion, and that this trend "has consequences for the health and shared prosperity of American capitalism."

The second, by Holman W. Jenkins, Jr., is entitled "The SEC vs. Zuckerberg"* and it argues that Facebook is wisely delaying an IPO until its young CEO is ready for the scrutiny that comes with running a public company.

While some who heard the news about Facebook and Wall Street this week may take a jaded view that they are not interested in Facebook's funding drama, or the investment-banking activities of big Wall Street banks, the Journal's editorial board is correct when they assert that the mechanism that provides access to capital for companies in this country is an incredibly important subject that affects all of us.

Andy Kessler (who is writing a lot of noteworthy articles these days) pointed out the importance of Wall Street as an alternative to government taxation as a source of capital in a recent article also published in the Journal. In his "How videogames are changing the economy" he notes that many technological advances in the 1940s, 1950s, and 1960s were driven by military spending, but no longer.

"So why has the military been displaced?" he asks. "For one, capital formation. Governments had the unique capacity to raise (read: tax) the enormous capital required to fund state-of-the-art projects. But a fully functioning stock market can raise billions for productive commercial applications, bypassing the military connection. Hate Wall Street all you want, but it's now better than wars at driving progress."

This observation is very insightful, and an important one for all Americans to understand. It is also the reason that the recent news about Facebook, and the implications discussed in the two articles above, are important for investors to consider.

* Subscription required to read them online. Due to an agreement with search engine companies, it is possible to read these stories from a search result. For the three articles mentioned, go to the following search pages and click on the top result: here, here, and here.