Friday, January 30, 2009

Is the Stock Market Working?

The heading of this post may seem like a strange question, but I think at times like these we need to ask ourselves more fundamental questions. The American people are deeply invested in the stock market in a myriad of ways, and now that stocks have lost almost half of their value, I think it’s time to re-evaluate the very model of our economy, and in particular, the role of the stock market. A majority of Americans are to a great extent dependent on the stock market doing well for their fundamental well-being. What I’m asking is: should that really be so?

The stock market is supposed to fill an essential function in an advanced society: to provide money for ventures that otherwise would have been far too expensive to embark on. The invention of the stock corporation was an ingenious one, in that it allowed many people, not just kings and despots, to invest in large and expensive projects such as factories, mines, and much more. This adds a whole new layer to society and enables immense progress, innovation and price reductions.

To determine whether or not the stock market is “working” from the perspective of society at large, one must try to determine the reason why investors buy stocks of different companies. If investors truly believe that a company has a good plan and structure for growth and profit, and invest in that company as a result, then that is a good example of how the stock market can help society progress and prosper. If, however, an investor invests in a company for other reasons, the role of the stock market in society becomes much more questionable.

The way you can tell whether or not investors are buying stock because they believe in companies or for other reasons is by looking at how the stock market moves. If the whole stock market as one, regardless of the industry that the companies are in, then something is up. Of course there will always be a connection to the economy as a whole, but different industries will always be affected differently. When the stock market moves up and down as one, as the American stock market has for a long time, then there is unquestionably something that is not working.

What is causing this is speculation without a motive. Investors buy stocks not because they think that the companies are going to do well, but because they think that other people will buy the stocks too, so that the price will go up. When they do that with borrowed money, a huge bubble is created, which will eventually pop and create a recession or a depression. This creates an outcome that is completely contrary to what the stock market is meant to do, in that companies that do well can get punished, and companies that do poorly can get a hugely inflated stock price. This sort of behavior removes the good dynamics of capitalism.

U.S. politicians have over the last 30 years allowed the stock market to become almost a state within the state. If the stock market does not get what it wants in terms of de-regulation and bailouts, it brings stock indexes down until politicians cave in. This is what happened when the first TARP-plan was voted down. Remember, stock brokers don’t get paid a percentage of the profit they make for their clients, they get paid based on the volume of what they trade. Hence, it does not matter to them if they win or lose, they just have to play. They need people to believe that the stock market is a good place to invest money in, and that is why you hear endless optimism everywhere in the media with regard to the stock market. When it seems like the whole financial world is coming to an end, stock brokers will try to tell people that it’s a great time to buy stocks based on some economic report that says that the situation isn’t quite as bad as everyone thought. It’s simply absurd.

Because almost all Americans own stocks in one form or another, Wall Street can hold everyone’s money hostage at the same time. This situation is undemocratic, inefficient and immoral.

The American people and the American economy must de-couple itself from the stock market. The stock market has become a place of pure gambling and blackmailing, without regard to what a stock market is actually supposed to do.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

1 comment:

Anonymous said...

Il semble que vous soyez un expert dans ce domaine, vos remarques sont tres interessantes, merci.

- Daniel