CHANGING AMERICA’S MIND - Chapter 1 - Part 1
INVESTMENT – the word simply rings with respectability. It’s what those other people do, those pillars of the community. It’s what we should do. Save and invest. We all know this is the prudent thing, the responsible thing to do. It’s the way to get ahead, to build a future for ourselves and our families, to move beyond living paycheck to paycheck. We’ve been told this since our youth and the media extols the virtues of those who do. Not only do they do well for themselves; they build enterprises that provide jobs and new inventions and needed products and services for others. That’s the American Way. It built our country’s prosperity. Solid, respectable, responsible, important, trustworthy, and vital – those are some of the virtues attributed to investors. And those who truly invest deserve such admiration. But most Wall Street transactions are not investment; they’re speculation, gambling, and even theft. And not just recently; it’s been that way for a long time. It is built into the structure and nature of such markets and the eternal quest to make more money quickly by doing and risking less.
Think about it. Where do the proceeds from these Wall Street transactions go? When I ask my students where the money from stock trading goes, over half of them say that it goes to the companies whose shares are being traded. If that were true, it would be investment. But they’re wrong; the money does not go to the companies. And most of you likely guessed wrong as well. The difference is that my students are college seniors pursuing degrees in business.
So where does the money go? Let’s continue with corporate stock as an example. Almost all of the proceeds from publicly traded stock go from the buyer to the seller, with percentages going to brokers, financial managers, analysts, rating agencies, and insurers such as AIG. Beyond the Initial Public Offering (IPO) [more on that later], none of it goes to the company except on the rare occasion when the company raises additional capital by selling off a portion of its retained corporate stock.
Wall Street and all other financial markets are places where people can place bets on how well certain stocks will perform, particularly in terms of their value. Will the share price go up or will it fall? Unfortunately, this has very little to do with how the company is performing. It has to do with expectations about the prices of shares and these are often affected by irrational and emotional reactions from reading too much into “signs” about the economy, from putting to much faith in CNBC “experts,” and from giving too much credence to internet rumors. Most participants in the market make money by buying shares cheap and selling them high – and their bets are mostly about that. Few make money by investing in companies and providing funds that are used to make products and to produce jobs. Less and less of the money in the market is in it for the long haul.
This description is of course an oversimplification. There are many kinds of financial transactions in such markets and some of them provide more money to companies than do others. I will address these transactions in greater detail later in this chapter. For the most part, however, a majority of these transactions end up draining money from the productive economy, not providing money for it. Perhaps it should not, therefore, be called investment.
So what sustains the myth that these Wall Street financial transactions stimulate the economy? What sustains the myth that by cutting taxes for the wealthy, more money will flow into these markets leading to economic growth which results in job creation? For the most part, it is repetition. If certain slogans are said again and again, they start to be perceived as maxims, assumed to be true even when they are not. A few public relations professionals and political consultants have specialized in creating sound bites and slogans that can be used this way for political advantage. They simply make up some phrases that fit a particular ideology, test them in focus groups for emotional response, and then sell the “winners” to the political party that hired them. For the last thirty years, variations of this “investment” myth have been packaged and sold.
In this particular case, the packaged myth also caught on because it was once true that buying stock in a company provided the capital needed for operations and growth. It was true when such shares were bought and sold by people who knew each other, before the large impersonal public markets which I refer to collectively as Wall Street existed. It still is true when people start a small business or buy into one or invest in start-up ventures. But beyond the IPO when shares are offered on the open market, share trading is in effect the selling and buying of pieces of paper that function as demands for payment from the company either in the form of dividends or increased share prices, not an infusion of money into it. And most share traders do not care how the companies get the money to pay them. In fact, most shareholders do not even know which company’s shares they own. They simply participate in financial funds managed by specialists who make all the choices. Such “ownership” is anything but responsible.
NEXT PORTION to be posted this weekend - WALL STREET MYTH -
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