CHANGING AMERICA’S MIND - Chapter 1 - Part 2
Wall Street Myth
Also according to popular media myth, Wall Street is synonymous with business. It is credited with stimulating the economy, spurring innovation, and creating jobs.
There is scant truth to any of these claims. Such claims are public relations fiction hyped by a misinformed media that serves to conceal the fact that Wall Street is a mechanism designed to make the rich richer – at everyone else’s expense. During the bull market in the spring of 2007, TV pundits and politicians alike pointed to soaring share prices as evidence that America’s economy was doing well. A deeper analysis revealed that the rising stock indices were being driven by corporate investments abroad while American wages were relatively flat. Furthermore, a statistical flaw in the methodology for computing GDP did not adequately account for these foreign investments and likely meant that annual growth was not the 3.2 % reported, but only a weak 1.4 %.
We learned later that the rising share prices were also being fed by the speculative instruments called derivatives, which were at that time driving the building “boom.” It did not take long for that “boom” to be known as the bubble that burst. Many middle class 401K purchasers and many retirees living on the proceeds from such retirement plans lost a great deal of money. In the mean time, when the quick profits from the real estate bubble ended, the derivatives speculators went looking for new prey and quickly drove up the prices of oil, gasoline, and flour, even though little had changed in terms of real supply and demand. At the same time, the distribution of income showed a wider and wider gap. The middle class was shrinking and the number of people in poverty was growing.
Wall Street is not Business. As many economists have pointed out, it’s much more like a casino. It’s a place where people place bets that stock prices will rise (or fall). They track the odds by frequently checking the scoreboards called The Dow Jones, the S&P, and the NASDAQ. According to the type bet they placed, it does not matter whether the market is rising or falling. They may win either way. It is a zero-sum game. These are not investments, they are bets. “Playing the market” it is correctly called just like in the phrase, “playing the horses.” Unfortunately, it is not just other gamblers who lose – it is also customers, workers, retirees, communities, taxpayers, and the environment.
Why then do these “players” get preferential tax treatment? Why do they get the capital gains rates which are approximately half the income tax rates paid by ordinary citizens? Beyond the IPO and perhaps the first purchase after that, these are mostly gambling gains, not true investments. Why don’t these speculators pay a gambling tax? Or come to think of it, why don’t they even pay a sales tax on these transactions like most of us must pay for most of our purchases. After all, they’re not buying food or other necessities.
“Well, at least the Market mirrors and measures the economy,” you might say in Wall Street’s defense. In 1929, it did not. In the run-up to Enron, it did not. In the Bull Market of 2007 it did not. In all those cases, it damaged the economy. These markets have little to do with reality, except for making a few people richer and causing adverse impacts for everyone else. Wall Street is an amusement park, filled with thrill rides, and runs on emotion, adrenalin, and greed.
But it does make the rich richer.
The popular belief has been that “As the Market goes, so goes America.” Yes, but that’s true only when it plummets!
“Buy American,” a grieving nation pleaded after 9/11. As part of this, many beseeched Wall Street traders to buy big when the markets reopened. Give America a boost.
You bet.
They sold.
And millions lost jobs.
The Markets may be American, but they are not patriotic.
They serve only self-interest. They’re designed to be that way.
“Well,” you protest, “the ‘invisible hand,’ described by Adam Smith in The Wealth of Nations, assures that such selfishness and greed unintentionally benefits the whole.” Wrong. The beneficence that the invisible hand bestows flows only from small businesses, start-ups, and closely-held mid-sized companies. Not share trading in multinational corporations and many of the other financial transactions that Wall Street traffics in.
Today’s “free market” ideologues need to reread Adam Smith. Multinational corporations in global markets are a form of the monopolistic forces he preached against. In addition, he advocated investment in ones own country as the only means of building a society’s wealth. “The Wealth of Nations,” his book was titled. Not the wealth of a few individuals.
Coming next -
Participants and Transactions The above commentary may seem too harsh.....
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Larry
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Larry, nice start. You might want to define derivatives, a mystery to many people, maybe just in a footnote.
ReplyDeleteYou might also want to say something about the initial purpose of selling stock -- to fund the business -- but that that purpose is lost afterward.
Also, so many of us have been sold on the idea that investing in stock was the way to provide for a secure future, particularly if one is not in a job for years so as to get a "pension." And now, most pension plans are built on the stock market too, generally mutual funds. I know I'm getting ahead of things, here, but hope you will address these issues.