Let me get this straight:
Stocks are pieces of ownership in a company. Stocks have value because a company makes profits for stockholders. The better a company is, the more profit a stock makes. The more profit a stock makes, the more valuable the stock is, which raises the prices of the stock as value increases and scarcity drives up the price.
Because of that scarcity, a whole industry sprang up trading these stocks. Once that happened, the prices of stocks began to fluctuate in more extreme ways than the actual value of a stock based on the piece of ownership it represented, or the interest generated on that piece of ownership’s returns.
Because of that fluctuation, money could be made by a stock without the company actually producing anything or providing any service. (And they say Socialists are utopian….)
Because a rational person tends to maximize their wealth potential for personal financial security, putting money into stocks seems a fine investment idea. Retirements, homes and children’s college tuition can be paid in such ways, as the money a rational person earns with their job can now be employed making additional money. Wealth is created, new businesses are created using that wealth, more people get jobs, more people have money to invest in new stocks created by new business, creating more wealth. This is a good thing.
Expanding liberty in our society means that more and more people can participate in wealth creation. This is also a good thing.
Unfortunately, the people who ran the companies that stocks represented were also paid in company stock. Because of this, increasing the value of those stocks, now based more on the “stock market” value than on goods the company actually produced or services the company actually provided, became a higher priority than producing goods or providing services. This is a bad thing.
With less emphasis on goods and services, consumers bought less goods and services from the companies. The company stock made less profit. The less profit a stock makes, the less actual value it has. The remaining value is only a trick of the market. This is a very bad thing.
To keep values up, the people who ran the companies made up stories about how much money the company had and how much money the company would make in the future. The people who reported on the companies and on the stock market did not investigate the actual value of stocks. Rational people believed these experts, and kept putting their money in the stock market because experts said stocks were worth thus and such. This went on for many, many years, and was very, very bad.
Rational people began to realize that the companies’ stock values were a trick of the market. But the people who ran the companies and the people who reported on the companies and on the stock market kept telling the people that everything was OK. As the housing market collapsed and financial institutions began to fail, we heard the talking: The fundamentals of the economy are sound. There is no recession. Lehman Bros. is no Bear Stearns. Bank of America is overcapitalized. Buy, buy, buy.
And then the rational people realized that the companies and the business media had been whistlin’ Dixie for years, and that stocks were overvalued. Remember, the market fluctuates more extremely than the actual companies are worth. Rational people were now frightened because the owned stock in companies that didn’t produce goods or provide services. They tried to sell, sell, sell. The value of stocks plummeted and continued to go down.
Like the boy who cried wolf, no one believes the companies or the business media anymore.
Why should we? The first group got us here, and the second group never warned us what was coming.
All I’ve heard them do this week is blame our new President for the mess we’re in. At least they still have balls, if not credibility or expertise.
They’ve been on the job for years and are the reason the stock market is sagging. They could have taken some responsibility, did their jobs and worked on righting this ship years ago. But they loved their kool-aid more than the most fervent Obama supporter.
We're out to save the free market folks, and once that's handled, the 'invisible hand' will put the stock market back where it needs to be.