The stock market exists to serve a real and important purpose. The market brings investors and their money together with companies who need capital. What the stock market is not, is a good barometer of the economic health of our nation. Yet, as we sit here today, we have evolved a media and political culture devoted to watching the stock market. A generation of market insiders have evolved along side, devoted to the premise of government-free operation, and committed to the notion of a government ready to attend to their every need. This boiling contradiction has so distorted our view, that we are blind to the real effects of our policy.
The history of the market is one of growth. Everything is predicated on the growth of individual prices and the market average. Growth equals profit, and the rewards for good behavior on the Street are very high indeed. Firms and the whiz kids they employ, make billions annually on transactions. There is no consequence for failure or benefit for success linked to the actual performance of companies in the real world. The billions available to the club on the Street can be had for those able to swing the deals and make the trades.
Remembering the purpose of the Street; a place to bring investors together with firms, we can see the contradictions clearly. Companies with potential could find individuals who would buy into that potential. This was a long term proposition, explicitly understood because finding funds on the Street implies long term capital projects. But today’s volume-based and profit-now Street is focused on next quarter, rather than next decade. Our industrial economy has, not coincidentally, declined at the very time that the stock market has surged to unimaginable heights. But corporate decline is not the only victim of the ever-ravenous Street.
Our democracy has been roped into designing policy that favors, not Main Street (with its workers and consumers), but Wall Street. Politicians have fallen, without regard to political leaning, to the fairy-tail that the Street creates wealth. The Street is a magnet for wealth, not a source, and our forgetfulness of this fact has cost us dearly. Over the last four decades, the Street has grown by as much as 1,200%, while mean household income has gone up by a little more than 30%. We have all seen the graphs showing CEO wages; but those people and their salaries are not the issue. If you sew up the skin, and ignore the artery, you have failed to fix the stab-wound. All of us buy-in to the notion that the stock market is important as a measuring stick. This is the fallacy at the root of many problems.
If we used mean household income, mean home prices, and consumer price indexes in the manner that we now use the stock market, our world would change. Imagine those numbers, relevant as they are to all of us, being reported on the nightly news in the place of the Dow Jones. Would we allow leveraged buy-outs that destroy companies while making the Street more money? Would we allow shadow markets that trade in bets on the failure of people? Would we allow companies to escape the costs of their actions, like B.P. and Halliburton might, if we weren’t consumed by a falling stock price?
The wealth effect of the stock market is real. For every $1 of stock wealth, there are an additional 3-4 cents of spending available down the road. But the wealth lost when a new CEO takes over and fires 10,000 people; what is the value of that? We Americans have a regrettable habit of crying over spilled milk, and failing to figure out how the spill happened. In fact, we usually don’t know where the milk came from. It is time we put the cap firmly on the jug.
The Rational Middle is listening…