The Stock Market
The Most Dangerous Game of All
When most people I know are asked what they know about the stock market, they can describe the basic concept of buying and selling stocks. However, in a society where more and more pensions (or lack of pensions, as the case more frequently tends to be), 401K plans, and livelihoods are dependent on the stock market, how much do we, the general public, really know about it?
Not much, I’ve found.
A lot of folks still carry a concept that I assume must have been taught in school—namely, that the stock market is a way for people who are cash-poor but idea-rich to receive capital to implement their ideas. This money would of course come from people who are cash-rich but idea-poor.
There is certainly a good deal of truth to this, historically speaking. However, there’s obviously a lot more to it than that nowadays. When did the stock market transform from this relatively noble exemplification of true capitalism into everything from a buy-low/sell-high lottery/gambling institution to a salvation for America’s impending Social Security calamity?
As it turns out, from Day One the stock market has never been quite the instrument of true capitalism that we were all taught.
So what's the origin of Wall Street?
Well, according to The Motley Fool, a pretty reliable source: “It all started in the early 1600s, when the Dutch formed a colony called New Amsterdam on what is now Manhattan. It was, even then, a region devoted to commercial enterprises, with much trading. When the Dutch feared trouble from English colonies to the north, they built a wall to protect themselves. Unfortunately for the Dutch, the attack came, but by sea. New Amsterdam became New York, and you’ll now find Wall Street where the wall used to stand.”
So while this doesn’t exclude some sort of greater good being served by Wall Street, I think it’s fair to say that the creators of the financial world that we today refer to as “Wall Street” didn’t have any particularly higher goals beyond expanding commerce.
Investorguide.com offers a more modern definition: “When people refer to ‘the stock market’ or ‘the market’ it can sometimes be confusing to beginning investors as to what those terms actually mean.” Investorguide.com goes on to explain some different ways that investing experts think about the market as a whole, including:
Bull and Bear Markets
Seasonal and Time-Related Market Factors
Revealingly, there is not a listing for “the benefit of the stock market for society”. The market is mentioned as a whole, but certainly not in any sort of terminology that implies we’re all better off because of it.
Why? Because while commerce has been a lynchpin of most civilizations, it also has never been anything but that – there isn’t anything inherent to commerce which lends itself to carrying the burden of millions of people’s needs once they reach old age.
The reality of the stock market today is that the average investor is completely removed from the company that he or she is investing in. Yes, companies send their stockholders neat little annual reports with glowing forecasts of future earnings (ever gotten one that said “we’re going belly up next year”? I thought not). But how many people ever visit a company to actually check on how many widgets they’re making, or to make sure that the quality of the widget is good and that the widget-makers are cheerful and efficient?
I highly doubt that there were ever a substantial number of Phoenician, Greek, or Persian traders taking someone’s word for it regarding the existence (much less the quality) of goods paid for in advance, but delivered later. In the historical world of business, credit with no conditions (i.e., no collateral) would fall under the heading of “fantasy”.
I can hear someone crying about how things are different today, because we buy stuff sight unseen all the time – and of course this is true. People back then didn’t have the kinds of governments and tracking systems we take for granted, which are what allow us to send money off to perfect strangers, knowing that the penalty for fraud is more or less a pretty good deterrent. I’m talking about wide-scale industrial-level commerce, not buying that Rock ’Em Sock ‘Em Robots game you’ve always secretly coveted from eBay.
The only lenders I’m aware of that have no collateral requirements would be the mob – and in that case, your collateral is you, quite literally. I’m sure there are others, and I’m sure most of them go out of business, as the dot-com bust should have reminded people.
What I’m getting at here involves what we call speculation – or, gambling, if we can be honest and not use a fancy-pants $10 word to describe it. And like it or not, that’s what the stock market has been fostering for a long, long time.
Who has time to wait to hear about actual profits or gains in production efficiency? Not the modern investor – the modern investor wants action, and he or she wants it NOW. Unfortunately, this aspect of the stock market, the need to create artificial profits, is what we should be worried about.
Case in point: The story of one Joseph P. Kennedy, the patriarch of the famous Kennedy clan. He made a fortune in the stock market right before the stock market crash in 1929 and the subsequent Great Depression. Did he make this fortune by enabling small, struggling entrepreneurs to receive cash from wealthy investors?
Don’t be ridiculous.
Wikipedia tells the story: “Joseph multiplied his fortune through stock speculation; he was a master of the stock pool, a then legal stunt in which a few traders conspired to inflate a stock’s price, selling just before the bubble burst. Ironically, a short time later he was appointed the first chairman of the Securities and Exchange Commission, where he oversaw the banning of these practices.”
“Ironically”? That assumes he did indeed oversee the banning of these practices, something I would take with a large grain of salt. I’d say it’s more likely he and his select friends used his new “untouchable” position to continue the “stock pool”, which in the end is nothing more than a wealth redistribution system that steals from the poor and gives to the already rich – kind of a reverse Robin Hood dealio.
In Kennedy’s day this was very simple, but today it’s a bit more complicated. If you’ve seen the movie Wall Street, you’re familiar with the concept of insider trading, but in fact the problems are much larger.
“The Wall St. Scam” outlines a good example. I won’t repeat the whole thing here, but let’s just say it starts with the dubious proposition called “short selling”, which basically means you are selling stocks you don’t yet own, which in turn leads to manipulation of stock prices, which in turn leads to insiders making money, and of course, that “ has to come from somewhere – from the small investors who didn’t have a clue about what was going on”.
So on to the matter at hand … what on earth makes anyone think that it’s a good idea to tie our Social Security finances to this system, which has been rigged in favor of old money insiders since its inception?
Here’s what George W. Bush has to say about Social Security: “We want to allow younger workers to take some of their own money and put it in safe investments so that $1 trillion grows to $3 trillion. The money stays within the system.”
Say what? Investing in the stock market is inherently unsafe! And what exactly is George Bush referring to by “ the system”?
Yes, in the long run the stock market outperforms many financial sectors, but that’s a generalization ignoring individual cases, and ignoring that millions of people retire while the country is in the middle of the recession part of a business cycle.
Tell the senior citizen who watches their “safe investment” evaporate right before they retire that they shouldn’t feel bad, as in the long run the country will be better off. But be prepared to run before they smack you with their walking stick.
The Social Security system has issues, definitely. But to fix it by making it just another player in the truly “most dangerous game” on Earth?
I think not.