According to the lead article in yesterday's (May 8, 2010) New York Times, "Origin of the Scare on Wall Street Eludes Officials," experts still haven't figured out exactly why, within a few minutes on Thursday afternoon, the Dow plunged a thousand points and then rebounded. More than $1 trillion in financial asset value briefly vanished and then partially reappeared. It was a dramatic demonstration of the easy come, easy go creation and destruction of phantom wealth that is a Wall Street specialty.
Theories about the cause of the sudden dip range from a computerized trading glitch to intentional market manipulation by Goldman Sachs. Either way, the speculation has focused attention on the fact that high frequency trading—rapid automated buying and selling of shares based purely on computer algorithms in response to price movements—accounts for some 50 to 75 percent of stock market trades. These trades are totally unrelated to real world events or underlying asset values and their only purpose is to extract unearned gains and manipulate markets. They have nothing to do with investment as that term is commonly understood.
Agreement seems universal that, although worries about Greek debt may have contributed to the market fall on Thursday, the size and speed of the drop had nothing to do with the underlying value of the companies that experienced violently gyrating share prices.
This was the backdrop for yesterday's New York Times editorial "A Week in the Life of the Economy," which noted it is still unclear whether Congress will act to protect taxpayers from another Wall Street meltdown or give in to Wall Street bankers and their lobbyists. It then goes on to urge Congress to "pass broad legislation to boost employment through aid to states, extension of unemployment benefits, and programs targeted to "small-business lending, infrastructure projects, green technology and summer youth jobs."
There is an important nuance here that aligns with the argument in my blog "Fix the Economy, Not Wall Street." Strict regulation of Wall Street is essential to protect the integrity of the economy, but neither Wall Street regulation nor bailouts are going to get people working. Wall Street is only interested in extracting society's real wealth, not in contributing to its creation. Giving public handouts to Wall Street in the hope that some of it will flow into the creation of productive jobs is a sucker's folly.
On the other hand, government spending to put otherwise unemployed people to work producing beneficial goods and services makes great sense. It increases tax collection to reduce deficits, recapitalizes the local banking system from the bottom up to the extent that wages are deposited with local banks and credit unions, and need not be inflationary even though financed with government-created credit or borrowed interest-free directly from the Federal Reserve (because unlike Wall Street bailouts, properly spent stimulus money is simultaneously creating real value).
- from David Korten's blog.
Wall Street is bankrupt. Instead of trying to save it, we can build a new economy that puts money and business in the service of people and the planet—not the other way around.