Pyramid Head

My first experience with the stock market was years ago in my father's "office". As I often did in fits of boredom I had invaded his space to see what he was doing. At the time he was looking at a web page with some measure of resignation. When I asked him what was up, he told me in his matter-of-fact, "life goes on" fashion that the other day he'd sold some stock he'd received as a bonus at work, but that the stock was up a dollar or so today which would have been another $500. Noticing my confusion, I got a brief lesson in the economics of the stock market.

In the following years I took an economics course, found out that my father's father had enjoyed investing in the market, and contemplated trying my hand at it. I was ultimately defeated by my lack of resources and fear. I watched the stock market go up and down without rhyme or reason, and that frightened me deeply. Matters which I don't understand do not scare me, but matters which I can't understand are outright terrifying. Trusting every dollar I had to such a beast was impossible.

Over the years I've picked up a better understanding of the system, but its fundamental principles bother me. It's obviously been on my mind a fair amount in recent days given the current economic crisis. The stock market is always topping the news, whether its about the latest drop on Wall Street or world markets, the presidential candidates stances on the issue, or the general knee jerk reactions people are having to the problems we face. EVer present are the tickers, the brokers and the news that yet another major bank is at risk.

So, as the Dow drops another 800 points, I pose the following question: What separates the stock market from your run of the mill pyramid scheme?

I'm not an economic powerhouse by any stretch of the imagination, but the fundamentals of how this works perplex and bother me. At the most basic level the stock goes up when people invest and goes down when people take back their investments. In principle this works fine so long as there's a constant increase in either the number of investors or the amount of money being invested. The obvious problem demonstrated by the Great Depression and perhaps the current situation is that once that assumption is broken the house of cards collapses.

This seems eerily reminiscent of the root cause of the credit crunch itself, where subprime mortgages were given out under the assumption that house prices would always go up. Once an assumption like that is broken the system breaks with it, taking down companies and victims in the process. We see this now as jittery investors begin to act in self-interest and pull their investments. I can't blame them for doing so, but it seems to illustrate perfectly the problem at hand; there's no benefit to being at the bottom of the pyramid.

So again, what separates the stock market from your standard pyramid scheme beyond its scope and reach? There is probably some fundamental mechanism I'm unaware of, some fact I'm ignorant of, but at face value It's difficult to see it as anything else.

1 comment:

360 Trooper said...

The whole thing always seemed kinda arbitrary to me. I've always likened it to Las Vegas. You could lose all your money on Blackjack, or you could invest responsibly. I should point out that "responsible investing" at one point in history included the likes of Lehman Bros. and Enron. And lately the whole thing seems rigged in the house's favor in both Vegas and Wall Street.