Thursday, May 17, 2012

Rekindling an Affair

A May 15th New York Times editorial, "Ending An Affair?", noted that investors are shunning the stock market due in large part to market bubbles and the fact that investor trust has been destroyed as a result of scandals and reckless trading, including the recent $2 billion loss at JP Morgan Chase.

In the minds of some critics, the stock market has become nothing more than a huge global casino and, as in most casinos, the adage of the “house always wins” may apply. Remember: brokerage firms get paid when you buy or sell stock and now the issue of “rebates” (in which the exchanges pay brokers for referring business) comes to light via the editorial. The image of a casino and the gambler’s mentality that goes with it is reinforced by JP Morgan’s recent troubles. It is little wonder that people are turning away from the stock market in favor of more conservative fixed income investments.

Clearly, the nation’s various stock markets, most notably the NYSE and NASDAQ, need to do a better job at communicating the benefits of investing and how the markets work– not only for the individual, but for the nation as a whole. It should be remembered that the stock market serves a useful purpose and has funded railroads, technological breakthroughs, cures for diseases and so on. In an ideal world, a person invests in something that he or she researches carefully, with the expectation of a reasonable return. Sensible investing needs to be defined and the techniques communicated.

One of the interesting points in the Times editorial – that we face the risk of “a less robust market, with fewer companies opting to raise money by issuing shares…” — is particularly troubling to me. Fewer companies issuing shares equals less money for corporate expansion and, as we know, expansion helps create jobs which, in turn, help the economic picture. Apple, which celebrated its 36th anniversary last month, was at one time a small business started in a garage. Today, that company employs more than 60,000 people as well as hundreds of thousands more in various support or ancillary businesses.

Obviously, trust needs to be restored. The question is how. The typical response is more regulation. Is that the answer? We saw what more regulation did after the Enron and WorldCom scandals, which greatly impacted the willingness of companies to go public. Of course, regulation is necessary; however, it should be sensible as opposed to punitive. It is clearly time for the stock exchanges to defend themselves and make the case that they play an important part in America’s present and future.

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