May 092010
 
Authors: Ian Bezek

Hey graduates: Are you wondering why you still haven’t found a job yet? Last week’s stunning stock market declines are a stark reminder that the economy has not “recovered” and is still, in fact, heading downward as jobs disappear and incomes fall.

While most Americans haven’t felt the impact of the alleged economic recovery, the talking heads and politicians jubilantly declared victory on the economic front over the past year.

But last week’s financial meltdown shattered the illusion of recovery. The market dove, with the Dow falling as much as 998 points on Thursday –– a new record –– and investors’ confidence was shattered.

Why did we get the largest ever crash –– bigger even, than any of the harrowing declines in 2008 –– on Thursday? Observers blamed computer malfunctions or human error at first.

The truth is much more insidious. It appears that the floor under the market fell out in just minutes after certain large banks’ automated computer trading systems quit trading. These automated programs are designed to make frequent trades without human intervention, and they usually do.

But when things start to get crazy, these computers programs quit doing what their human masters anticipate. It appears that on Thursday, the computers decided the market had fallen far enough, and they exited the financial markets, dumping their shares and refusing to buy any stocks at any price.

The result was that many companies, such as the gigantic energy utility Exelon, accounting firm Accenture and brewer Boston Beer started the day worth billions of dollars and by early afternoon saw their stocks drop to literally zero.

The market regained much of its losses Thursday with the Dow rising to a loss of “only” 348 points instead of the 998 seen at one point. But confidence was lost, and it can’t quickly be regained.

Just as the claim that Internet companies were the future in 2000 was debunked, and the claim that housing values could go up forever was debunked in 2008, we see that stocks cannot rise indefinitely while the economy grows weaker.

This market crash Thursday was reminiscent of the disaster in 1987 when the market lost 20 percent of its value in one day because some supposed geniuses decided to create “portfolio insurance,” which in effect caused computers to start selling stocks when the market began to decline.

Long story short, everyone thought portfolio insurance was a good idea, and so when the market started dropping, everyone’s computers started selling more. It was a train wreck.

What’s the moral of this story? When you give people with lots of money the power to make large decisions quickly, disasters sometimes follow. That’s fine in a free market, failures happen.

But we have a government-supported market, where the banks are gambling with our tax dollars. The banks shouldn’t be gambling with money that isn’t theirs. Besides, many of these computers seek to make money playing off the gullibility and naivety of many investors.

The whole financial mess has been caused by banks gambling on risky things, such as pools of mortgages, bets on interest rates, investments in the stock market and other such financial instruments. And for a while, our banks were so good at it that the rest of world followed us.

Now the European economies have started to collapse as their banks have taken on crushing losses from the financial mess. As I type, European leaders are desperately trying to hammer out some agreement to stop the decline in their plummeting Euro and keep Greece from declaring bankruptcy before markets across the world resume their harrowing declines Monday.

The whole talk of an economic recovery from our leaders was a deliberate lie. They wanted people to believe things were getting better because the economy is currently a confidence game.

When that confidence erodes, we get things like sickening 1,000 point declines in the Dow. The truth is that unemployment is still rising, wages are falling, debts aren’t being repaid and things just keep getting worse. Anyone who says otherwise is lying to you.

The answer to this mess comes from cleaning up the banking system, but that’s, unfortunately, not something that our politicians are willing to do.

Ian Bezek is a senior economics major. He thoroughly enjoyed getting to know all of you while he was editorials editor of the Collegian this past year. Letters and feedback can be sent to letters@collegian.com.

 Posted by at 12:52 pm

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