I'm writing a paper for Economics, and I have to answer why the stock market is falling and what might be done to turn it around. I've been looking online and I just get a bunch of **** where they just explain that it is falling, or point fingers, and I'd like to know some of your oponions.
Ready.... GO!
Why is the stock market falling?
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FireLighter
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Why is the stock market falling?
"To fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting."
-Sun Tzu, the Art of War
-Sun Tzu, the Art of War
Short answer, American banks lent money to people who did not have the income to pay them back or the assets to guarantee them. These NINJA (No income no job no asset) hit them hard as interest rates started to rise.
Case in point sub prime housing. People got mortgages they wouldn't normally have qualified for and paid nothing down for it. As interest rates rose, they were no longer able to make payments on their house and since they had paid nothing down, they walked away.
Easy credit made houses easier to buy which lowered supply and drove up demand, increasing cost. Easy credit made it easier to bid on expensive houses, fueling competition between buyers, further increasing housing costs.
The banks gave out mortgages for homes that had been wildly overprice because of the above conditions. As people abandoned these homes because they had no real stake in them (remember no down payment) the banks were stuck holding mortgages worth more than the property. These toxic assets became a huge money drain.
Many banks had heavily invested in these sub prime mortgages and used the fictional money the people owed them as part of the mortgage to invest, buying things in the stock market. As the housing market fell, suddenly a lot of money that was invested in houses became worthless and pulled everything else down with it. Several banks failed across the world, Iceland is particularly hooped, and America is trillions of dollars in debt.
Investors panic and sell stocks, further devaluing the stock market and destroying investor confidence prompting more selling and more devaluation.
So that's it in a nutshell.
I'm a policy guy not an economics guy, so someone can likely explain it in more detail than I can.
Case in point sub prime housing. People got mortgages they wouldn't normally have qualified for and paid nothing down for it. As interest rates rose, they were no longer able to make payments on their house and since they had paid nothing down, they walked away.
Easy credit made houses easier to buy which lowered supply and drove up demand, increasing cost. Easy credit made it easier to bid on expensive houses, fueling competition between buyers, further increasing housing costs.
The banks gave out mortgages for homes that had been wildly overprice because of the above conditions. As people abandoned these homes because they had no real stake in them (remember no down payment) the banks were stuck holding mortgages worth more than the property. These toxic assets became a huge money drain.
Many banks had heavily invested in these sub prime mortgages and used the fictional money the people owed them as part of the mortgage to invest, buying things in the stock market. As the housing market fell, suddenly a lot of money that was invested in houses became worthless and pulled everything else down with it. Several banks failed across the world, Iceland is particularly hooped, and America is trillions of dollars in debt.
Investors panic and sell stocks, further devaluing the stock market and destroying investor confidence prompting more selling and more devaluation.
So that's it in a nutshell.
I'm a policy guy not an economics guy, so someone can likely explain it in more detail than I can.
The waves came crashing in like blindness.
So I just stood and listened.
So I just stood and listened.
Big SNAFU situation normal all ****ed up
Right Speech has four aspects: 1. Not lying, but speaking the truth, 2. Avoiding rude and coarse words, but using gentle speech beneficial to the listener, 3. Not slandering, but promoting friendliness and unity, 4. Avoiding frivolous speech, but saying only what is appropriate and beneficial.
Actually - from my perspective as a private investor, the answer is obviously simple.
Lemmings.
No seriously - anybody who've followed the stock market over the last half year has seen common sense, economical theories and so on been put out of effect by the lemming-effect.
Think about it - sure banks have loaned out too many money to people who couldn't pay, sure some CEOs have been less then hornest and basically ripped off a lot of people and all that - but frankly - it isn't extraordinary.
What has been extraordinary is the loss of value on the stock market, which have created the vicious cycle of causing more problems because banks have loaned out too much money.
Suddenly a number of organizations and people had to cash in on their assets, meaning they sold stocks. Combine this with the effect of hearing that the economy is in trouble, you see many others follow and sell theirs to avoid or minimize loss and thus when "everybody" sells, many does sell.
Its quite visible, stocks rise and fall based on rumors and internal memos and panic. And it does so because people are lemmings.
This in turn causes the many problems we see with unemployment because now banks - who've loaned out too much - want to get money back, so they kill businesses, they cancel loans and that hurts the common people.
So if just the stock market finds a somewhat steady level (the last couple of weeks trend is positive in that aspect), then the economy will stabilize and we're into "just" an ordinary recession instead of a major crisis.
Unfortunately I'm not rich, but I have used most of my money the last few months in buying up some stocks, because the price have been so low. It's been basically private investors like me who've acted most sensible on the stock market - at least according to a piece I saw in a Danish financial media. Of course this is because "we" are less likely to need the money we invest suddenly and thus aren't forced to sell.
Even being a somewhat capitalists, I'm thankful that the governments around the globe take this crisis serious, unlike in the 30s, and actually does attempt to soothe the effects.
If the governments had done little and said it was the banks/businesses own problem - there's no way of knowing just how bad it would have been now.
Lemmings.
No seriously - anybody who've followed the stock market over the last half year has seen common sense, economical theories and so on been put out of effect by the lemming-effect.
Think about it - sure banks have loaned out too many money to people who couldn't pay, sure some CEOs have been less then hornest and basically ripped off a lot of people and all that - but frankly - it isn't extraordinary.
What has been extraordinary is the loss of value on the stock market, which have created the vicious cycle of causing more problems because banks have loaned out too much money.
Suddenly a number of organizations and people had to cash in on their assets, meaning they sold stocks. Combine this with the effect of hearing that the economy is in trouble, you see many others follow and sell theirs to avoid or minimize loss and thus when "everybody" sells, many does sell.
Its quite visible, stocks rise and fall based on rumors and internal memos and panic. And it does so because people are lemmings.
This in turn causes the many problems we see with unemployment because now banks - who've loaned out too much - want to get money back, so they kill businesses, they cancel loans and that hurts the common people.
So if just the stock market finds a somewhat steady level (the last couple of weeks trend is positive in that aspect), then the economy will stabilize and we're into "just" an ordinary recession instead of a major crisis.
Unfortunately I'm not rich, but I have used most of my money the last few months in buying up some stocks, because the price have been so low. It's been basically private investors like me who've acted most sensible on the stock market - at least according to a piece I saw in a Danish financial media. Of course this is because "we" are less likely to need the money we invest suddenly and thus aren't forced to sell.
Even being a somewhat capitalists, I'm thankful that the governments around the globe take this crisis serious, unlike in the 30s, and actually does attempt to soothe the effects.
If the governments had done little and said it was the banks/businesses own problem - there's no way of knowing just how bad it would have been now.
Insert signature here.
I need to emphasize something obsidian said. The bad loans were used as collateral for the banks to borrow money to make more bad loans. In some cases this happened several times over. If it was only one layer of bad loans the banks would have been just fine. As it was was it turned into a multi-layered ...fecescake with toxic assets used as collateral to borrow money to make more toxic assets.
Do this enough times and the fake money outnumbers the real thing and the banks topple under the weight of their own feces.
Do this enough times and the fake money outnumbers the real thing and the banks topple under the weight of their own feces.
Look up 'reserve ratios' relating to banking to toss in some technical mumbo jumbo with regards to what Obsidian was saying.
While the 'animal spirits' (name of a good book, might be worth quoting) that Xandax was talking about had an early effect (say late 08), what we're essentially in the midst of is a liquidity crisis. The aforementioned toxic debt has been distributed throughout the banking system due to the complex financial instruments and packages devised by investment bankers, largely on the 'get rich quick' principle. I know more about the UK side of things, but world financial centres such as London have been fairly stable over the last decade and a half or so. The general trend in globalization and the rise of consumer markets in India & China/outsourcing meaning cheaper consumables, lower production costs, higher returns etc etc has meant that confidence has been riding very high not only in terms of the consumer but also the investor.
So banks and financial institutions have been swollen with cash, they saw a few folks (think the early Black-Scholes Quants before they screwed up) get rich ridiculously fast and so high-risk banking (with the now highly controversial big-bonus culture to stimulate the search for such high returns) replaced the traditional conservative/stable nature of many of the big names in finance.
Net effect is that the world's largest private financial institutions, cornerstones to the world economy (hence why the US abandoned its supreme tenet of laissez-faire capitalism with the collapse of Bear Stearns/Fannie Mae), had allowed toxic assets into their system.
As part of the massive cash flows undertaken by such institutions on a daily basis for normal trading, these banks lend to one another. When the word of the sub-prime trouble got out, and that its effect was much wider, and that big banks started stumbling, suddenly everyones keeping their cash firmly to their chests.
Initial massive wipes of value off stock markets was down to investor panic (Xandax's 'lemming effect'), but the long run effect of such shocks is the loss of liqiduity as financial institutions of still reluctant to lend to one another, this feeds down into reduced credit to the consumer and small businesses. Less consumption: small businesses collapse: unemployment: less consumption, higher propensity to save for fear of unemployment: big businesses see revenue fall, more layoffs, economic output falls. Low growth or even shrinking means less returns on investment. So less investment, less liquidity, so forth.
Solution? The evanescent 'consumer confidence' needs to be returned, but the reality is, atleast in the UK economy much of it's consumption has been sourced through credit rather than earned income rises. There is argument that this global recession is in a sense a return to normal levels of spending and consumption as the 'borrow like no tomorrow' ethic disappears. It will require a couple of years of organic growth to reach levels of consumption industries are used to. What governments are trying to do, and will hopefully find a solution to at next weeks G20 London Summit, is minimise the damage the loss of credit availability and liquidity is doing to national economies in terms of unemployment figures. Stimulus packages and what not, in my view, are a political rather than economic solution, as consumer confidence does not always match disposable income figures. I think the main way for economies to be propped up is for governments to guarantee more loans and banking transactions (in a sense more nationalisation). Both small and large firms need loans that the current high-risk environment refuses to provide to sustain them through this slump, and so keep on employees, who in turn continue to spend. It is the fear that more and more firms will enter into administration/bankruptcy that is preventing the cash from flowing back onto the stock markets.
Eh, I haven't studied economics in years, so feel free to challenge any of the above. And I'm not sure at what academic level you are writing your paper, but feel free to ask for any more expansion on detail.
While the 'animal spirits' (name of a good book, might be worth quoting) that Xandax was talking about had an early effect (say late 08), what we're essentially in the midst of is a liquidity crisis. The aforementioned toxic debt has been distributed throughout the banking system due to the complex financial instruments and packages devised by investment bankers, largely on the 'get rich quick' principle. I know more about the UK side of things, but world financial centres such as London have been fairly stable over the last decade and a half or so. The general trend in globalization and the rise of consumer markets in India & China/outsourcing meaning cheaper consumables, lower production costs, higher returns etc etc has meant that confidence has been riding very high not only in terms of the consumer but also the investor.
So banks and financial institutions have been swollen with cash, they saw a few folks (think the early Black-Scholes Quants before they screwed up) get rich ridiculously fast and so high-risk banking (with the now highly controversial big-bonus culture to stimulate the search for such high returns) replaced the traditional conservative/stable nature of many of the big names in finance.
Net effect is that the world's largest private financial institutions, cornerstones to the world economy (hence why the US abandoned its supreme tenet of laissez-faire capitalism with the collapse of Bear Stearns/Fannie Mae), had allowed toxic assets into their system.
As part of the massive cash flows undertaken by such institutions on a daily basis for normal trading, these banks lend to one another. When the word of the sub-prime trouble got out, and that its effect was much wider, and that big banks started stumbling, suddenly everyones keeping their cash firmly to their chests.
Initial massive wipes of value off stock markets was down to investor panic (Xandax's 'lemming effect'), but the long run effect of such shocks is the loss of liqiduity as financial institutions of still reluctant to lend to one another, this feeds down into reduced credit to the consumer and small businesses. Less consumption: small businesses collapse: unemployment: less consumption, higher propensity to save for fear of unemployment: big businesses see revenue fall, more layoffs, economic output falls. Low growth or even shrinking means less returns on investment. So less investment, less liquidity, so forth.
Solution? The evanescent 'consumer confidence' needs to be returned, but the reality is, atleast in the UK economy much of it's consumption has been sourced through credit rather than earned income rises. There is argument that this global recession is in a sense a return to normal levels of spending and consumption as the 'borrow like no tomorrow' ethic disappears. It will require a couple of years of organic growth to reach levels of consumption industries are used to. What governments are trying to do, and will hopefully find a solution to at next weeks G20 London Summit, is minimise the damage the loss of credit availability and liquidity is doing to national economies in terms of unemployment figures. Stimulus packages and what not, in my view, are a political rather than economic solution, as consumer confidence does not always match disposable income figures. I think the main way for economies to be propped up is for governments to guarantee more loans and banking transactions (in a sense more nationalisation). Both small and large firms need loans that the current high-risk environment refuses to provide to sustain them through this slump, and so keep on employees, who in turn continue to spend. It is the fear that more and more firms will enter into administration/bankruptcy that is preventing the cash from flowing back onto the stock markets.
Eh, I haven't studied economics in years, so feel free to challenge any of the above. And I'm not sure at what academic level you are writing your paper, but feel free to ask for any more expansion on detail.
"I fart in your general direction! Your mother was a hamster, and your father smelt of elderberries!"
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Weedutchgirl
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On top of all that, there was a choice made to reset the daylight savings time a few weeks earlier, allowing for more trading. Europe still changes it at the end of March, this weekend, while we here in North America have been enjoying it for a few weeks already. Add everything up and it will hit the fan.
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LeoStarDragon1
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Snafu?
SNAFU or S.N.A.F.U. = "Situation Normal, All Fouled Up" (You also avoid an acronym in an acronym that way!)
Now to keep this on subject.
Stocks! Should I sell mine now or keep them?
Psst! Claudius! If you used the non-profane version, you wouldn't have to censor yourself. (I've posted this elsewhere, but I'll repeat it here.)Claudius wrote:Big SNAFU situation normal all ****ed up
SNAFU or S.N.A.F.U. = "Situation Normal, All Fouled Up" (You also avoid an acronym in an acronym that way!)
Now to keep this on subject.
Stocks! Should I sell mine now or keep them?
Shhh! Be very quiet! I may be sleep writing and sleep reading! :laugh:
Who said, "It is not whether you get knocked up, but whether you can get down!"?
Who said, "It is not whether you get knocked up, but whether you can get down!"?
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fable
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Sell them. That way, you will lose a lot of money, and according to one conservative analyst, this will increase the chances for the masses to learn through suffering. (I'm not making this up.)LeoStarDragon1 wrote:Stocks! Should I sell mine now or keep them?
To the Righteous belong the fruits of violent victory. The rest of us will have to settle for warm friends, warm lovers, and a wink from a quietly supportive universe.
I seem to recall something about buy low sell high. So if your high then sell them and if your low then buy.
Right Speech has four aspects: 1. Not lying, but speaking the truth, 2. Avoiding rude and coarse words, but using gentle speech beneficial to the listener, 3. Not slandering, but promoting friendliness and unity, 4. Avoiding frivolous speech, but saying only what is appropriate and beneficial.
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LeoStarDragon1
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To Fable & Claudius!
To Fable: :laugh: Uh, say what?! :laugh:
To Claudius: Heh! :laugh: That seems like something that should be overheard in a jazz club somewhere! :laugh: By a naughty Muppet!
For Both: Actually, I did sell all but one share as that share was earned as a reward for hard manual labor. The rest I had come by, via paycheck deductions to purchase them. The money was used to pay for a vacation.
It was a part of.... Ah, never mind that!
To Fable: :laugh: Uh, say what?! :laugh:
To Claudius: Heh! :laugh: That seems like something that should be overheard in a jazz club somewhere! :laugh: By a naughty Muppet!
For Both: Actually, I did sell all but one share as that share was earned as a reward for hard manual labor. The rest I had come by, via paycheck deductions to purchase them. The money was used to pay for a vacation.
It was a part of.... Ah, never mind that!
Shhh! Be very quiet! I may be sleep writing and sleep reading! :laugh:
Who said, "It is not whether you get knocked up, but whether you can get down!"?
Who said, "It is not whether you get knocked up, but whether you can get down!"?
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LeoStarDragon1
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Without Dancing To A Beat.....
By the way, it's stock in "Wal*Mart", and I earned my first one via the "Great Job!" button incentive program. You save four tiny ones, then turn them in for a big one, and you get a letter and a certificate saying how much you own. Because it was hard to earn that one, I am reluctant to ever sell it.
..... I can appreciate your reply, being that it is a buyer's market. However, I was thinking about selling mine, just to get the cash. But then not selling it, means I still own something. If I had the cash, it'd be gone soon enough and then I'd have nothing left, and I'd be like I am now. Except that I can still claim to be a stock owner with the right to vote.Xandax wrote:Buy buy buy.
By the way, it's stock in "Wal*Mart", and I earned my first one via the "Great Job!" button incentive program. You save four tiny ones, then turn them in for a big one, and you get a letter and a certificate saying how much you own. Because it was hard to earn that one, I am reluctant to ever sell it.
Shhh! Be very quiet! I may be sleep writing and sleep reading! :laugh:
Who said, "It is not whether you get knocked up, but whether you can get down!"?
Who said, "It is not whether you get knocked up, but whether you can get down!"?
If you have the money your best off buying as much as you can, a lot of great companies have low stock for no good reason.
Avoid selling just for the quick cash. It's likely a lot less than it is actually worth and will do your own small part of further depressing the stock market.
Things will get better. I know my own stocks took a hit but I'm still investing in the market. Will I lose more money? Probably, but if people don't invest the market will fall more. And I'm young, eventually my investments will pay dividends.
A lot depends on how old you are. No is not a good time to be a pensioner living off your investments. Right fable?
Avoid selling just for the quick cash. It's likely a lot less than it is actually worth and will do your own small part of further depressing the stock market.
Things will get better. I know my own stocks took a hit but I'm still investing in the market. Will I lose more money? Probably, but if people don't invest the market will fall more. And I'm young, eventually my investments will pay dividends.
A lot depends on how old you are. No is not a good time to be a pensioner living off your investments. Right fable?
The waves came crashing in like blindness.
So I just stood and listened.
So I just stood and listened.
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LeoStarDragon1
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The Obsidian Order!
So here I sit unemployed, my benefits all used up. Hence a slight urge to sell. But as I said, then the cash would be gone soon enough anyway, and then I'd have nothing to show for my time in... that place.
I already spent 13 or so years, wasting my youth in food services. I loath going back to that racket just to be employed, at minimum wage plus tips.
Hence why I've been looking for an agent or a publisher. But I digress.
The point is, no cash to take advantage of this buyer's market! I'd have to borrow it, and that's another Catch-22. Oh, hey the transfer is done!
Well, it's a Catch-22 for me, concerning cash versus stock ownership. I already cashed out my Templeton Foreign Fund a long time ago. As for Wal-Mart! Hah! Hah! I still own a piece of the company that terminated my employment due to 3 write-ups concerning "slow productivity", all my female AM's who had me helping them, but wouldn't accept that was why I was away from my department and thus sometimes it wasn't all done on time. The male AMs had no problems and it was one of them that taught me how to do my job. So blah! Being black listed is for the ...... Hm Too much information! 1 hour and 8 minutes to pass time with for this lastest file transfer.Obsidian wrote:If you have the money your best off buying as much as you can, a lot of great companies have low stock for no good reason.
Avoid selling just for the quick cash. It's likely a lot less than it is actually worth and will do your own small part of further depressing the stock market.
Things will get better. I know my own stocks took a hit but I'm still investing in the market. Will I lose more money? Probably, but if people don't invest the market will fall more. And I'm young, eventually my investments will pay dividends.
A lot depends on how old you are. No is not a good time to be a pensioner living off your investments. Right fable?
So here I sit unemployed, my benefits all used up. Hence a slight urge to sell. But as I said, then the cash would be gone soon enough anyway, and then I'd have nothing to show for my time in... that place.
I already spent 13 or so years, wasting my youth in food services. I loath going back to that racket just to be employed, at minimum wage plus tips.
Hence why I've been looking for an agent or a publisher. But I digress.
The point is, no cash to take advantage of this buyer's market! I'd have to borrow it, and that's another Catch-22. Oh, hey the transfer is done!
Shhh! Be very quiet! I may be sleep writing and sleep reading! :laugh:
Who said, "It is not whether you get knocked up, but whether you can get down!"?
Who said, "It is not whether you get knocked up, but whether you can get down!"?