Theos-Talk Archives (July 2002 Message tt00061)

Steve Stubbs wrote:
> I don't begrudge anyone making an infinite amount of
> money so long as it is not removed from my wallet at
> gunpoint. One thing most people do not know about the
> stock market is that no money is created. It merely
> changes hands. So if there are going to be
> institutions making money (i.e., removing money from
> the market to pay salaris, etc.) and a very few
> individuals making money, there must necessarily be a
> lot of ignorant people out there losing an equal and
> opposite amount. 

The stock market is not a closed system; new money can enter it.
Therefore, a continual influx of new money can make the total money made
greater than the total money lost. 

That was the major problem with the junk-bond takeovers of the 80's.
For those who don't know how it worked (although the movie OTHER
PEOPLE'S MONEY explained it pretty well), an investor (let's call him
"Mr. Vulture") finds a company with several divisions, some of which are
more profitable than others (we'll call it "Pigeon, Inc."). He creates
an investment company (Vulture Investments) whose purpose is to take
over Pigeon, Inc. He sells bonds (borrowing money) at high interest
rates, and uses the money to buy controlling interest in Pigeon, Inc.
But now, as the new company (still called Pigeon, Inc.) has the combined
debts of both companies, Pigeon has to pay off the bonds of Vulture
Investments, the very money that was used to take over Pigeon! Mr.
Vulture then sells off the currently valuable assets of Pigeon, junks
the rest, pays off the bonds, and gets whatever is left over from the
liquidation value Vulture's shares of Pigeon, without having invested a
single penny of his own money. Yet, while he has made a pile of money,
the total wealth in the economic system has been reduced, so it is a net
loss to the economy. That is how, during the 80's, a few became rich
while causing major damage to the economy. 

What happened in the Internet economy was a mite different. There was a
lot of new money entering the market, based on promises. Unfortunately,
the promises were based on too high expectations, and numerous companies
were competing where there was not really a market for numerous
companies (such as web portals and general search engines). So there was
a first wave of companies folding because the market just wasn't there
(the dotcom collapse of 2000). This caused a secondary wave of failures
of companies which were, themselves, quite viable, but got hit either
because they served companies that went under, or were victims of loss
of investor confidence, and could not weather out the storm. Finally,
we're hitting a third wave right now, where large companies which were
darlings of the stock market turned out to have been hiding their
debits, with insider managers making tremendous amounts of money while
the other owners of the company (aka the stockholders) end up losing
their shirts (the reason for laws against "insider" trading is that
managers are hired by the owners to run the business; they should not be
allowed to use their knowledge of the inner workings of the company to
make money at the expense of those who own the company). 

Bart Lidofsky