5 Wall Street Fallacies

Notice how they're blaming everybody but themselves?

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An oversized dose of humility sure hasn’t cured the narcissism rampant on Wall Street.

It’s all about them, you see. The nation’s in a painful economic swoon, jobs are disappearing, families are struggling to pay their mortgages, and lots of people are just plain failing. But read the papers or turn on the radio or watch CNBC and you’d think the top national priority is boosting the stock market. To convince you further, there’s the ubiquitous “sad trader” photo, showing some guy in a blue or red jacket on the trading floor looking catatonic after yet another triple-digit blowout.

[See why more companies are likely to fail this year.]

Obviously the stock market is important. Most middle-class Americans have some stake in the markets, whether through stocks, mutual funds, a retirement plan, or just the need to feel upbeat about the economy. But we’re getting a lot of this backward. Some of the most prominent misconceptions:

The markets come first. Wall Streeters pleading for some kind of boost from Washington seem to believe that the stock market helps determine the fate of the economy. It’s the other way around: The markets reflect the state of the economy. When companies and their profits are growing and the economy is healthy, the value of stocks goes up. When companies are shrinking and losing money – like now – stocks go down.

[See 5 things that could revive the markets.]

A temporary spike in the markets isn’t going to convince IBM or Motorola to invest in new technology or hire more workers. Only fundamental business forces will help determine that. So when it looks like the economy is starting to get healthy again, that’s when the bear market is likely to end. Short-term stimulants from Washington won’t make a meaningful difference unless they help improve the overall economy first.

It’s Obama’s fault. You’ve got to be kidding. We’re in a once-a-century financial meltdown caused by a 10-year housing bubble, reckless financial engineering, global greed and Swiss-cheese regulation, yet Jim Cramer & Co. blame President Obama for not turning things around in his first 60 days. While they’re at it, why not blame Obama for failing to end the Israeli-Palestinian conflict or eradicate cancer? What’s taking him so long anyway?

[See 5 pieces missing from Obama's stimulus plan.]

It’s entirely possible that Washington, including 535 politicians on Capitol Hill who are the narcissistic equals of anybody on Wall Street, will bungle their responsibility to safeguard the public interest. We’ll know soon enough. But the real problem is that Wall Street screwed up so bad that it needs a government rescue in the first place. Blaming Obama for the problem (or George W. Bush, for that matter) is like getting drunk, driving your car into a tree, and then blaming the doctor who treats you in the emergency room.

A rescue isn’t happening fast enough. Everybody wants Treasury Secretary Tim Geithner to hurry up and unveil his plan for stabilizing the banks and dealing with $2 trillion or so in losses (since the banks can’t do it themselves). No doubt, sooner would be better than later. But there’s also ample evidence by now that an incremental solution is almost as bad as no solution. Since the meltdown began last September, there have been half-a-dozen attempts to fix the banks and stabilize the stock market. Since then, the S&P 500 has fallen by more than 40 percent. And every time a half-measure fails to do the trick, it degrades confidence and makes the whole problem worse.

[See 4 myths about Geithner's bank-bailout plan.]

Geithner made a poor showing in early February when he announced a bank-rescue “plan” with details to be named later. That created more anxiety than it relieved, and if Geithner continues to present vague, trust-me plans, he’ll prove his critics right. But Geithner can make up for his earlier misstep by announcing a comprehensive solution when the details of his plan finally materialize, probably in April. The history of “quick fixes” shows it’s better to wait for a thorough plan than to carry out an endless series of tactical maneuvers meant to calm the markets for a few days. Waiting may even work to Geithner’s advantage, if it allows him to gather enough information from the banks to see around the next bend in this rocky road.

It’s up to the government to fix the economy. If this is true we’re all cooked, because the government is no better at running the economy today than it’s ever been. And it’s been terrible. It’s going to take the same thing to get the economy back on its feet that it’s always taken: Investors willing to risk their own money to make a profit and create value, in the process creating jobs. All of this stuff out of Washington – the stimulus bill, the homeowner bailout, the banking rescue, the credit subsidy – is aimed mainly at helping capitalists help themselves. If investors, entrepreneurs, and consumers don’t take the baton at some point, then we have ourselves to blame, not the government.

[Want to measure your own well-being against the Dow? Here's how.]

We all need Wall Street. Don’t be so sure about that. The balance of power is clearly shifting away from megabanks toward smaller – and healthier – regional banks that may be in a much better position to loan money to consumers and businesses. Big companies will still rely on the megabanks for complex global transactions. But keep in mind that small businesses employ about half of all working Americans, and they don’t really need hedge funds or investment banks or derivatives brokers. Besides, the “real” economy can grow even while Wall Street stagnates. The economy grew during most of the 1970s, for example, even though the stock market barely budged over the course of the decade. It’s better for both to grow in tandem, of course. But we can do it without Wall Street if we have to.