The business environment is one of the most dynamic and versatile in the world. Following the bankruptcy of many mortgage lenders in the U.S, there has been panic in the mortgage sector triggering liquidation of housing loans provided as collateral. The extent to which the credit crunch struck has raised fears of whether it could spread to other market areas. Furthermore, the Federal Reserve has been compelled to provide more loans to companies to prevent their closure. In a critical perspective, it implies that even if the government initiates rescue plans the eventual cost will be transferred to the consumers meaning that more interest rates will be charged by banks on loans. Currently, the focus is on Wall Street every investor looking at it with a lot of anxiety. However the Wall Street may be the current focus and the easier scapegoat, but the real cause of the financial crisis is as a result of a combination of factors with the Wall Street being the most apparent of them all. Decision-makers and policymakers are up and down on their heels forgetting that such a situation occurred during the great depression and that there should have been being something to learn from it. The blame game on the financial crisis even continues to the point of politics involving former president Bush because it started during his tenure. Financial institutions such as Fannie Mae and Freddie Mac have requested assistance from the federal government for a crisis that would not have been there in the first, place where banks were more careful and procedural in their lending. The financial crisis emanated as a result of financial institutions giving credit services on the prediction that the economic situation would remain constant. The stock market offered an opportunity for most average Americans to invest in the fluctuations of stocks of different companies. Just as riches have been reaped from the stock market industry through calculated predictions and investing market in the right places at the right times, so have persons and businesses lost significantly by making the ‘wrong’ choices.
Securities Regulation and Trust
The business has transformed the world in a way that would have not been achievable when the marketplace was void of competition. Competition has led to innovation and entrepreneurship in various sectors of the economy. The stock market according to Mitchell (301) was born out of the creativity of American Corporations. However, nobody was ready for the dynamics that would follow. The stock market became a place of predictions and speculations and business people made money just by making the right calls in terms of what direction the stock market would take. The stock market later became a preferable way of investment due to its ability to promise quick returns without additional investment of time. However, the stock, market also brought with it downsides as investors continued to lose significant amounts of revenue. The security offered by the stock market is versatile and apparently, this fact contributed significantly to the high levels of revenue gained. The most affected sector though is the stock market. Before looking at an efficient market it is important to consider a perfect market. In this case, individual selling stock is of the idea that they will probably sell at a higher price than the one they were bought at on the other hand an individual buying stocks will be of the idea that they will be probably cheaper. The efficiency of a stock market is relative it cannot be efficient. Stock market efficiency is where the competition in the stock market influences the prices. According to Gerald, “this view is derived from the model of perfect competition in which all market participants share the necessary information, resources are never misallocated, prices never distorted and adjustments are instantaneous.” Gerald goes on to outline that, “this is a thoroughly mechanistic and fallacious way of looking at the economy and explains why the theory has been unable to account for, let alone explain market crashes.”
In an efficient market, there is a general assumption that stocks are more or less perfect. However, this situation is rarely attained. The current stock market is highly unpredictable and knowledge concerning the dynamics in the stock market is highly distributed and there is no central source of information that can be accessed by all players. Some occurrences in the stock market are instantaneous that even the most vigilant are sometimes perplexed. This can be attributed to the fact that there is no and there cannot be sharing of information attributed to the fact that the market is competitive and everyone wants to stay ahead of the rest. Therefore the stock market does not offer sufficient security.
The explanations in the previous paragraph bring out two important aspects of the stock market. It is impossible to make profits on the stock market and that just like price controlled by the law of demand-supply so does the stock market and it shows a clear indication of the concept of a free market. Over issuance of credit is also another aspect that affects the stock market in the sense that it leads to alterations of prices, therefore, leading to misguided conclusions and investment decisions.
There is still debate as to what caused the market crunch. However, the facts available could provide some insight. Initially, financial and mortgage institutions had taken the step of providing easier terms for individuals who wanted to obtain mortgages. However, the financial determinants led to the increase in interest rates, and the housing prices began to fall as a result there was an increase in defaults, and house prices failed to rise as had been expected. The one aspect that became obvious during the fall in the stock market was that it resulted in raised living standards which resulted in decreased consumer purchasing power. Furthermore, financial institutions were also so much drained that apart from being able to offer credit facilities to customers their financial strength was also greatly compromised. The reason why financial institutions provided easy credit was that there was so much inflow of cash into the U.S economy which created an atmosphere that encouraged the issuance of easy credit on housing.
Consumers on the other hand assumed that the loans would be easy to pay because the creditors being in the market long enough knew the financial situation and would therefore have the capacity to predict with a certain degree of precision. Many institutions not just in America but around the world greatly invested in the housing sector with the view that the returns would be favorable. However, when the housing prices began to reduce drastically there was loss everywhere and this resulted in a further fall in the stock market which is mostly governed by sentiments and they were not favorable at all. The role played by banks and other financial institutions in the issuance of credit had been greatly undermined. The institutions hitherto had been playing a crucial role in the economy and that is why their failure resulted in a global crisis.
The stock market represents an individual’s ownership in a company and therefore it signifies confidence in the individual towards the company. Most companies rely on the good performance of the economy and investors are always on the watch for the performance of the economy too. A fall in the market capital leads to diminished investor confidence. A fall in the economy also means that consumers will have a reduced purchasing power such that even if confidence in the stock market recovers the stock market will still experience a downturn. Fluctuations in the stock market can be influenced by many factors but the important consideration is that the fluctuations should not occur with wider margins to affect investor confidence. The performance stock market as explained earlier is determined by the general purchasing power of investors and their willingness to invest their money in the stocks of a particular company with the view that returns will be favorable.
Investing in the stock market does not only require market efficiency. Market efficiency stipulates that all the information concerning the stock market to all the available players so the only determining factors are the market forces. However, this situation is not always arrived at due to factors such as competition. Investing in the stock market, therefore, requires much more than the assumption the stock market can be efficient. The essence is n the finding of the right stock market to invest in about the history of the performance and the financial statements of a company which is nowadays readily available. The stock market still has so much to offer and the recession should not be a reason to completely disqualify it. Economic and investment mistakes occur from time to time evidenced by the fact the U.S experienced a financial crisis during the great depression and recovered.
Just as outlined earlier, the business world has created significant opportunities for people in society. The only requirement is for a person or corporate to offer goods or services that attract consumers. The popularity of investing in the stock market was fuelled by the nature of the American economy and the fact that most Americans sought after an investment that would not consume much of their time. Soon the stock market became lucrative offering employment opportunities for many Americans. However, the stock market soon became a hub of deceit as various persons and businesses sought to make quick fortunes out of the lucrative business. Judging by the current financial crisis escalating from careless and unethical practices from various sectors, the stock market has also become a source of pain for most Americans. The result was the current financial crisis that did not spare companies and investors and led to w worldwide crisis as the stock market faced one of the most challenging moments in history. Financial institutions such as Fannie Mae and Freddie Mac have requested assistance from the federal government for a crisis that would not have been there in the first place were banked more carefully and procedural in their lending. The financial crisis emanated as a result of financial institutions giving credit services on the prediction that the economic situation would remain constant. The stock market offered an opportunity for most average Americans to invest in the fluctuations of stocks of different companies.
- Mitchell, Lawrence. The Speculation Economy: How Finance Triumphed Over Industry. San Francisco: Berret-Koehler, 2007.
- Gerald, Jackson. Stock Market Crashes and Market Efficiency. 2009.