Add liquor, blackjack tables and slot machines, and the trading floor of the New York Stock Exchange begins to look an awful lot like a Vegas casino: thousand-dollar suits with glittering, rabid eyes, glazed over from sleeplessness, stress and the prospect of striking it rich.
But the NYSE is, in fact, not Caesar’s Palace, and the economy deserves respect. So, on February 27th, in the spirit of Adam Smith’s invisible guiding hand, the stock market decided to purge itself of the gamblers.
First, the Chinese stock market plummets 9%, the sharpest drop in a decade. Frenzied investors with stakes in China jettison their stocks. Panic-selling begets panic-selling and globalization aggravates the domino effect, resulting in worldwide mass hysteria. The Dow Jones Industrial Average falls 416 points, headlines scream “CRASH!” and the word “recession” is on everyone’s lips.
This debacle was catalyzed by utterings from two sets of lips. The first belongs to Cheng Siwei, Vice Chairman of China’s highest legislative body, who hinted at raising interest rates to prevent China’s economy from overheating. The second belongs to Alan Greenspan, ex-Chairman of the Fed, economic genius and naysayer. In his opinion, stabilizing corporate profit margins are harbingers for an overdue recession. On that cue, investors bailed on their riskiest bets.
Analysts are categorizing what happened on February 27th as a stock market correction, defined as a temporary dip in stock market prices that brings overvalued stocks back to a level closer to their actual value. Intelligent investors realize this, and with a shrug, are content to cut their losses in their diversified, well-hedged portfolios. The investors who sustain third-degree burns from the stock market correction are the gamblers.
Whether Mr. Greenspan is correct or not in his prediction of a recession, it is notable that the economy has been suspiciously sanguine lately. The hype surrounding India and China’s burgeoning economies couldn’t last, and with good reason. China has been tinkering with its political character, trying to reconcile its communist beliefs with its capitalist ambitions. In the face of political upheaval, companies that have invested billions in China could find their assets seized by the government without warning. India hasn’t invested nearly enough in infrastructure in past years to support the rate of economic growth it is currently experiencing. Without reliable highways, airports, running water and electricity, something’s got to give. None of this is new information, but after February 27th, people are taking a long, hard look at their investments.
The stock market correction is like a light dose of antibiotics for a feverish marketplace: it weeds out the impetuous speculative investors who overvalue stocks in the first place, leaving the resistant, serious investors to flourish in a more stable, albeit bearish marketplace.
It is such market mechanisms that prevent blackjack tables, bars and slot machines from being installed on the NYSE trading floors.
An interesting side-effect of February 27th: since investors are now more wary, they are pulling capital from risky China and India and investing it in the US, the safe haven for business ventures. As they say, the house always wins.
Priyanka Timblo is a junior majoring in economics. She may be contacted at p.timblo@umiami.edu