QUESTION: President Reagan has ridiculed "Wall Street," complaining the financial markets aren't showing support for his programs. If the administration is so convinced of the merits of its long-term plan, why does it care about the sinking stock and bond markets?
ANSWER: What concerns the administration primarily is the broad, psychological impact on the general population of gloomy news about financial markets. Most Americans do not follow Wall Street trading activity in any consistent way because they do not invest directly in stocks, bonds, commodities, government securities or other investment instruments that can be readily traded in open markets.
However, these Americans do turn on their television and radio sets in large numbers every weeknight. And when broadcasters get to "the business report," it normally consists of an all-too-brief summary of that day's financial markets plus a couple of other five-second headlines. In recent weeks these daily reports have concentrated on the decline in the Dow Jones average of 30 industrial stocks traded at the New York Stock Exchange, the most closely watched stock market index.
The selloff at the New York exchange has been dramatic: From a post-Reagan inaugural high of 1,024.05 in April, the Dow Jones average has plummeted as of last night to 840.94, the lowest level since early 1980. If inflation is taken into account, the current Dow average is not much changed from its decade-low point of 577.60 at the end of 1974. Whatever the reasons for this decline, it has been widely publicized, and the general impression is that investors have given President Reagan's program a vote of no confidence.
Administration leaders worry that, in reacting to news about the stock market, more Americans will become discouraged about the overall economic program and thereby damage its chances for success.
Q: So why is the administration picking on Wall Street?
A: It's a convenient and time-honored practice, catering somewhat to a general distrust of persons and institutions that manage money. Even before the first organization of New York stockjobbers (as brokers used to be called) was formed in 1792, James Madison was complaining to Thomas Jefferson about the role of Wall Street.
"In fact, stock jobbing drowns every other subject . . . The coffee house is an eternal buzz with the gamblers," Madison said in a letter dated July 10, 1791 about brokers who normally worked on the street curbs but moved inside coffee houses when the weather was inclement.
President Jefferson's administration was the first to be openly suspicious of what was regarded as a collection of rich merchants.
The streets of lower Manhattan island, where Wall Street is one of many narrow but short passages, really was the first center of this country's financial markets, when a market developed for early government debts. Some persons who held government securities considered them worthless and sold them to investors who gambled that there might be real value, thus creating the environment for an auction market of buyers and sellers that continues to this day. Wall Street brokers became the middlemen. When prices of government securities fell sharply in 1792, an early outbreak of speculative fever led to the nation's first panic.
Today, Wall Street continues as the home of the New York Stock Exchange, but financial markets have spread throughout the country. Investment firms that trade stocks, bonds, commodities and other securities are located in most communities, and they are linked by electronic and telephone connections to the New York exchange, the smaller American exchange in New York, commodities trading floors and stock exchanges in large cities and thousands of other brokers for over-the-counter buying and selling many miles from New York.
Q: Who are the winners and losers when Wall Street prices decline?
A: According to the New York Stock Exchange, about 30 million Americans have invested in stocks of corporations in their own names. An estimated 115 million other Americans have an indirect stake in the stock market because they are participants in pension programs or beneficiaries of insurance plans that invest in stocks. These large institutional investors have come to dominate much of the daily buying and selling.
Investors buy stocks for a variety of reasons, including speculation about possible short-term gains if prices rise and long-term gains if they stick with a stock that promises growth. For steady income over many years, bonds used to be popular. But on average, with stock prices practically stagnant for almost a decade, stock investors have not kept up with inflation. And record inflation has caused owners of long-term bonds to see their investments greatly reduced in value.
However, there is no such thing as an "average" investor. Many individuals and institutions have moved large amounts of money out of stocks in recent years to help fight inflation by taking advantage of higher immediate gains from high interest rates on government securities and mutual funds that invest only in high-interest, short-term securities. Others have been buying stocks at relatively cheap prices, guessing that increases will come in future years as the economy rebounds.
For every winner in the markets who buys or sells at or near the right time to take advantage of changes in trends, there is a loser. Persons who have taken the advice of investment advisers in the past -- to hold on to their investments for long periods of time without regard to volatile ups and downs of the market -- have been among the losers in recent years. But the biggest losers are probably American businesses that need capital and entrepreneurs with an idea that carries great risks, who need financial support. With stock prices at such low levels (the combined yield of the 30 blue-chip firms in the Dow Jones averages, measuring appreciation in stock value plus dividend return, is at a historic low of about 6 percent a year), companies find it more useful to buy their existing cheap shares than to try to raise money by selling new stocks. And the long-term interest costs of raising money by selling bonds have scared companies out of the bond markets. With these traditional methods of raising funds foreclosed, businesses either must borrow from banks and create major interest expenses or postpone expansion and modernization plans.
Q: So Wall Street activity does have a big impact on inflation and future economic trends?
A: No. As a barometer of where the economy is going, the markets often are right, but often they are wrong. To the extent that the markets don't work as a source of capital and become a gambling or speculative exchange, the climate for business expansion is weakened and inflationary trends may be aided. For the most part, however, the markets basically reflect thousands of individual investment decisions every hour, and it is difficult to describe any one factor as causing gains or losses.