Monday, 8 June 2009

The moral dimension of the stock market

There’s something immoral about sitting on your butt and making a lot of money as against working your socks off and making less money. I find it difficult to reconcile to this.

The Indian stock market has exploded in the last five months. Its gone up by 50%. Popular perception is that its because of the euphoria of the elections throwing up a stable government, which was unexpected. But as Swaminathan Anklesaria Aiyar notes in his very well written article in the Times of India, the rise has little to do with the elections. Global money which had retreated shellshocked into US gilts is pouring out again into stock markets. Some $ 20 bn has gone into emerging markets since April. China’s stock market has gone up by 57%, Russia by 63%, Brazil by 60%, Argentina by 45%. India is not alone, by any means. And no wonder, the rupee is strengthening again, if there’s so much dollar inflow.

I think, as a society, we have learnt little from the financial crisis, we are right in the middle of. We are feeding the same boom and bust again – I am sure Madras maamis are sitting in front of CNBC in India and day trading again.

It is quite likely that if you have any decent investments in the stock market, you would have made much more money these 5 months than by working hard at whatever job you are doing. In fact if you have some significant investments in the stock market, its very likely that you made much more money doing nothing with it than in virtually any year of your working life, where you slave unthinkable hours. This just cannot be morally right.

This is the problem with the financial sector. It rewards ridiculously for resting your backside (and calling it risk taking). An honest day’s toil, whatever your job might be, is far less rewarding than sitting idle and gambling. What is true for the individual, is true of corporates as well. An investor who does nothing more tiring than pressing a button to buy a share, can make more money than the company he buys the shares of makes by producing and selling a real product or service. Sure he can lose his shirt as well. But then governments are there to bail him out.

I am not a hard core leftist. On the contrary, I am a rabid fan of capitalism. Financial markets have an incredibly important role to play in raising capital and without these markets, we would be back to stone age. But that doesn’t prevent me from having some moral issues with it.

The reward equation for passive investment, or worse gambling, is completely wonky. What does it say of our society that rewards passive investment many times over productive work.

Can somebody shed light on the morality of all this please.


Ajay said...

Hi Ramesh! This post, once again, incited me to comment back :)
I think, as do you, that the financial markets are as fair and as perfect a manifestation of a market as can be. It's purely driven by demand and supply and intrinsic value of the goods. Of course, there are some deviations from the normal due to speculative action. The reward for sitting on your derriere and doing nothing while the market shot up 50% is directly proportional to the penalty that several people would have received during the nauseating dive of the sensex from 21000 to 8000 (and no, the retail investor does not get saved by the government because he's already been stopped out of the market with rising margin calls. It's the big investors that benefit from the bailout packages and I too agree that that's not the way it should be. Hence, antitrust measures). So in a way, it's about being in the right place at the right time - which extends to not just financial markets but anything and everything in life. About working your socks off and making less money - the same holds true even for migrant labour across India. They work certainly harder than most of us. Be it rain, sun or fog, they need to make their daily wage if they have to sustain themselves and their families. So, why crucify the traders / investors for something that is inherent in a non-utopian society? It's not like the top management of the former bulge bracket banks didn't know what sub prime lending practices were going on. Only when the crap hit the fan, they needed a scapegoat - the traders.
About the economic booms and busts, that's the way economies behave. Booms and slowdowns are inherent. And the stock markets over reacting to them is also natural. As long as mistakes like subprime crisis and mismatching of incentives and targets is not repeated, the natural booms and slowdowns of the economy can be survived. And let the risk takers take the risk and be suitably rewarded or punished - as the markets see fit.

lafemmereva said...

huh!! all abt working smart versus working hard!!! I say!!

rads said...

I second reva on this, the smarter you are the more you earn by relaxing.

Anonymous said...

Much as i wanted to, i never got around to learning the intricacies of a stock market and its functionings.. and this post does warrant 'experienced' comments. With whatever little I know about the stock market, I feel its rewarding the hugest risk taker, i feel taking a calculated risk is an be able to know which button to push requires a lot of thinking.. so i guess its only right to reward it that way. - AJCL

Ramesh said...

@ reva and rads - Not sure if sitting on your backside is a manifestation of being "smart" :)

@ Ajay - Very logical and beautifully argued comment. I completely agree with your economic rationale. My problem is with the morality. I have no problem with different professions yielding different rewards. I would argue that venture capitalists who back an idea and let a business be built must be rewarded disproportionately. But what about the "passive investor" or the punter. I don't grudge him his gains (or losses), but there is something that doesn't appeal to my "bleeding heart" to say by doing this, than by doing "productive work" you can earn a lot more. And I don't buy the argument that when market goes down the punter looses - governments always intervene when markets go down. Part of the reason why markets are going up is because governments world over have released incredible sums of money into the economy.

Your comment has been one of the best ones I have receieved. Please comment more ! Or better still start blogging !!

Ramesh said...

@AJCL - yours is a very "experienced" comment - very few people actually "know" the stock market. I know the rewards relate to risk, but I am stuggling with its disproportionate nature. The economics is irrefutable. I am just struggling with the moral dimension - such thoughts come in old age !!

AMIT said...

Good explanation about stock market.

Finance Bookmark

Ramesh said...

Thanks Amit for visiting and commenting.

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