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Dean Baker on the Facebook IPO
http://www.nationofchange.org/if-facebook-falls-its-face-1337774434In the last two decades the economy seems to have created many openings for people whose primary skill is lifting money out of other people’s pockets, not in doing anything productive. Wall Street is the center of such practices.
Many of the country’s biggest earners run hedge funds that specialize in computer algorithms that allow them to front-run large trades. This means that if a major investor is about to buy a large amount of a company’s stock, these high-speed traders can buy shares ahead of them and then resell the shares second later for a profit.
In effect, this is a form of insider trading. It is very profitable for those who can do it successfully, but it provides no benefit to society. It actually harms society and the economy since it reduces the return to honest investors, making them less willing to put their money in the stock market. Wall Street has many other tricks, most notably being able to rely on the no-cost government insurance provided by the implicit too-big-to-fail guarantee.
But today’s story is not Wall Street, or at least not directly Wall Street, today’s story is over-hyped technology companies. Even if Facebook ends up losing much of its value in the years ahead, it is virtually certain that Mark Zuckerberg and other inside players will remain incredibly wealthy individuals. After all, Steve Case is still one of the country’s richest people even though his former company, AOL, could be purchased for pocket change today.
The wealth that these people command was not created out of thin air. It came from suckers who bought the hype. With Steve Case, the big suckers were the top management at Time-Warner. They effectively sold the largest media company in the world for almost nothing, giving away most of the company’s shares in exchange for AOL stock. Shareholders who took the deal and did not immediately dump their AOL shares lost more than half of the value of their holding
