Jon Moen, professor and president of theEconomics departmentat the University of Mississippi, analyzes some of the current financial conditions in the midst of the COVID-19 pandemic and provides insight into the state of Wall Street during an unprecedented plunge, which according to it is not comparable to the Great Recession of 2008.
Moen received his doctorate from the University of Chicago, where the economics program is ranked in the top percent of the country. He joined the Ole Miss faculty in 1990 after working as an economist at the Federal Reserve Bank of Atlanta, one of 12 regional branches of the Federal Reserve System, the country’s central banking system.
Moen is the author of over 35 scholarly articles. His most recent study, “How JPMorgan Chose the Winners and Losers in the 1907 Panic: Resolving Unfavorable Selection and Restoring the Surplus in a Frozen Deposit Market” was accepted for presentation at the 2020 Annual Conference in theEconomic history societyat St. Catherine’s College, Oxford University.
Q: Let’s start with some ABCs. What is the difference between an action and an obligation?
A: An action is a share of ownership of the future profits of a business. When a business is profitable, the shareholder obtains a share of this profit. A bond is a loan to a private enterprise or to a government entity made by the bond holder.
For most people, income from a bond is made either by collecting interest on the loan bond, or by selling it for more money than you paid. Most people’s financial investments, like a pension fund, are a mix of stocks and bonds.
Q: How do you know if you are making money from your stocks?
A: There are three main American indices (indices) that take the temperature of the New York Stock Exchange and other stock markets. These are the Dow Jones Industrial Average, the Standard and Poor’s (S&P) 500 and the National Association of Securities Dealers Automated Quotations (NASDQ).
Q: How do these indices differ from each other?
A: The Dow Jones measures the future profits of 30 companies, each representing a major sector of the American economy. This is why it is called the “industrial average”. For example, some of the Dow companies are Exxon Mobile (energy), Walt Disney (entertainment), McDonald’s (fast food), Microsoft (technology) and United Health (health care), this is just a sample.
The S&P 500 is an index of a diverse group of 505 small businesses, from BorgWarner, which manufactures and supplies components for the automotive industry, to companies that sell real estate.
NASDAQ is the most recently created index. It measures IT commerce. There is no “place” where these exchanges take place, like the parquet of the New York Stock Exchange. And there is no one who physically trades stocks. Everything is done by computer at high speed.
Q: Why are there large fluctuations in the stock market, for example, when many investors buy or sell their shares at the same time?
A: It’s a bit like being in a grocery store and seeing a lot of people buying a certain thing. It makes you think, “Maybe I should buy this too.” Investors watch what other investors are doing, and they don’t want to be excluded as a buyer or seller, so they start doing the same thing even if they don’t knowWhythey’re doing it. It is the behavior of the herd.
Q: Many people now compare the stock market losses to the 2008 crash. Is the current financial situation just a repeat of that?
A: No. These are two very different situations. Now, there is a specific and identifiable reason for the decline in the market: the expectations of a decline in profits for businesses and individuals because COVID-19 puts them in bankruptcy. Businesses are closing because of something completely out of their control; they are not just behaving badly or making bad decisions as they were in 2008 when they created layers of derivatives based on mortgage-backed securities.
This pandemic does not happen on paper. It’s a real thing in our environment.
Q: What is the role of government when the stock market goes south?
A: The government identifies the causes and sees if it can do something to mitigate or mitigate the effects of the losses.
Q: Is there a stock market that resets to zero so that stocks no longer have value?
A: It did not happen even during the Great Depression. It could happen theoretically, but it never happened.
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