If someone walks into a pub and declares their jacket to be worth £300, but everyone else declares it to be worth a mere £50 - has £250 been wiped off the economy?
It's an interesting question, because today the Guardian website squeals that "World stock markets tumbled sharply again on Thursday, wiping nearly £50bn off the value of Britain's biggest listed companies". Further down the article we learn that in fact it's worse: £110bn has been wiped off in the past week!
Whoops, that is careless! Britain's biggest companies have lost £110bn! But it's nonsense. Going back to the someone in the pub with his '£300 jacket'. Let's say he's a scam artist this time. He walks in and says here's my £300 jacket, and has planted a couple of his mates in the pub to talk it up, say how lovely it is (reminiscent of the Emperor's New Clothes isn't it?) and fool some mark into paying £300 for a £50 coat. If the mark buys, then he has lost £250. That is because the asset has a clear value: £50.
Back in the stock market, this fluctuation between confidence and panic would not be a problem if it was only one rogue scam artist - the problem for the stock markets is, this is the system.
It is for this reason that seemingly sensible, educated, intelligent people panic when anyone points out the Emperor's flies are undone, let alone that his willy is hanging out. So when AAA rated CDOs (£300 jackets) are pointed out to be near junk (£50 jackets) the system seizes up in the same way that the mark in the pub won't buy from the scam artist again.
On such occasions these same great brains (who never predicted this could happen) start using infantile playground language: warning against 'scaring off the confidence fairy' or 'talking down the economy' - as if a sound economy would collapse because someone says something negative. In the same way that most of us aren't reduced to gibbering wrecks because someone tells us 'you're a git', sound economies don't collapse because of a few words.
Of course in 2008 economies started collapsing for the very real reason that they were based on the valuation of scam artists. Governments around the world stepped in and guaranteed much of the scam artists' nigh on worthless assets.
The question is will the government (a la the mark in the pub) be fooled twice and bail out or will it learn from its mistakes and nationalise, control and operate their assets in the public interest - maybe ven taking on the mafia behind the scam artists (the bond markets)?
For those of a left-wing disposition shouldn't we be asking,'do we need a stock market?', 'shouldn't we shut it down?', when it simply serves to create destabilising panics and to distort the economy.