From a Q & A with Roger E. A. Farmer, author of How the Economy Works: Confidence, Crashes and Self-Fulfilling Prophecies:
Q: Why does the stock market matter to every American?Visit Roger Farmer's website.
Farmer: In the 1930s, stock market wealth was much more concentrated than it is today. Middle and low income Americans held their savings in banks and it is for that reason that the collapse of the banking system in the 1930s was so devastating. In the 21st century, most middle class Americans own pension plans that invest in the stock market.
US wealth is roughly two-fifths houses and three-fifths factories and machines that are indirectly owned by households through their ownership of financial intermediaries such as bank accounts and pension rights. When the stock market plummets but recovers quickly, as it did in 1987, the effect on private households is minimal. When the stock market falls, as it did in 2000, but house prices keep rising, the effect is again small since households can borrow against housing wealth to maintain consumption. When houses and stocks fall together as they did in 1929 and again in 2008, the effect can be devastating.
Q: From an early age, the American student learns the basics of math and science, but the fundamentals of economics are often not part of his or her core curriculum until college. Do you think economics should be a core component of a student’s primary education?
Farmer: Economic literacy is...[read on]