To the contrary, scarce or expensive capital helps filter out bad ideas and improve imperfect ones. Great businesses— Microsoft , Dell, Hewlett-Packard , Walmart —were started with virtually no external funding or breakthrough ideas. Their founders relied on their wits and hustle until they found the products and technologies that could propel rapid growth.
.. Conversely, investors can do great harm by oversupplying capital to fashionable businesses that haven’t found a profitable trajectory. “You can call it the new economy,” says a skeptical CEO. “But I can’t take money from shareholders and give it to customers and call it a business.” Once indiscriminate investment has bloated a profitless venture, changing direction is almost impossible, as was evident when the internet bubble burst.
Cheap and abundant capital can even wreck mature companies by encouraging willy-nilly expansion. The origins of General Electric ’s recent implosion go back, according to a canny financial observer, to the low-cost capital that Jack Welch’s star status secured for the acquisitive conglomerate during his tenure as CEO from 1981 through 2001.
We should rejoice, not grieve, if market volatility forces users of capital to pay more attention to its cost, and improves the quality of their investments. Besides, stock markets will fluctuate, like it or not, as J.P. Morgan famously said. Share prices reflect not only current profits, but what investors expect to receive over decades to come. But how much profit a company will earn—and sensibly reinvest or pay out as dividends—is a wild guess. Even when Apple enjoyed unquestioned dominance in its markets, investors sensibly anticipated good times wouldn’t last forever. But they couldn’t reliably quantify this anticipation. As a result, the company’s stock price fell by nearly half in eight months after mid-September 2012—and then doubled in under a year and a half. Now Apple stock has lost a third of its value from its early-October peak.
.. Former Fed Chairman Paul Volcker, who was unconcerned about “surprising markets,” once asked: “What’s wrong with making traders lose money from time to time?” Mr. Powell faces different problems than Mr. Volcker did. But asserting the Fed’s independence from stock-market hostage takers would serve the nation well.