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Could Facebook Destroy the US Economy?

The massively popular social network's IPO has shed light on a trend among investors that could foreshadow another economic crash, like the ones experienced in 2000 or 2008.

Yesterday, Facebook released its IPO to the general public. Trading began at $38 per share. Facebook’s share price has since fallen, and as of this writing is currently trading at $30.96 with no end in sight. Paul B. Farrell, writing for MarketWatch, claims that Facebook could be the harbinger, if not the cause, of the destruction of the US economy, worse than either of the crashes in 2000 or 2008.

With the number of public companies declining over the years, from an average of 311 IPOs annually prior to 2000 to an average of 99 in the past decade, each IPO has a greater effect on the economy as a whole. Facebook is just a symptom of a trend among investors, which behavioral science and psychology has labeled the “psychology of denial.”

What is the psychology of denial? In a nutshell, it’s the inability to see problems or warning signs until well after the bubble bursts. After months of hype surrounding Facebook’s IPO, many investors were convinced that if they didn’t jump on board immediately, they’d miss out and be devastated, as many investors who passed on Google’s IPO were, and no amount of pointing out the risks and warning signs will change their minds.

Farrell says that there are four main reasons for this mindset among the millions of small-time, personal investors. First, investors cling to the idea that they are rational, rather than irrational, emotional, ill-informed investors. Second, Americans are optimistic people no matter the odds, but optimism is an investor’s worst nightmare. Third, Wall Street loves small-time, “Main Street” investors, because irrational, uninformed, optimistic investors are easily manipulated investors. Lastly, Americans are, by nature, trusting people, and want to believe that Wall Street is telling them the truth, though most of the time that isn’t the case.

This causes a mindset among investors eerily similar to the dot-com bubble of 1999, with Facebook being too big to fail, continuing to grow indefinitely at insane rates. One Chicago lawyer noted that, in order for Facebook to reach Google’s level of sustainability, they would have to grow at more than 40% year after year for five years, nearly impossible for any business to do.

The problem with Facebook is that it’s “too big to succeed.” Its cash value is currently in the pockets of the Facebook insiders that have become overnight millionaires. The only value the company has right now is in the minds of its investors, and one slip-up in the company’s revenue will cause the stock price to plummet. With so many investors sinking money into Facebook, this could spell the beginning of another massive crash as thousands of people lose big on the social network.

Original Source: Market Watch

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