Just because the Dow drops 777.68 points…

Monday, September 29, 2008

… doesn’t mean the entire economy is having a bad day.  Sure, if you’re holding stock that’s gone down, you’re net worth is lower – but then the market has a long history of coming back.

What it could also mean is that a lot of people were betting on the fact the government was getting ready to spread around some serious money.  That didn’t happen today and so lots of people got nervous and assumed that everyone else would get nervous, so they sold to get out ahead of the drop, and then the other people saw the prices falling and said, “I knew it!” and they sold…  Hey, it’s a speculative market.  What did you expect?

Actually, stock prices are driven by two factors:  real changes in the fortunes of our publicly held companies, and speculation.  Some of the speculation is about profits and potential growth, but a lot of it, especially in the context of wild ass (pardon me) doomsday language coming out of the Administration, is just pure speculation, plain and not so simple.  (Keep in mind that some people on Wall Street and elsewhere in investment banking make as much or more money during downturns than upswings.  Even among we ordinary people, who out there on isn’t wondering, “You know, honey, maybe this would be a good time to buy?” …”Don’t be ridiculous. Not until we redo the kitchen.”)

The point is, nothing has happened to the real component of our economy in the last few hours.  Prices will go back up, eventually.  They always have.  This is not the end of our economy as we know it.  Not even close.  (Citicorp helped out Wachovia today, and they did it all by themselves without government assistance.)

I’d like to personally ask Congress to avoid being distracted by stock prices, whichever way they’re moving, and focus on defining the extent of the current problem and evaluating alternative solutions.  To borrow a phrase from James Carville of the Bill Clinton campaign, “It’s about the economy stupid,” which is something much larger, much more powerful, much more deserving of your attention, than the momentary fluctuations of a very, very speculative market.

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2 responses to “Just because the Dow drops 777.68 points…

  1. I agree that the bailout may not be the best solution and that other approaches may offer greater reward with less risk. And I also agree with your piece in that the stock market isn’t the be all end all of the economy. That said, there is definitely a crisis. An economic crisis? Maybe. A crisis of confidence? Maybe. Or more likely one that caused the other.

    Let’s remember a couple of weeks ago when AIG and Merril Lynch went by the wayside. As trading continued on that disastrous day (I think it was a Thursday), shares of Morgan Stanley and Goldman Sachs were down something on the order of 30-40%. More importantly the bonds of these “relatively” healthy companies traded cheaper than most junk. All of a sudden the market expected out nation’s (actually the world’s) premier investment bank to fail. And when the market began to expect it, it was soon a reality. Sometime there after, Ben Bernanke called all of the major investment banks and told them to “chill out.” To stop spreading rumors, stop shorting stock, etc. If not, disaster was imminent. It was then that fed leaked word about some kind of toxic-asset removal program. The stocks rallied, yes. But more importantly a solvent, premier institution (Goldman) wasn’t wiped off the map because of a panic. The effect of that would have been disastrous. That’s what I call a crisis.

    Taxpayer money is already well on the line. We own most of AIG, have our necks on the line in the Bear Stearns deal, and even the Wachovia deal has the taxpayers potentially footing a several hundred billion dollar bill. The private sector isn’t handling this crisis alone. Wachovia was experiencing the early signs of a bank run (let’s call it a Wamuuuuu!). It reached out to potential suitors. Wells Fargo was about to bite but then took a final look over the banks and ran away faster than Usain Bolt. Citi stepped in and said the same and it was only when the FDIC brokered a deal, whereby Citi can take only a $42 billion hit from Wachovia’s several hundred billion dollar loan portfolio that a deal was done. Let’s face it, JP Morgan, Citi, and Bank of America can’t keep gobbling up every institution that is teetering. And by the way, would we want them to?

    To solve the crisis we need to restore confidence. Is the bailout the best plan, I have no idea. But a crisis there is no doubt. Check out GE’s one year bonds. It has a historical AAA rating. I think they are trading somewhere between 7-8%, while one-year treasuries are trading at 1%. In other words a whole bunch of people think that there is a reasonable chance that GE will fail within the year. That’s absurd and we need to change their minds!

  2. Hi. Good stuff, Blue Jay. Always good to hear from you.

    There’s been so much government involvement in all this, it’s hard to differentiate between what’s real, what’s rumor-driven or the result of government interference. Wachovia, for example, was in the process of merging with Morgan-Stanley, only to have the rug pulled out from under that transaction by the government’s decision to turn Morgan Stanley and Goldman Sachs also, if I remember correctly, into banks. Besides the effect upon the banking community, Wachovia is now without a plan and is absorbed by CitiGroup. In the meantime, all this is happening in a panic mode without taking the time to understand the short-term and longer-term recovery value of the real estate backed loans that have failed. By the way, CitiGroup didn’t do the acquisition out of patriotism. It stands to make billions.

    The point is, I get the feeling that our government — Bernanke included — is proceeding on a knee-jerk basis to patch this and that on the fly. It’s a dangerous process which could very well be doing more harm than good, feeding off hysteria that its reactions are themselves helping to create — while being spoon fed along the way by Wall Streets’ best who make billions playing Washington for all its worth.

    Nobody really thinks GE is going to fail. What you’re seeing is insiders making a fortune leveraging panic among less sophisticated individual and institutional investors.

    It’s a mess alright and, you’re right, it’s the mess itself, not the specific problems in this or that market, that’s the heart of the crisis in which our government — and especially Secretary Paulson — is the leading instigator.

    Stop back again when you have time.


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