The Corner

The Great Equalizing

Shouldn’t the Left be at least a little bit pleased with the stock market slide — is there a better way to equalize wealth in this country than to destroy a lot of it quickly? According to David Malpass this is actually a theory making the rounds:

It’s easy to find reasons for the continuation of the equity market sell-off since the inauguration — the Fed shrank its balance sheet and stopped offsetting the credit freeze, devastatingly bad fiscal policies, the accounting system’s assertion of nationwide insolvencies (though almost all loans are being paid and banks, households, and insurance companies have huge cash balances), and the four-month technical selling cycle into mid-March graphed in our earlier pieces.

A dark side of the sell-off is the buzz (surely false) that the Administration sees lower equity prices as part of its wealth-redistribution goal.  Equity ownership is very progressive (ownership goes up with incomes), so the equity sell-off is rapidly narrowing the wealth gap between rich and poor (and the geographic wealth gap between New York and Washington.)

This can’t be Washington’s true motivation, but it’s hard to find another explanation for the Administration’s inaction — no uptick rule, a still-out-of-control CDS market, lax enforcement of naked short-selling, and Washington’s acceptance of the continued drain on regulatory capital from mark-to-market, momentum-based bond ratings, CDS market practices (see the market’s destruction of GE and life insurers).

As the equity market sinks to new lows, there’s an almost palpable feel of money and power shifting from the longs (dumb optimists) to the shorts (savvy realists.)  The problem is that jobs and capital formation depend on the longs, as do pensions (state, local, union, corporate) and future social security payments. 

We maintain our view that the collapse of the U.S. economy and financial markets can be stopped, and probably will be, but not with Washington’s current policies.