Kudlow’s Money Politics

Government Announcements Lead to Falling Stocks

Stocks plunged again today, following the latest episode in the Treasury bailout of insurance company AIG. The Dow closed down about 300 points.

There’s a pattern here. Stocks fell last Friday following the latest bailout chapter for Citigroup. And stocks fell last Thursday after the release of Obama’s budget, with its breathtaking expansion of government and its war on entrepreneurs, investors, banks, and so on. Stocks also fell after Obama’s address to Congress, and they collapsed after Tim Geithner’s misbegotten financial speech. So you don’t have to be Sherlock Holmes to see a pattern of government announcements leading to falling stocks.

The AIG business is just as weird as the Citigroup deal. In return for another $30 billion or so — the third rescue in five months — AIG sort of has a restructuring plan. But there are no specific performance measures, no specific targets, and absolutely no clarity as to how AIG will pay off taxpayers or when it will get off the government dole.

There are ideas about AIG getting rid of some its operations, but nothing specific. And as is the case with Citigroup, the taxpayers get a worse deal today than they had yesterday. Since the AIG common stock doesn’t pay a dividend, the taxpayer loans are not even serviced properly. Considering that the Citigroup deal had even fewer specifics than the AIG plan, it’s clear that the government is driving a soft bargain rather than a hard one.

Actually, even the GM bailout is looking better to me in relation to the Citi and AIG deals. At least the carmaker has specific items it is working on, such as union benefits, the debt swap, and the VEBA healthcare trust. None of these are binding. And GM will probably get a lot more money from Uncle Sam, whether it meets its targets or not. But at least the carmaker has a more specific gameplan than either Citi or AIG.

Another point worth noting today is that there is some relatively decent economic news, and it seems to be going unnoticed by the stock market. Consumer spending and income went up in January. In fact, after tax, inflation-adjusted income has risen for five straight months as a result of the energy plunge and the inflation tax-cut effect. Plus, the ISM manufacturing index was basically stable in February — just a few points above December — with the production component now above the fourth-quarter level.

We are still in a tough manufacturing downturn, but at least there may be some stabilization occurring.

Meanwhile, the G-20, in its report prepared in advance of the April summit, says “Neither monetary nor fiscal policies will work unless and until the blockages in the supply of credit are resolved.” In other words, until Treasury man Geithner can muster up a credible plan to relieve the financial system of its toxic assets, markets may not ever buy into a recovery scenario. But then you have to ask this: If there is agreement on the need to relieve the toxic-asset problem, why is President Obama raising taxes on the very private investment funds that are expected to buy the toxic assets in the first place?


Larry Kudlow — Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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