The Campaign Spot

Why Are the Markets Falling?

Jonah and Ramesh have taken issue with aspects of today’s E. J. Dionne column. I would shift the spotlight to another statement, of note on a day when the NASDAQ dropped another 2 percent and the Dow Jones Industrial Average dropped another 80 points:

Moreover, some of the criticisms are nonsense. Wall Street conservatives — well-represented on the financial cable shows and the Wall Street Journal’s editorial page — are arguing that the stock market is collapsing because Obama wants to institute a relatively modest set of tax increases on the wealthy, starting in 2011.

Well there are the tax increases, yes – not merely income, but increasing capital-gains taxes, and taxing hedge-fund earnings as income, not as investment returns. But there are several other reasons for the investing class to be worried about the future course plotted by the Obama administration, and for them to buy (rarely) and sell (frequently, and at a loss) accordingly:

1. Going back to the Bush administration, the Fed and the Treasury Department have thrown massive amounts of cash at various financial institutions. Few of them seem to be doing much good; AIG is on bailout round number four. (On a related topic, the lack of any warm bodies working in any deputy, assistant secretary, or undersecretary role has grown from an obscure topic for a Campaign Spot post to Exhibit A in the case that the Obama team isn’t up to snuff. Much like the lack of top staff at the RNC, this issue goes away as soon as there are qualified warm bodies in those slots.)

2. Part of our economic mess comes from millions of Americans having put their faith in illusory wealth, buying homes they couldn’t afford and believing they could sell at a profit at any time. Yet that day is a long way off in most parts of the country:

Across the nation, 19 million houses and apartments — nearly one out of every seven — are vacant, the highest percentage since the 1960s. But only about six million of those homes are for sale or for rent. That means millions more could still flood onto the market, depressing prices further.

3. As I wrote earlier, the Obama administration offers some signs of being protectionist, and even if the president were a fervent free-trader, many other nations are responding to the global slowdown by talking up trade restrictions. This slows their economic growth, which means they can buy fewer products and services made in America. This year looks rough, and improvement in 2010 is not certain.

4. The deficit is exploding this year, and all of Obama’s reductions assume rapid economic growth starting next year. Seems like an overoptimistic plan right now.

5. The administration does not seem receptive to alternative ideas, since they so quickly attack critics:

Newly minted Enemy of the State Jim Cramer:

When I somewhat obviously and empirically judged that the populist Obama administration is exacerbating the crisis with its budget and policies, as evidenced by the incredible decline in the averages since his inauguration, I was met immediately with condescension and ridicule rather than constructive debate or even just benign dismissal. I said to myself, “What the heck? Are they really that blind to the Great Wealth Destruction they are causing with their decisions to demonize the bankers, raise taxes for the wealthy, advocate draconian cap-and-trade policies and upend the health care system? Do they really believe that only the rich own stocks? What do they think we have our retirement accounts in, CDs? Where did they think that the money saved for college went, our mattresses? Do they think the great middle class banks at the First National Bank of Sealy and only the wealthiest traffic in the Standard & Poor’s 500?”

6. The president himself may have exacerbated investors’ doubts in his responsiveness with comments that inaccurately described the developments in the market since he took office.

Cramer, again:

They exacerbated their insensitivity when President Obama proclaimed that he wasn’t worried about the averages, dismissing them as traffic polls that go up and down in the short term. Ah, if only they went up occasionally and not down endlessly then I would believe the President’s logic.

7. The markets dislike many things, but high on the list is uncertainty. I continue the drumbeat on Obama’s “expiration dates,” but the record is accumulating that what the Obama administration says one day may not be policy the next day. Will the administration really be lending $1 trillion to hedge funds and private-equity firms? Will the automakers get another bailout, or will one or more of the Big Three be left to bankruptcy? Is the mortgage assistance really going to go to second homes and investment properties after earlier pledges that it wouldn’t? Is nationalization of the banks coming down the pike, or will the current denials hold?

On those issues and others, investors really don’t know what kind of decisions will be coming from this administration in the coming year.

The market’s plunge since he took office is not all Obama’s fault, but he’s earned his share.

To refresh, on Election Day, 2008, the Dow Jones Industrial Average closed at 9,625.
On Inauguration Day 2009, the DJIA closed at 7,949.09.
Today the Dow is 6547.05.