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MARKET REACTIONS.
Karen Tumulty twitters, "GOP Congressman Connie Mack is on CNN calling on Geithner to resign. Message undercut by screentag showing Dow up 288 pts."
I'm no Connie Mack fan, but I'm not comfortable letting the Dow's reaction stand as the arbiter of success or failure. Dean Baker wrote a prescient post on this subject last night:
Suppose Timothy Geithner announced a new program that would tax every family $10,000 dollars and give the money to Wall Street banks and hedge funds. (Any resemblance between this hypothetical program and real world programs is purely coincidental.)
We would expect the stock of Wall Street banks and other financial sector firms to rally based on the anticipation of higher profits. Is this good for the economy? It's not in any obvious way. After all, we can always tax people more to raise profits for Wall Street, but that doesn't help the economy.
Reporters should remember this when assessing Wall Street's response to the plan proposed by Geithner for buying bad assets from banks. The larger the subsidy, the better the news for Wall Street. It's not clear that most of the public should be happy about seeing more of their tax dollars going to Wall Street.
There's much that enters into a stock market rally, but little is more directly correlated to enthusiastic trading than the prospect of making money. And no one doubts that this plan offers private investors an almost historic opportunity to make money. It may be that the plan is also the correct salve for the economy, or it may be that the plan is a good opportunity for investors that will fail the broader economy. But when you're offering this direct of a subsidy to Wall Street, I don't know that you can intuit much from Wall Street's reaction besides the fact that they're thrilled with the subsidy.
COMMENTS (7)
I suppose in that case the merits of Mack's call for Geithner's head come into play. But nothing in your post really addressess what Tummulty actually tweeted, that the message is undercut. I think it does stand to reason that a day that a major initiative of the Treasury is greeted by a 4% rise on the Dow in the middle of a bear market actually is a bad day to call on the Secretary to resign, regardless of the virtues of the action for the underlying economy. Do you disagree with that?
Posted by: Mike | March 23, 2009 11:55 AM
Dean is right, but for the record, the market gains are strongest in financials (suggesting that, yes, part of this is just that they're getting a subsidy), but that the gains are also strong across all sectors (suggesting that maybe traders believe this thing is actually good for the economy).
Posted by: Joel W | March 23, 2009 12:13 PM
one would suspect that financials would rise when you remove the threat of nationalization while simultaneously agreeing to take the shitpile off their books
Posted by: amazing | March 23, 2009 2:30 PM
Four animals:
Bulls: Those who will make money on a market rally (bear market/dead cat rally, market turnaround/recovery rally) or from longer term investing in financial stocks (and bonds) free from the debts that threaten the future of the financial guys.
Bears: Those who think this won't work, or that saving wall street isn't saving the economy.
Pigs: Those who literally care less about the future and focus on making lots of bucks from slaughtering the sheeple regardless of consequences.
Sheeple: The taxpayer, the retired person, the student with no prospects, the folks displaced from their careers and thrown on the pile of human waste as sacrifices to wall street greed.
Posted by: JimPortlandOR | March 23, 2009 3:43 PM
Baker's point would make sense if investors were only jumping on financial stocks.
But that's not happening. As of this moment, here's today's equity increases by sector:
Basic materials: 5.8%
Capital goods: 5.95%
Cons. cyclical: 6.44%
Energy: 7.01%
Financial: 8.99%
Healthcare: 2.79%
Services: 4.92%
Technology: 5.32%
Transportation: 6.42%
Utilities: 2.16%
It's a broad-based rally, suggesting that -- for today at least -- investors are anticipating higher profits across the broad economy.
Posted by: santamonicamr | March 23, 2009 3:55 PM
What this proves is that the only focus of government plicy these days is to please Wall Street. If Wall Street is up, it was a success, otherwise a failure. The common good is definitley NOT a consideration of our economic policy executioners. Can you think of a more devastating indictment of the Obama administration?
We should rememebr that all the BS about bank bailouts started when Wall Street tanked on the day Lehman failed. From that moment on, trillions have been wasted to prop up Wall Street. It hasn't worked, by the way, but that is secondary. The real point is that the Dow is the wrong metric of economic sanity, and keeping the stock market from crashing is the wrong objective. We are wasting all this money on fighting windmills instead of doing something useful that would actually create benefits for people.
Posted by: piglet | March 23, 2009 4:45 PM
Live by Kudlowism, die by Kudlowism; conservatives who were jumping down Obama's throat three weeks ago blaming the first month of his presidency for large losses in equities are suspiciously silent today (save for Eric Cantor, who lacks the ability to stop talking). We shouldn't give Obama credit for today's rally, but it's worth pointing back to critics who pointed to it for other reasons in the recent past to humiliate them now.
Posted by: Zach | March 23, 2009 11:10 PM