Academic

The Obama Market: One Month Report

By Calvin Massey

The stock market nosed down again today.  That's hardly news.  Today's dive was attributed to continuing concern that the federal government will nationalize the banking system.  Yet, in one form or another nationalization is happening and will continue to happen.  Mammoth amounts of public capital are needed to keep the crippled financial system operating, even at a reduced level of liquidity.  I suspect that investors are worried more about the duration and effect of overt, frank governmental opertion of the banks than they are about the amount of public funds necessary to support the system.  The fear is that once bureaucrats take over the banks, they will make political, not economic, decisions and that these decisions will inevitably hamper recovery.  Moreover, the bureaucrats will be reluctant to leave.  A more general comment on this theme is this recent column by David Brooks. Does anyone seriously think that Citibank and Bank of America will be run better and make more prudent loans if they are run by Chris Dodd and Barney Frank?  Despite the attempts by the White House to deny any intent to nationalize the banks, investors appear unmoved.  They don't trust the declared intentions of the Obama administration and its Democratic allies in Congress.  Nor is it merely domestic investors who are skittish.  Foreign investment in long term US debt is in sharp decline.  That may be a temporary problem, but maybe not.  With a couple of trillion in bailout expenditures looming, the inability to borrow abroad means that we will likely put the printing presses into overdrive.  On January 20, 2009, theDow was at 7949; today it closed a shade under 7366.  Here's the chart for the last three months. 

Full post as published by The Faculty Lounge on February 20, 2009 (boomark / email).