Academic

The Obama Market: Update

By Calvin Massey

Last week I posted the one month report on the Obama market, but a correspondent has mentioned that the relevant comparisons ought to be with either or both of election day, November 4, 2008, or the last market day before President Obama's inauguration, which was January 16, 2009.  On November 4, 2008 the Dow closed at 9625.  Today it closed at 7115.  That's a drop of over 26% since election day.  On January 16, 2009 the Dow closed at 8281; today it is off over 14% from that level.   

It is true that this is not entirely the fault of the Obama administration.  Nor is it the fault of the Bush administration.  There is plenty of blame to go around: 1) The Community Reinvestment Act, a product of a Democratic Congress and President, designed to force banks to make loans to people whose ability to repay them was questionable; 2) similar pressure on Fannie Mae and Freddie Mac to buy and/or guarantee such loans; 3) the invention by Wall Street wizards of the securitized debt instrument, which allowed mortgage loans to be funded by investors in the capital markets, here and abroad, with the result that oceans of capital were available for these risky mortgage loans; 4) the uncoupling of loan origination from assumption of the risk of repayment, a phenomenon that was made necessary by securitization, with the result that loan originators could not have cared less whether the borrower had a snowball's chance in hell of paying back the loan; 5) the stupidity of borrowers to borrow 100% of an inflated appraisal on a house, thinking its value could only go up, and paying no attention whatsoever to the teaser introductory rate on their ARM that would soon expire, leaving them with an unaffordable mortgage payment; 6) the decision by Wall Street investment banks to become publicly traded entities, thus making it easier for those banks to become highly leveraged, because the risk of leverage was no longer borne by the bank's partners, but was mostly exported to shareholders who did not appreciate the level of risk; 7) the invention of the ridiculous credit-default swap, which lulled investors in mortgage-backed securities to think they had no risk; and 8) a general airy-headed assumption on the part of most Americans that we could go on forever borrowing from the Chinese and the Arabs to pay for the stuff we bought from the Chinese and the Arabs.

Full post as published by The Faculty Lounge on February 23, 2009 (boomark / email).