March 11, 2009

The Problem Remains the Banks, Not the Dow

[Click image for full size. Shaded portion denotes the Obama Administration.]

As the economy continues to flounder in the wake of George Bush's presidency, a new meme has been trotted out by the Republican opposition: the current state of the Dow Jones Industrial Average - which has continued to shed value despite what many appear to believe are mystical powers associated with the inauguration of a new chief executive - is Barack Obama's fault. The conservative echo chamber has picked it up, and the dishonesty inherent in this position was perhaps best exemplified in an opinion piece by free market ideologue Michael Boskin at that institution of fact-free blather, The Wall Street Journal editorial page.

Indeed, Mr. Boskin’s article hit all of the now-traditional high notes: spending in times of recession denies the lessons of history (studiously ignoring the fact that spending within FDR’s New Deal dug America out of the Great Depression); other countries have lower corporate tax rates than the United States (refusing to acknowledge the fairly important - if inconvenient fact - that most corporations pay no income taxes at all); etc., etc.

To be frank, the idea that President Obama, who has been in office for 50 days as of this writing, is responsible for the financial bloodletting on Wall Street is, simply, ridiculous. The downward trajectory of the Dow began long before he took office (see graph above), and as Dan McCrum from the Financial Times notes in this video, it is the economy driving the state of the stock market; not policies that have been in effect for less than seven weeks.

Now, saying that President Obama is not responsible for the stock market is not the same thing as saying that he has done everything he can to improve the economic conditions that underpin it. To be sure, he was successful in pushing through a stimulus package that will help soften the recession’s bite to some degree, but in my opinion, he has moved too cautiously with regard to the mess in the financial sector. The stock market only thrives when certain baseline assumptions are considered reliable, and in this case, the health of some of the country’s largest banks - a necessary baseline assumption if ever there was one - remains in doubt.

Piecemeal relief for these staggering financial behemoths hasn’t worked, and pursuing that course of action is just throwing good money after bad. A broad cross-section of public figures, from Nobel Prize-winning economist Paul Krugman to former Chairman of the Federal Reserve Alan Greenspan to rightwing mouthpiece Senator Lindsey Graham, agrees that the nationalization of insolvent banks needs to be on the table. As I wrote in What Really Drives the Debate Over Regulation, the Obama Administration appears strongly resistant to this idea, most likely through misguided principle, despite a chorus of support for it from across the political spectrum. (Discounting, of course, the base stupidity of people like Senator Richard Shelby - the ranking Republican on the Senate Banking Committee no less - who is touting his belief that bad banks can simply be allowed to close their doors without without fear of ripple effects on the broader economy.)

As Paul Krugman points out, the FDIC puts banks into federal receivership all the time - it’s “as American as apple pie”. If “nationalization” is a dirty word, fine; find another way to sell it to the Richard Shelby’s of the world. (Or not; managing receivership is the province of the executive branch, anyway.) Temporary nationalization would end the cycle of privatized gains and socialized losses that has been emblematic of Wall Street. It would enable American taxpayers to profit from their investment, as opposed to simply providing corporate welfare as we do now through bailouts. And perhaps most importantly, it would end uncertainty about the fate of insolvent banks, which is contributing to the doldrums in the Dow. It is not that Mr. Obama’s stimulus and spending plans are too radical; it is that he - or Treasury Secretary Geithner - has not been decisive enough in addressing the ongoing crisis in the financial sector.

All of that being said, however, it’s important to remember that the Dow Jones Industrial Average is but one measure of our nation’s financial health. Even if it suddenly soared, it would do little for the growing population of homeless in places like Sacramento who live in sprawling tent cities after losing their houses to foreclosure. President Obama’s approach must be bolder when it comes to the banks, but he is not the arbiter of the stock market’s current performance, nor is the standard to which he is being held by the conservative noise machine consistent, fair or even meaningful, as Jon Stewart (who has been on fire lately) reminds us:

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