Posted by
Andrews on Wednesday, March 11, 2009 10:10:56 AM
I have recently heard even relatively staid economic sources making absurdly negative statements about the economy. It seems to be the new consensus that Obama is right and we are headed for a long depression. But are we really?
First, let us make clear that part oft he problem is on paper, not in reality. As the government requires publicly traded firms to mark the value of assets "at market", that means when the resale market in mortgages dried up, all subprime mortgages had a value of zero. That includes performing loans. So many financial firms no longer had adequate reserves, even though in reality they had more than sufficient performing assets. This sort of accounting problem created the impression that the problem was worse, and more widespread, than it really was.
Second, the media created a panic mindset which drove many small investors from the market. I saw this daily before the Obama inauguration, a day full of panic selling followed by bottom fishing by professionals. However, the professionals were also strapped for liquidity due to the ongoing problems, and eventually the panic selling began to strip the market of much needed funds, exacerbating the liquidity crisis.
And then we have the government itself. It is not a coincidence that whenever the government promises massive spending the market falls. It happened during Bush's TARP planning, and got even worse with Obama's truly massive, misguided spending plan. Why? Because the market is well aware of the potential inflationary damage such spending will cause. Nor is inflation the only worry. With all the talk of CEO salary caps, government interference in firms, government-business "partnerships" and so on, investors are worried that the government will kill whatever sectors it touches.
And then there is the talk of increased taxes, especially increased capital gains taxes. That has inspired much profit taking ion recent days, as investors who have managed tot urn a profit cash out now to avoid the higher taxes they expect in the future. It has also discouraged new money from entering the market. At a time when liquidity is desperately needed, especially in the form of new investment, the government seems to be doing all it can to discourage investment. (And saying "go ahead, invest" doesn't count as encouraging investment.)
What is interesting is that during the period between Obama's election victory and his first talk on his huge spending plan the market showed some signs of recovery. Likewise, between his first mention of the plan and its actual passage, the market showed some hesitant signs of improving.
And that is the truly sad fact. Left on its won, the market will recover, probably in a relatively short period. Without massive spending, oppressive laws, new taxes, or any other meddling, the market will adjust to the new circumstances and begin to grow again. What is slowing our recovery is not any weakness in the market, but all the attempts to "fix" something that isn't broken.
The market is fine, it always was, it was government intervention that created the problems, and government intervention is prolonging the recession. Yet the only proposals I hear are for still more intervention.