A slump in financial stocks sent the Dow Jones Industrial Average to its first close below 10000 in three months as concerns about the global economy and U.S. interest-rate policy simmered.
Here is a question no amount of searches on Google will help answer: Why did Google choose the one product it doesn’t need to advertise for its first Super Bowl commercial?
No commentary here, just some food/articles for thought!
Finally, a plan that addresses a root cause of the crisis: housing.
It’s clear that politicians have been dragging their feet on dealing with bad assets in banks. This topic certainly deserves a fool post, but since I’m on vacation, you get a link and a quote.
ut the first-day verdict on the Dow Jones average went in the right direction for Mr. Geithner this time, up nearly 7 percent and 500 points, in contrast to the precipitous slide after Mr. Geithner’s first effort, when his inability to explain in any detail how the program would work left Wall Street jittery about whether the administration had a workable plan.
A Treasury spokeswoman insisted the only difference was that Mr. Geithner had the time to complete details so complicated that they amount to creating a new financial system with global reach. But beyond the substance, the administration also had a more careful plan in place to introduce the proposal, because neither Mr. Geithner nor Mr. Obama could afford another negative review.
The first week of the past several months has set the tone for changes in the major indexes. Look at Google Finance and look at November and October, big drops at the start of the month. If the rebound of the past few days is a real recovery, we should expect a gain this week. Especially on news of strong holiday sales so far.
So far, the Dow is done 400 points, things aren’t looking great.
I quotes this article in my last post, but there is another great point that it makes:
When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.
As I write this entry, the DJIA is inching up on news of housing sales. The market has not been doing so well for the better part of a year. The government has reacted dramatically bailing out several companies and enacting the wider reaching bailout plan. Moreover, the Fed is now offering loans to numerous private corporations. The Democrats and the Fed want Congress to pass another stimulus plan.
I think that the above quote is extremely interesting. There is no fundamental right to a positive return on investments. That is the nature of risk. The government response to economic indicators reveals that people feel entitled to profit on their investments. Interesting in an atmosphere where greed is seen as a vice.
Economic indicators represent value and expectations. Prices go up and down. Rising prices create value for current stockholders. Falling prices create value for short-sellers and represent an opportunity for future stockholders. In fact, as I’ve said before, a substantial decline in the market causes a transfer of wealth from our parents’ generation to our own. The market is valuing companies that our parents have invested in significantly less, but their money has already gone to purchasing capital and investing in the company. Some of the money may be lost arbitrarily, but the companies are now much cheaper for us to buy stakes in.
There is a social benefit to a growing economy, but the discretion of individual decision-makers in the economy means that growth is not guaranteed. The only thing we have to guide our daily decision-making is prices. Government intervention distorts prices in an effort to create value for current shareholders. This distortion also mires future decision-making. Not only that, but more often than not it lowers value. We’ve seen this for the past few weeks. The government has done a lot, but the market is not responding.
So what should we do?
If there is a social benefit to growth, there is certainly a social cost to recession and depression? There are cases of incomplete information where the market fails. Market failure is different than a down day for the Dow. Market failure is the inability of prices to account for the social cost of pollution that harm a diffuse group (also known as an externality).
We should make sure that institutions are set up that facilitate the transmission and clarity of information. This way people can make their down decisions. In this world, we have to accept that their is no right to profit, but over time assets will correctly value themselves in a way that facilitates firms to make decisions that maximize their profits and minimize their costs.
Down 758.80 points! After the recovery Monday, I had been thinking of investing. 1) Shows what I know 2) Thank God.
When will things get better? I think as the government progresses with the bailout and gets some liquidity in the mortgage markets, so we can figure out how much people’s homes are worth. More specifically, how much the loans on people’s homes are worth.
I think there is a reason that one of people’s worst nightmares is falling down a dark hole that they can never get out of. I honestly thought that the government bailout plan would buoy the markets through this rough time. I guess they need to get working on getting the plan in effect.
Today the Dow Jones closed below 9000 and was headed nearly to below 8500.
Now for the sad news…the Dow is down again. Not a surprise really, but shocking to see it fall so far repeatedly. I am starting to wonder if these anti-war protesters got it all wrong (actually I’ve been suspicious of that for a while). Perhaps the biggest blunder of the Bush administration will be failing to support Lehman Brothers. In other words, failing to properly handle this banking crisis when the Fed and Treasury first got wind of it. After Lehman’s collapse markets froze up and shit really hit the fan:
Lehman’s collapse was a decisive moment in the 13-month-old credit crisis. The government’s decision not to bail out the firm set off a near panic among investors and lenders world-wide, forcing the U.S. to push through a historic rescue plan for the financial system.
Banks that are holding bad assets should be put out of business or at least have their business practices reformed if they can’t recapitalize, but at what cost?
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