Friday, March 06, 2009

How much blame can President Obama take for the stock slide?

It's always hard to tease out all the reasons for the stock market going down. But Business Week asks the question of how much blame the Obama administration deserves for the slide that has been going on since he took office. Clearly, the market was heading south since before the election for reasons that have nothing to do with Barack Obama. But the president in office, however much he may or may not deserve it, always gets the credit or blame for how the economy does while he is in office. But has the Obama administration done anything to ameliorate the slide or has his performance exacerbated the fallout on Wall Street? And Business Week clearly comes to the latter conclusion. They identify several elements to the slide. First there were unreasonable expectations that no political messiah, no matter how gifted, could have lived up to. But they have just bungled any approach to easing the financial crisis. President Obama promised us that Secretary Geithner would present a detailed plan on February 10, but then Geithner gave a poor presentation of an unsubstantial program and people lost confidence that there was any coherent strategy coming from this administration on how to deal with the credit crunch. And that created great uncertainty about what the government was planning.
A lack of details from Geithner disturbed investors, says Quincy Krosby, chief investment strategist at the Hartford (HIG). "Markets need certainty," she says. "The market has been sitting here waiting, waiting, waiting. That allows rumors and conspiracy theories to dominate."

Jerry Webman, chief economist at OppenheimerFunds (OPY), defends the Administration. "I would like to see Administration people more visible" on the issue, he says. But, "the problem is: What do we expect them to say? 'This is a big complicated problem and we don't know where we're going to get the money to solve it'? That would be the truth," Webman says, but it wouldn't make market participants very happy.
We might be uncertain as to what they're going to do for the financial crisis, but they've been very frank about all their plans for rebuilding the economy in other areas. And the market has responded to some of those plans.
The impact of Obama's proposals are easy to see in particular segments of the market. In a speech to Congress on Feb. 24, Obama pledged a "substantial down payment" on health-care reform. David Chalupnick, head of equities at First American Funds, points out that, since then, stocks in the Dow Jones U.S. Health Care Providers Index (IHF) are down 16%. Health-care stocks had been a relative safe haven in the market, because medical spending tends to hold up even in recessions.

Investors aren't just expressing their political beliefs that taxes and regulations are bad for the economy. They're also making a practical calculation that they will hurt corporate bottom lines in the future. "What you're doing is lowering the profitability of these firms," says Bill Larkin of Cabot Money Management.
I think the uncertainty is one of the deepest problems. If you have a business and you're thinking of expanding, how can you base decisions projecting energy costs, government regulations, health care for your employees, tax rates, etc.?

That's why a Democrat who supported Obama like Jim Cramer has now earned a place on the Obama enemies list by ranting about how the Obama administration is harming our economy.
But Obama has undeniably made things worse by creating an atmosphere of fear and panic rather than an atmosphere of calm and hope. He's done it by pushing a huge amount of change at a very perilous moment, by seeking to demonize the entire banking system and by raising taxes for those making more than $250,000 at the exact time when we need them to spend and build new businesses, and by revoking deductions for funds to charity that help eliminate the excess supply of homes.

We had a banking crisis coming into this regime, but now every area is in crisis. Each day is worse than the previous one for this miserable economy and while Obama's champions cite the stimulus plan, it's really just a hodgepodge of old Democratic pork and will not create nearly as many manufacturing or service jobs as we hoped. China's stimulus plan is the model; ours is the parody.
President Obama might pooh pooh the importance of the steady drop of the stock market when he said,
"You know, the stock market is sort of like a tracking poll in politics. It bobs up and down day to day, and if you spend all your time worrying about that, then you're probably going to get the long-term strategy wrong."
But he can't ignore the causes of that free fall or the effect that that has. This isn't like 1929 when only a small percentage of the public was invested in the stock market. Now the great majority of Americans are part of the investor class. And they're seeing their savings for retirement fade away as well as perhaps the money that they'd invested to save for their kids' college or that new house. Peter Wehner puts it well,
The market is plunging, not gyrating. And to compare it to a tracking poll in politics is foolish and somewhat callous. What we are witnessing are trillions of dollars of people’s savings evaporating. It is causing enormous fear in a lot of people, especially those nearing or in retirement, who are watching their life savings disappear. To cavalierly dismiss this concern, as Obama does, is a sign that he is already at the point of employing unserious arguments to explain a crisis he has, so far, not only been unable to reverse, but has made worse.

It’s amazing how quickly a formidable political figure, in the midst of a crisis he (so far) seems unable to confront, can go tone deaf. And, of course, the next step when you’re at sea is to attack Rush Limbaugh. Gosh, and to think we were told that we were through with petty politics and childish ways.
And while this uncertainty continues, as Gerald Seib points out, consumer confidence will keep falling and the economy will continue to falter.
Indeed, Mr. McInturff notes that in a January Journal/NBC poll, equal percentages of Americans cited the decline in the stock market and the broader slowdown in the economy as a factor having "a great deal" of impact on them. In other words, people were as likely to feel hurt by the stock market's decline as by the overall economic decline.

There's an explanation for that finding, of course, which is that stocks have become steadily more important in the real economic condition of average Americans. The spread of 401(k)s and individual retirement accounts means market conditions penetrate tens of millions more homes now, which is one of the most significant changes in the structure of the economy in the past generation.

Figures compiled by the Investment Company Institute, the national association of investment firms, tell the tale. The institute conducts an annual survey of American households to gauge stock ownership. It found that the number of American households owning mutual funds -- the most common vehicle for holding stocks -- more than doubled between 1987 and 2007, to 55.3 million households from 22.5 million. The percentage of households owning mutual funds during that period rose to 47.7% from 25.1%.

Put another way, a drop in the stock market now has a real -- not just a psychological -- impact on the well-being of half of America's households.

The effects are demonstrable. A new Journal/NBC poll, released this week, found that the Americans most likely to have stock investments -- those with family incomes above $50,000 -- also are markedly more likely to say they are very dissatisfied with the economy. In other times, that distinction might have gone to those on the lowest income rungs.
Obama has been losing the right of center analysts like David Brooks and Christopher Buckley who supported him over McCain and Palin. Now he's losing left of center supporters like Jim Cramer and Stuart Taylor. Taylor is particularly devastating in his column about Obama's contributions to our economic decline and the fuzzy numbers he's been using to try to pretend that his budget plan actually saves money.
As for the budget's $2 trillion in projected net "savings," Obama's budget director, Peter Orszag, admitted in testimony on Tuesday under questioning by Rep. Paul Ryan, R-Wis., that $1.6 trillion comes from phantom cuts of the money that would be needed to sustain the troop surge in Iraq for another decade -- money that nobody ever intended to spend.

Other supposed savings -- especially from Medicare -- seem unlikely to materialize absent benefit cuts, which Obama has not proposed. And the cost of any health care legislation -- to be drafted largely by a Congress that is allergic to the kind of cost-cutting necessary to make universal care sustainable -- is likely to be two or three times the $634 billion over 10 years that Obama has budgeted.

Meanwhile, "politics trumps economics" in Obama's housing program, says Washington Post columnist Robert Samuelson. It targets tax credits narrowly on first-time homebuyers with weak credit ratings while creating few incentives for the more affluent and credit-worthy people who have the collective buying power to revive the housing market. Obama also supports a "cram-down" proposal -- authorizing bankruptcy judges to unilaterally cut distressed homeowners' payments -- that would be hopelessly unadministrable at best and might drive up mortgage rates.
Taylor issues a final plea that many of us would endorse - that Obama would ponder these wise words from Margaret Thatcher.
And I hope that the president ponders well Margaret Thatcher's wise warning against some collectivist conceits, in a 1980 speech quoted by Wehner: "The illusion that government can be a universal provider, and yet society still stay free and prosperous.... The illusion that every loss can be covered by a subsidy. The illusion that we can break the link between reward and effort, and still get the reward."