Charles Krauthammer points out what should be rather obvious by now: the stock market no longer functions as a stock market. Rather, it functions as a political market. The markets rise and fall now exclusively on political news, not market forces.
As economist Irwin Stelzer argues, we have gone from a market economy to a political economy. Consider seven days in November. On Tuesday, Nov. 18, Paulson broadly implies he’s only using half the $700 billion bailout money. Having already spent most of his $350 billion, he’s going to leave the rest to his successor. The message received on Wall Street — I’m done, I’m gone.
Facing the prospect of two months of political limbo, the market craters. Led by the banks (whose balance sheets did not change between Tuesday and Wednesday), the market sees the largest two-day drop in the S&P since 1933, not a very good year.
The next day (Friday) at 3 p.m., word leaks of Timothy Geithner’s impending nomination as Treasury secretary. The mere suggestion of continuity — and continued authoritative intervention during the interregnum by the guy who’d been working hand in glove with Paulson all along — sends the Dow up 500 points in one hour.
Monday sees another 400-point increase, the biggest two-day (percentage) rise since 1987. Why? Three political events: Paulson’s weekend Citigroup bailout; the official rollout of Obama’s economic team, Geithner and Larry Summers; and Paulson quietly walking back from his earlier de facto resignation by indicating he would be ready to use the remaining $350 billion (with Team Obama input) over the next two months.
That undid the market swoon — and dramatically demonstrated how politically driven the economy has become.
Political matters did, of course, always have some impact on the markets. But now that political news appears the only thing that raises and lowers the market. This should worry all Americans – in fact, it should worry the entire world. The fate of our economy – and that of the entire world – in the hands of a handful of politicians? With a 13% approval rating?
Companies succeeding or failing depending on the whim of politicians? Be afraid, people. This is not a good development.