Response to Congress' rejection of the proposed bailout plan on Monday has rocked the markets, both on Wall Street and Intrade. I'm not convinced that the bailout alone is dispositive in any of the major markets here (except, of course, those tracking the bailout itself).
First, its financial effects are routinely overstated. True, the Dow posted its largest single-day drop in history this week, at 777 points – but in fractional terms that's only 7%. The crash of 1929 amounted to a net drop of fewer than 200 points – but from its prior high of 381, the index lost nearly half its value. On Black Monday, October 19 1987, the Dow fell 22.7% in a single day (then quickly bounced back). Despite all the late unpleasantness, the Dow remains above the 'psychologically important' 10,000 mark we heard so much about after 9/11. Apparently it’s no longer so psychologically important.
Its political effects at first appear pronounced. Obama, trading nearly on par with McCain last week, has surged ahead by more than 27 points (McCain 36, Obama 63) in the clearest rally yet. I wonder though how much of that is tied to the bailout, and how much just reflects spillover of the frothing little cauldron of horrors that is McCain’s campaign of late.
Complicating factors are many. For starters, Sarah Palin has now embarrassed herself more thoroughly than any political candidate at any level of government that I have ever seen, meanwhile birthing the phrase "skewered by Katie Couric" – a sequence of words never before needed in English. Palin’s reappearance on CBS with McCain as chaperone further highlighted her status as an insult to an intelligent electorate. Are markets reacting to Palin?
Maybe - her chances to be withdrawn from the GOP ticket have nearly
tripled in the past week, trading as high as 11.9 during today's session.
Or perhaps investors are still punishing McCain for his aborted effort to postpone the presidential debate. This gaffe had the dual effects of making McCain appear vastly overconfident – as though he would ride into Washington to personally set right those pesky financial troubles – and in the meantime rather sheepish, like an unprepared student looking for a doctor’s note in hopes of escaping the big debate.
(Max Keiser blogged about this earlier this week on these same pages.)
To me, the reason for Obama’s recent surge is far simpler. Despite his attempts to distance himself from the Bush administration, McCain still stands at the head of the GOP: the party under whose watch America entered a drawn out war and fuelled a consumer economy with cheap money and HELOCs. Skittish post-tech investors retreated to real estate. We witnessed a furious rise in housing prices, widespread adoption of exotic debt instruments to pay for overvalued properties, and the subsequent implosion of bad mortgages along with the blue-chip firms that traded them. All is not well, and the average voter won’t need any more reason than that.
Of course, it’s wrong to simply blame all this on one political party or another. Much of it is just the heave and flex of a market economy, albeit one lacking some needed regulation. But the fat years are past, and the recession – the same one we deferred with cheap loans since the tech crash and 9/11 – is finally coming due. That is true today, and will remain true long past Election Day.
So while the importance of recent market corrections may be overblown, public perception is paramount. The financial markets will absorb these overdue corrections and carry on – but growth-focused pundits will juxtapose numbers from last week, last month, or last year, and brand this still a massive crash. People will decry the collapse of America's financial markets and condemn any who brought us here.
The good news is the markets are basically sound. The bad news is, no one believes it. It is the simple vacillating impulse – things are bad, vote for the other guy – that will end up carrying the day on November 4th.
Given that, Obama at 63 is just free money.