- Free market aficionados, particularly in the media, have
long been wont to tell us that the "market knows best." That
was always the line when progressives (remember when there used to be progressives
in government?) would come up with some do-good scheme like a public jobs
program during the Johnson War on Poverty, or Medicare, or bigger subsidies
for urban mass transit. If the stock market sank, they'd pronounce whatever
program or bill it was as a bad idea, because "the market" (meaning
investors), had nixed it by selling shares.
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- The same kind of analytical brilliance has been routinely
ascribed by economic pundits to investors when it comes to business decisions--particularly
mergers and acquisitions, or divestments and breakups. If Bank of America
announces that it is going to buy the foundering Merrill Lynch and shares
of B of A fall, then the merger is a bad idea. If the shares rise, it's
a good idea. And so it goes.
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- The whole idea that a bunch of people who sit around
at computer screens betting on stocks and eating cheese doodles all day
really know much of anything, or that taking their herd responses collectively
as some kind of delphic oracle has always seemed the height of folly to
me. But if you really wanted proof that investors taken collectively are
idiots, you could simply look at today's stock market. Yesterday, every
index plunged by about 4%, pulling the overall market to lows not seen
in 12 years, because of concerns that the recession was deepening, that
the big banks were toast, and that the government's economic stimulus
plan was not going to help much.
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- There was every reason to expect the downward trend to
continue, but up stepped Federal Reserve Chair Ben Bernanke, and, in a
statement presented in Congress, said that in his considered view, the
current recession could be over by the end of this year.
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- Relieved investors jumped back into the market and bought
stocks, pushing the Dow and the S&P indexes back up by almost as much
as they'd lost the day before.
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- But wait a minute! Isn't Ben Bernanke the same guy who
was chair of the Fed last year and the year before? The same chair who
completely failed to see the coming credit crisis and global financial
collapse? And if that's the case, why on earth would investors take seriously
anything he says about the future direction of the economy?
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- You'd have to be in a state of glycemic overload to believe
anyone who told you that this recession, which is just starting to really
roll downhill, is going to be over by the end of 2009. Why, we're also
getting reports that earlier estimates that official unemployment this
year would hit 8 percent are far too low, and that it will actually be
closer to 9 and rising by year's end. (Real unemployment--that is as measured
the way the Dept. of Labor used to measure it before the Clinton administration
changed the methodology to hide how bad things were in the late 1970s--is
about 18 percent already.)
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- We don't even know as of today what the fate of the three
so-called US automakers will be. One may end up sold, or partly sold to
China, one may go bust, and the other may be belly up a year from now.
And as for the banks, there are plenty of smart people who are pointing
out that banks like Citibank and B of A are really, at this point, zombies,
and that the government may end up, against its will, having to take them
over, break them apart, and sell off the parts that still float, using
the rest for kindling.
-
- I'm no economic prognosticator, but I do know that this
economy is not about to bounce back. The whole American public is now
in a hunkered down, defensive position, hoarding money, worrying about
losing employment, struggling to pay bills. That's not an environment that
sets the stage for a recovery.
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- Bernanke is talking through his hat.
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- The only rational reason to buy today on Bernanke's comment
would be if you surmised that the average investor is an idiot and would
likely buy based on the Fed chairman's comments. But then, of course,
you would only be buying to ride the short bump those comments would cause,
jumping back out soon afterwards, before common sense returned and the
market continued it's downward slide.
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- Of course, looking more broadly, there is a theory that
market behavior can be predictive as a leading indicator. Major economic
downturns have generally been preceded by major market crashes (just as
recoveries have been preceded by market rises). We had a roughly 40% crash
in the market in 2008, which, judging from history, would be predictive
of a serious recession. But we've also had an additional slump of 16-18
percent just since Jan. 1. In normal times that would almost qualify as
a "bear market" (a serious market crash, defined as a fall of
20% over a two-month period) in itself, and as such, would be considered
a "leading indicator" of a coming economic slowdown.
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- Far be it from me to say investors know anything about
the future of the economy, but I'd guess that their longer-term lack of
confidence in the stock market is giving a far more accurate and honest
assessment of the likely direction of the US and global economy than Chairman
Bernanke's latest comments to Congress.
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- ________________
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- DAVE LINDORFF is a Philadelphia-based journalist and
columnist. His latest book is "The Case for Impeachment" (St.
Martin's Press, 2006 and now available in paperback edition). His work
is available at www.thiscantbehappening.net
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