Wall Street's Message

by John M. Curtis
(310) 204-8700

Copyright March 3, 2009
All Rights Reserved.                    

            Sending the White House a loud message, Wall Street rejected President Barack Obama’s $3.55 trillion budget, concerned that Washington’s new liberal agenda will only make a bad situation worse.  While it’s tempting for Democrats to continue bashing former President George W. Bush, he’s not entirely responsible for today’s economic mess.  Barack must seriously stop listening to House Speaker Nancy Pelosi (D-San Francisco) and Senate Majority leader Harry Reid (D-Nev.), both can’t get beyond past partisan bickering.  Barack ran on a platform to end Washington’s partisan dysfunction, preventing the two-party system from functioning as the framer’s intended.  Wall Street’s devastating meltdown is not only based on bad economic news:  It’s based on perceptions of whether the two parties can fix the problem.  Pitched battles don’t bode well for economic recovery.

            Baracks’ recent budget frightened investors concerned about growing deficits.  Democrats may wish to launch long overdue programs but current economic conditions require the White House to tamp down its own expectations and wish list with what’s best for the economy.  Financial markets don’t want to hear about explosive government borrowing and spending, during a time of economic upheaval.  All can agree on more stimulus but all don’t agree on launching costly new government programs, like national health care, global warming initiatives and dramatic changes to the tax code.   Barack & Co. need to go back to the drawing board, scale back spending plans and focus right now on fixing the nation’s broken financial markets.  New revelations about more losses at AIG should remind the White House that there are other priorities before funding costly new programs.

            Wall Street will express welcomed relief to White House overtures to scale back unrealistic spending.  Barack shouldn’t waste his time—and credibility—connecting an overhaul in the health care system to today’s financial meltdown.  When he spoke Feb. 25 to a joint session of Congress, he could have reassured Wall Street about his commitment to deal with exploding budget deficits.  Proposing a $3.55 trillion budget with $1.75 trillion deficit shocked Wall Street into its recent selling frenzy, taking the Dow Jones Industrial Average to the lowest point since 1997.  Instead of new spending plans, Barack should have talked about fiscal discipline by his White House and the rest of the government.    Pushing national health care now—as important as it is—was bad timing given the continued hemorrhage in financial markets.  Showing restraint would have reassured investors.

            No one knows for sure how low the Dow can go.  Collapsing more than 50% since its Nov. 2007 high of $14,000, the Dow now stands at 6,763, dropping nearly 300 points.  Wall Street will continue to slide when it perceives the White House as barking up the wrong tree.  While Wall Street insider Tim Geithner leads the Treasury, it won’t give him a pass without showing some common sense.  It’s not common sense to go on a spending spree of well-meaning programs when financial markets remain in chaos.  “As bad as things are, they cans still get worse, and get a lot worse,” said Bill Strazzullo, chief market strategist for Bell Curve Trading, expecting the Dow and S&P to bottom out around 5,000 and 500, respectively.  While no one can predict a bottom, there’s little expectation that markets can recover past worth.  Without another asset bubble, there’s scant chance of markets rapidly bouncing back.

            Barack’s $3.55 trillion budget stunned investors, knowing full well without full implementation that the deficit could top $2 trillion.  No one believes newly minted Budget Direct Perter Orszag’s can shrink the shortfall by 50% during Barack’s first term.  Nose-diving another 300 points, the Dow hit 6,763, a bottom not seen since 1997.  Without the dot-com bubble of the late ‘90s, the Dow would have never hit its peak in March 2000 of 12,500, nor, for that matter, would it have peaked at 14,000 in Nov. 2007 without the latest real estate bubble.  Investment and Depository Banks, government agencies Freddie Mac and Fannie Mae and AIG Insurance were decimated by reckless derivative trading that went bust when the real estate bubble popped.   Vital protections like the Depression-era Glass-Steagall Act were reversed in 1999, leaving the banking industry vulnerable to risk.

            Wall Street craves common sense judgment on the part of the new administration.  Instead of getting fiscal restraint, they got profligate spending promising to explode the deficit and threaten economic recovery.  Wall Street needs the White House to recalculate the budget, scale back grandiose plans and demonstrate it’s serious about controlling government spending during this time of fiscal crisis.  Once the fiscal crisis has passed, then it’s time to propose whopping new spending programs.  “The economy definitely has deteriorated since November,” said Sean Sinko, head of fixed income management at SEI Investments.  “It’s just the fact that we haven’t seen signs of improving or stabilizing, per se, which is adding to the morass in the market.”  Stability comes from a sober White House not intoxicated with power, promising a spending binge but mindful and cautious about taxpayers’ money.

John M. Curtis writes politically neutral commentary analysing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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