Barack's Economic Woes Tied to Stock Market

by John M. Curtis
(310) 204-8700

Copyright August 2, 2010
All Rights Reserved.                                

          President Barack Obama finds himself trading places with former President Bill Clinton before the disastrous 1994 midterm elections where a Democratic House lost 54 seats and handed former House Speaker Newt Gingrich (R-Georgia) control of Congress.  Two years before, Clinton swept into office largely from a stubborn recession that dogged former President George H.W. Bush’s chances of a second term.  While there are parallels today, some economists worry that the outlook could be bleak when the next presidential election returns in 2012.  Democrats like to point out that Barack inherited the mess from former President George W. Bush, who’s been a missing person since leaving office Jan. 20, 2009.  With much of Obama’s $787 billion stimulus spent, the specter of a double-dip recession looms.  Only one thing stands in the way:  The mighty U.S. stock market.

            When Bush left office, Wall Street was in a tailspin, dropping from a November 17, 2007 high of 14,000 to a low of 7,450 Feb. 19, 2009, a 47% drop.  Right wing pundits blasted the young president one month into office, insisting stocks couldn’t grow under a Democratic regime.  Proving his critics wrong, the Dow made a stunning turn around, climbing back to 11,000 April 12, 2011, a whopping 43% rebound in less than 14 months.  Economic progress looks better when the stock market rallies, giving publicly traded corporations the needed cash to expand payrolls.  Prospects of robust economic growth dimmed when the Commerce Dept. reported a sluggish Q-2 growth rate of 2.4 %.  While disappointing, it’s better than contraction.  Today’s anemic growth directly relates to a sideways stock market, requiring Wall Street to take more responsibility in economic recovery.

            Contrary of popular belief, Wall Street isn’t driven by aliens but predictable mutual, hedge and private equity funds.  When the funds sell off at the same time, markets plummet, causing share prices to drop.  While market ups-and-downs seem driven by earnings and economic trends, today’s unregulated hedge and private equity funds play both sides of the market.  Profits are typically driven by sell-offs, dumping shares once they reach certain price-points.  Profit-taking is a fact of life on Wall Street.  Hedge and private equity funds, on the other hand, typically bet against the market during sell-offs, namely, short-selling.  European central bankers strongly urged U.S. central bankers to follow suit and regulate short-selling.  Regulating short-selling was not part of the historic July 21 financial overhaul.  Fed Chairman Ben S. Bernanke knows there’s more work needed.

            Market-makers like Goldman Sachs needs to work with the Treasury Department and Federal Reserve Board to craft better controls on currently unregulated hedge funds.  Barack’s most recent financial overhaul focused on restricting banks from risky derivative investing to help prevent future catastrophic losses.  When major U.S. financial institutions ran out of cash in 2008, the Federal Reserve had to re-supply banks with trillions in cash to save depositors.  Bush and Obama’s economic bailout account from less that $1.5 trillion, a drop in the bucket. Bernanke had to print nearly $15 trillion to bailout bankrupt banks and other financial institutions.  Barack’s financial overhaul focuses more on unscrupulous lending practices that left banks holding trillions in toxic debt.  Restricting bank loans and tightening credit is only one small step in beefing up regulatory reform.

            Barack can’t expect to grow the economy until he and his Treasury Secretary Tim Geithner figure out how to stop short-selling.  As long as hedge and private equity funds continue to profit from short-selling, the markets will stay sideways and mutual funds won’t reclaim past losses from market downturns.  Short-selling has turned profit-taking into a kind of freefall, where market losses amplify many fold.  Fed and Treasury officials must now go back to the drawing board to regulate short-selling, especially in the financials.  Short-selling bank stock nearly bankrupted Bank America in Feb. ’09, driving blue-chips, like Wells Fargo Bank, to near insolvency.  Short-selling decimates pension funds and long-term investors, creating unfounded liabilities for the nation’s biggest investment funds and endowments.  White House and Fed officials must revisit the short-selling issue.

            Barack’s July 21 financial overhaul was a necessary first step in preventing another financial collapse.  More work is needed to prevent hedge and private equity funds from wrecking the markets’ long-term growth.  Only long-term growth can supply publicly traded corporations and the nation’s biggest pension and mutual funds the cash needed for gains in long-term investments.  No individual, family or corporation can tolerate the pernicious effect of short-selling, robbing corporations and pension funds of the cash needed to eventually add jobs.  Public works jobs can only go so far.  Private sector jobs are essential to ending the recession, job creation and eventual economic recovery.  More bailouts and makeshift government jobs won’t lead to the private sector cash needed to add jobs.  Restricting short-selling and promoting long-term stock market growth is the only way forward.

About the Author    

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

©1999-2012 Discobolos Consulting Services, Inc.
(310) 204-8300
All Rights Reserved.