Hedge Funds Spoil Wall Street's Parade

by John M. Curtis
(310) 204-8700

Copyright November 2, 2011
All Rights Reserved.                                         

              After a spectacular one-month run-up, short selling hedge and private equity funds rained on Wall Street’s parade, taking the Dow Jones Industrials down 276 points or 2.26%, still far from the October lows when the Down tanked to just under 10,000.  Since taking office March 20, 2011, President Barack Obvam has watched the stock market rise of 60%.  His critics like to point to the sluggish economy but are hard-pressed to explain why the markets have done so well since taking office.  They’d do much better yet had Barack’s July 21, 2010 included regulating hedge and private equity funds, currently profiting mightly from market downturns.  As long as the Securities and Exhange Commission has no control over runaway short selling by these funds, the markets and economy will continue to move sideways.  Long-term stock market growth requires control of short selling.

            During October, the market rose 9.5%, a whopping gain when you consider the storm clouds over Europe.  With European banks going through a similar cash-flow crisis as U.S. in 2008, a thousand point gain was welcomed relief.  At the same time, rapid run-ups in recent years have been matched with equally steep sell-offs, leaving overall market and portfolio growth essentially flat.  To stimulate the economy, the market must be left to rise over the long-term.  Short-selling hedge and private equity funds are responsible for robbing businesses and consumers of the needed cash to spur stable economic growth.  When publicly traded companies lose market capitalization through runaway short selling, they don’t make long-term commitments of adding jobs.  Without adding more jobs, it’s difficult to talk about real economic growth.  Nothing spurs economic growth more than job creation.

            Common sense tells you that when companies add jobs and retirement funds rise in value, consumers spend more money to spur the Gross Domestic Product.  GDP growth stalls when investment income or savings slows down.  Today’s plunge mirrors the end of euphoria about Europe solving its sovereign debt crisis.  While the European Union has come up with a temporary fix, it doesn’t mean the Europe is out of the woods.  Problems in the Eurozone with Greece, Portugal, Spain, Italy, Ireland, etc. won’t go away anytime soon.  Now that there’s some respite in Europe, the White House must do more to coordinate a coherent economic policy.  Ignoring the problem with short selling unregulated hedge and private equity funds won’t make things better.  To keep the stock market and economy rolling, there must be some regulation of short sellers.  Nothing reduces debt more than economic growth.

            With October ending on a bad note, policy makers must show renewed interest in finding fixes to spur economic growth.  Something must be urgently done to slow the real estate market slide that also robs consumers of the cash needed for consumer spending.  Calling an for a White House economic summit, Barack call on the heads of Fannie Mae, Freddie Mac and Federal Home Financing Agency to get mortgage loans in the hands for creditworthy consumers.  Processing more residential and consumer loans can only help consumers boost real estate transactions.  More home and commercial sales translates into consumer spending, the only real fix to the economy.  White House officials must also tackle the thorny topic of creating more domestic manufacturing jobs.  Domestic and foreign companies must be strongly encouraged to set up shop and add jobs in the United States.

            To prevent another 1929 Stock Market Crash, the government must reinstate necessary provisions of the Depression-era Glass Steagall Act, designed to prevent banks from risky stock market investing.  If 2008 taught anything, it’s that banks—regardless of potential profits—cannot place depositors cash at risk in the stock market.  Most economists don’t think that public works jobs will generate enough private sector activity to grow the economy.  Regulating hedge and private equity funds, insisting on domestic manufacturing and promoting more residential and commercial lending should help spur the kind of consumer spending needed to stimulate jobs.  All the bickering in the government Supercommittee about cutting government spending would be irrelevant with strong economic growth.  Only when the money’s tight do the fangs and claws come out in Washington.

            Before markets surrender much of last month’s gains, the White House needs to act decisively to host and economic summit to deal with the many challenges to long-term economic growth.  Throwing more good money after bad is not solution to improving the economy.  Bailouts alone cannot fix anemic growth.  Promoting more domestic manufacturing, regulating hedge and private equity funds, improving residential and commercial lending and recalibrating current tax rates should help keep the economy rolling.  If lawmakers could agree on some very simple fixes for economic growth, the Supercommittee wouldn’t have to slash the federal budget.  Revenue comes quickly when the economy’s creating jobs.  Before it’s too late, the White House needs to take the lead before S&P, Moody’s and Fitch’s does the unthinkable and downgrades more U.S. debt.

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.

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