What's Next?

A brief discussion of the stock market is in order.

Before that gets underway, though, a discussion of my own economic credentials is warranted: There aren't any. I'm just a guy who watches things that happen and things that don't happen. All that is really necessary is an ability to see abject stupidity when it happens, and what we have seen recently is exactly that. (For details on the stupidity, please see "Depression Package" two posts ago.) Whether the purpose of that stupidity is, well, just purposeless incompetence, or if it is a more nefarious plan is not provable. I hesitate to accuse because that's one of the things that bothered me so much about the criticism of President Bush: people didn't just claim that he was wrong, they claimed that he was evil. They took clearly reasonable policy decisions, the wisdom of which could be honestly debated, and attributed the motivations to cabals, conspiracies, and just plain old dictatorial meanness. Which is stupid in and of itself. The one thing that was plain to most of us about GW is that right or wrong, he was and is a good man. I disagree with about 1/3 of his policies - marginally acceptable on average - but I don't think that where we disagree is due to his purely evil nature. So that is why I'm hesitant to attribute any of the current crisis to ill-intent by Obama. Not because I think it isn't possible, but because though I vehemently disagree with nearly every aspect of his public life, I still owe my own president the benefit of the doubt when it comes to harming his own country. And yet. And yet I cannot avoid my gut, and my gut is telling me that on the incompetent/nefarious axis, Obama falls right in the middle where there's just a bit of nefariousness (is that a word?) exasperated by incompetence.

Here's what I think: I think that before the election, Democrats saw a squishy economy and decided to exploit it in the polls. It worked, but having a weak to non-existent understanding of economics themselves, they didn't see where they has so severely undermined it with Freddy, Fannie, Chriss, and Barney. They thought that they could call a spade a spade without the rest of us noticing that it was in fact a back-hoe. They talked the economy into sliding faster and harder than it had too. Then they started talking about bail-outs: Bad ideas that held the economy in limbo during their discussion. While waiting for the government to get off its butt and give the markets something to react to, everything slipped further. Then incompetence took over entirely. Oh, trillions of dollars of pork and hand-outs represent more than their share of personal greed and corruption as well, but the vast majority of all this bail-out crap was incompetence. The bailouts passed, and the markets said "hell no!". And if you think I'm wrong, check out the dates each "stimulus" or "bailout" was signed and then look at the DOW for the next week. Markets don't lie. Markets can be inaccurate, but they cannot lie. If the did and got caught, I'd be rich, and they still would have worked. But I digress.

A little immorality and personal ambition drop-kicked a weak economy over the edge. Good policy could have softened the slide. If upon taking office the president had slashed top quintile personal income taxes, corporate income taxes, and capital gains while letting a few bad banks fail, the drop would have not been half as bad and recovery would be more complete. But they had to throw in that little bit of state-sponsored immorality where banks were actually pressured into taking bailout money. No big deal on the face of it (No, no, please don't give me billions of dollars!!), but then incompetence followed public outrage into restricting the behavior of companies trying to be competitive. And the markets lost even more confidence.

So here we are. The DOW dropped into the six thousands, and has now had a few day upswing. Economists debate whether this is a "sucker's surge" or if it's the real deal, but there is a lot of confusion. Mostly because so much of what markets are being drive by has nothing to do with what markets are supposed to be driven by. Irwin Stelzer discusses that here better than I can. So what what's next long term?

Here's my guess: Where good policy would have seen our 13000 pt DOW drop to about 10,000, it instead dropped to just below 7,000. The value of the stocks in our market are currently under-valued in relation to their own ability to produce real value. They will recover back to a somewhat tolerable level, but that will not be their "real" level. I guess that within a year we'll be back at 9,000, and within 2 years it'll be between 10,000 and 11,000. Five years later, it won't have moved significantly higher. Maybe 12,000.

That will be trumpeted as "the stimulus worked!" What it will really mean is that the stimulus is still undermining an otherwise healthy economy. Unemployment will still be relatively high, and the housing market still won't be sure what to with itself. The people who were bailed out will stop paying again, and the people who were not bailed out because they were too responsible will start saying "screw it" and hit the reset button themselves. Add this to the long term de-valuation of the dollar that everybody BUT a democrat understands is nothing but simple math, and the most dynamic economy on earth will not act that way again for nearly a decade.

We are not the cradle of world freedom because of our wealth. We are wealthy because of our persistent freedom. If we lose that free-market mentality, we will all lose in the long run.