Financial experts: Falling bank stocks not indication that bank regulation is ill-advised

Jason Schwarz: “The economy should actually be better off in the long run.” In a January 21 blog post, Jason Schwarz, author of the Economic Weather Station newsletter, stated of a decline in big bank stocks that could result from new regulations, “Good. The days of speculative bubble growth didn't work out so well for the broad market”:

In the short run, investors fear that new regulations imposed on the banking industry will cause big bank stocks like JP Morgan, Bank of America, and Citigroup to sink. I agree with this assumption. The broad economy needs to get back to an environment where banks make their money from lending and not much else. This regulation will limit future growth. Good. The days of speculative bubble growth didn't work out so well for the broad market.

In the long run, this restructure is very different than the collapse of the financial industry that we witnessed in 2008/2009. The economy won't go into a double dip because of these regulations. The economy should actually be better off in the long run. If investment capital is going to leave the financials, where will it head? It will flow to real areas of innovation like technology, alternative energy, and successful biotech. The time to own the banks was during stage one of the market recovery, now that we are in stage two it's time to look elsewhere. The market will be able to move on without them.

Jeffrey Hirsch: New regulations could “shore up the integrity of the system.” BusinessWeek reported on January 21: “Eventually, the market may appreciate Obama's tougher approach, says Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac, who believes the proposed changes could over the long term 'shore up the integrity of the system.' ” The article further stated: “But, on Jan. 21, the market appeared to show a more emotional, knee-jerk reaction to Obama's plan, he says. 'It's like a child who is being told not to do something,' Hirsch says. 'Don't take my toy away' -- that's a natural reaction.”

Economic experts say stock market does not necessarily reflect broader economic health

Casey Mulligan: "[H]istory has shown that the non-financial sector can do well when the financial sector does poorly, and vice versa." Economist Casey B. Mulligan wrote in a September 28, 2008, blog post arguing against the Wall Street bailout plan that contrary to the belief that “the non-financial sector in a modern economy revolved around financial markets,” economic research “has shown that the financial and non-financial sectors experience quite independent changes, especially over the short and medium term.” Mulligan added that “history has shown that the non-financial sector can do well when the financial sector does poorly, and vice versa.”

Dean Baker: “The market fluctuates all the time without in any way jeopardizing the financial stability of the economy.” Economist Dean Baker wrote in a January 24 blog post that "[e]quating financial stability with the stock market's performance is incredibly irresponsible":

The second paragraph of a front page Washington Post article tells readers:

“Now, an aggressive stance against the bankers, financiers and even government officials popularly blamed for causing the crisis is gaining political momentum, and there are signs it is eroding the very financial stability the government championed.”

This statement is misleading in several ways. First the article presents no real evidence that financial stability is being eroded. It discusses the drop in share prices in recent days. This has as much to do with financial stability as the score of the weekend's football games. The market fluctuates all the time without in any way jeopardizing the financial stability of the economy.

Equating financial stability with the stock market's performance is incredibly irresponsible. It implies that anything that might hurt the profitability of any important sector of corporate America, for example a public option in the health insurance industry, could undermine the financial system. This is absurd on its face, although getting the public to believe this view would be in the interest of major corporations.

Daniel Gross: Financial markets don't “represent the collective wisdom of rational actors processing information efficiently.” Daniel Gross wrote in his June 4, 2009, Slate Moneybox column that “the notion that the market is telling us something -- anything -- ultimately rests on the erroneous assumption that financial markets represent the collective wisdom of rational actors processing information efficiently.” Gross added: “There are plenty of cool-minded forward-thinking investors in the markets. But there are also a lot of lunatics, fools, sharks, widows and orphans, government actors with ulterior motives, algorithmic traders, greedy speculators, and whack jobs. The markets resemble the Star Wars bar scene more than they do the economics faculty lounge at Princeton.”

Barry Ritholtz: “I can show you many eras in history when the economy was awful, and nonetheless markets rallied strongly.” Noting that markets often “decouple from the economic fundamentals,” chief market strategist for Ritholtz Research and finance blogger Barry Ritholtz wrote on October 6, 2009:

I can show you many eras in history when the economy was awful, and nonetheless markets rallied strongly.

There have also been times when earnings did not matter, and profitability was irrelevant. There are times when animal spirits run the show, when irrational exuberance was in charge.

Such is the result of giving two million primates lots of money and keyboards and a belief they can make a living based on numbers and letters moving around -- on a screen, in a futures pit, on an exchange floor, or even under a buttonwood tree.

[...]

I believe you can describe and explain what the market is doing, but in doing so, we must acknowledge Keynes terriblyu accurate observation that "Markets can stay irrational far longer than you can stay solvent."

Andy Sutton: “It is imperative to separate” economy from stock market. Investment adviser Andy Sutton wrote on April 5, 2009, that "[t]he stock market does NOT equal the economy." Sutton noted: “In the fourth quarter of 2007, while America was entering a recession (which would not be admitted until nearly a year later), the Dow was peaking at an all-time high of over 14,000. Clearly, the economy had been slowing for a period of time prior, yet the Dow surged ahead. It is imperative to separate the two.”

MarketWatch: “The Dow doesn't represent the economy.” An October 15, 2009, MarketWatch article stated that while “Dow 10,000 shows big companies are doing just fine,” small businesses “are still mired deep in a recession.” The article noted that the Dow “includes 30 of the biggest and most successful companies” and stated, “The health of big business -- and the rebound in the stock market -- may be blinding us to just how weak the rest of the economy is.”

Nonetheless, right-wing media cites stock market dip to criticize Obama on economy

Gingrich: "[T]he demagogic attack on the banks last week ... led to the worst drop in the stark market since March." Fox News political contributor Newt Gingrich stated during the January 25 edition of On the Record that "[t]his administration has spent a year trying to figure out there's a socialist model for running America. The recent -- most recent experiment was the demagogic attack on the banks last week, which led to the worst drop in the stock market since March of last year."

IBD: Obama's “quest to take control” of private economy “didn't play on Wall Street, with the Dow off 335 in two days.” In a January 21 editorial, Investor's Business Daily stated of Obama's bank regulation proposal, "[T]he Obama administration is back on its quest to take control of as much of the private economy as it can. Polls must be telling the White House that kicking 'Wall Street' still plays well in Peoria, even if the nationalization of health care does not. (It sure didn't play on Wall Street, with the Dow off 335 in two days.)"

Fox News' Buttner: “Billions were wiped out of the market by just mentioning this.” During the January 24 edition of Fox News' America's News HQ, Fox News business correspondent Brenda Buttner said of Obama's bank regulation proposal, “If you measure stock market value -- is the very day he came out with this, Bank of America down 9 percent. I mean, billions were wiped out of the market just by mentioning this. If we get more details, who knows what will happen.”

Quinn: “Congratulations ... to our undocumented president, who managed ... to tank a reviving stock market.” During the January 25 edition of The War Room with Quinn & Rose, co-host Jim Quinn stated: “Congratulations to the president -- to our undocumented president ... who managed with just a couple of short speeches to tank a reviving stock market by 400 points or more, talking about his regulatory responses to the banks, which is nothing more than political populism, trying to get all of you out there -- to distract your attention from the fact that this guy's a total and complete failure, and that he surrounded himself with a shadow government that's completely unconstitutional, and that, frankly, he's a communist and so are all of his friends.”

Boortz: “The stock market drops” while “Obama is delivering his 'Banks are evil, we are good' speech.” Radio host Neal Boortz stated in a January 22 blog post, “Obama is now proposing the most sweeping and onerous new regulations on banks and financial institutions since the 1930's What happens as Obama is delivering his 'Banks are evil, we are good' speech? The stock market drops to its lowest level in months. Oh ... but I'm sure one thing had nothing to do with the other." Boortz added, “Obama's populist assault on the world of high finance, coupled with China's tightened lending, has left Wall Street in a state of uncertainty. Is this the way to grow jobs?”

John Lott: “Obama's populist attacks drives down stock market.” John R. Lott Jr. wrote in a January 23 blog post, “Obama's populist attacks drives down stock market.” Lott quoted from a Reuters report stating, “U.S. stocks capped their worst three-day slide in 10 months on Friday on fears the White House's plan to curb bank risk-taking would cut profits,” and added, “Beating up the banks has sure brought a lot of confidence to the market.”

American Thinker: “Obama's bank bashing killing wealth creation.” Ron Lipsman wrote in a January 24 American Thinker post, “There was a period about ten months ago when every time Obama opened his mouth, the stock market plunged another 100 points. ... Not surprisingly, the market reacted very negatively to these threats-both to the specific prospects inherent in Obama's threats as well as to the uncertainty caused by their enunciation. Untold hundreds of millions of dollars of asset wealth were destroyed by the resultant decline in the Dow and other indices." Lipsman added:

Well, here we go again. This past week his Excellency reprised his repeated thrashing of the banking and insurance industries - with the same result on the stock market! Now, many expected that the recent market surge would yield to a correction. Leave it to our clueless President to initiate the correction and render it more severe than necessary. It's time for Bill to tell him to shut up again.

This is what we get for electing an ignorant community organizer with no expertise in running a newsstand, much less a country. Republicans might be happy that his Presidency is going up in flames, but that brings scant comfort to those whose wealth he is shrinking. As for the Democrats, if I may quote Monty Pelerin in a blog in the Jan 23 issue of this magazine: The only happy Democrat today is Jimmy Carter. He probably senses the chance to pass his heavy mantle of “worst President in my lifetime” on to “The One.”