What Saved the Dow? Sensible Economic Policies

As of the closing bell on Tuesday, the Dow was trading at 14,254—well above the previous all-time peak of 14,198, which the market reached on October 11, 2007. With investors increasingly optimistic about the economy, nearly four hundred issues on the New York Stock Exchange hit new highs. Sticklers will point out that, after accounting for inflation, stock prices are still more than ten per cent below their previous peak, but that’s quibbling. Any way you look at it, during the past four years the market has made a remarkable recovery from the post-Lehman crash.

One way to gauge this turnaround is to take a quick historical quiz. How long do you think it took the market to regain its high after the stock-market crash of 1929? Five years? Ten years? Fifteen years? Twenty years? Keep going. On September 3, 1929, the Dow closed at 381.17, a level it didn’t see again until November 23, 1954. That’s twenty-five years, two months, and twenty days—more than a quarter of a century. The stock market’s recuperation from the Great Depression took almost five times as long as its recovery from the Great Recession.

No big surprise there, you might say. September, 1929, marked the peak of a stock-market bubble, and the Great Depression was a lot more serious than the Great Recession. In the early nineteen-thirties, the unemployment rate reached about thirty per cent, there was widespread hunger, and some serious thinkers believed capitalism was imploding. By the summer of 1932, the stock market had fallen by almost ninety per cent.

Whilst that’s all undeniable, nobody should understate the transformation in sentiment over the past forty-eight months. On March 2, 2009, six weeks after President Obama took office, the Dow closed at 6,626.90. In the six months after the collapse of Lehman Brothers, it had fallen more than four thousand points. Compared to its October, 2007, peak, the market was down about fifty-four per cent—the biggest decline it had suffered since the Second World War. Between 1973 and 1975, the Dow dropped forty-five per cent. In October, 1987, it tumbled by a third. But this fall was deeper than either of those.

If, in early March of 2009, you had said the market would rebound to a new high within four years, few would have believed you. With consumers and employers panicking over the ongoing financial crisis, the Gross Domestic Product was falling at an alarming rate, and the economy was shedding more than seven hundred thousand jobs a month. On Wall Street, analysts and investors had roundly booed the initial effort by Tim Geithner, the new Treasury Secretary, to explain how he intended to end the panic.

At the risk of beating a dead horse, and enraging some devotees of Andrew Mellon’s approach to economics, it’s perhaps worth remembering what turned things around: activist government policies. A combination of government bailouts (which originated in the Bush Administration), emergency-lending programs from the Fed, and bank stress tests organized by the Fed and the Treasury Department stabilized the financial system. The Obama Administration’s stimulus program put a floor under the economy at large. And cheap money—a result of the Fed’s ongoing efforts to flood the financial system with cash and keep interest rates ultra-low—eventually led to a recovery in stock prices and housing prices, which was what Ben Bernanke and his colleagues wanted to see. In the nineteen-thirties, the initial policy response was very misguided. With Mellon at the Treasury, there were virtually no stimulus programs; meanwhile the Federal Reserve stood by and allowed many banks to collapse. As a result of this inaction, the economy spiralled downward until F.D.R. entered the White House.

Of course, the combined policy effort this time around hasn’t been a complete success. The rebound in G.D.P. and job growth has been slower than it was during the recoveries from previous deep recessions: consequently, the unemployment rate remains stubbornly high, and many discouraged workers have dropped out of the labor force. Other deep underlying problems that are afflicting the U.S. economy, such as stagnant wage growth and rising inequality, remain unresolved. And with Washington policymakers busy raising taxes and cutting government spending, there’s always a danger that even the modest recovery we have seen could be extinguished.

For reasons I’ve written about before, I’m reasonably confident this won’t happen and the recovery will continue. Clearly, most investors agree. In fact, the almost universally sanguine attitude to be found on Wall Street is one of the reasons I think we may well be heading for a short-term correction in the market. Having tacked on more than thirteen hundred points since Christmas, the Dow already reflects a lot of good news.

But that’s another story. Today is a moment for marking milestones, and not just the obvious one that will send people looking for their brokerage and 401(k) statements. Despite all of the noise and fury coming out of Washington, activist government and Keynesian economics are alive and well. Last November’s reëlection of President Obama demonstrated that they have passed the political test. Today’s events on Wall Street show that they have passed the market test.

Only one question remains unresolved: When will the free-market crowd acknowledge this success?

Original Article
Source: newyorker.com
Author:  John Cassidy