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ECONOMIC STIMULUS

Did Big Government Lead To The Stock Market Recovery?

Federal spending has increased economic growth, writer argues

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by David Mark

Editor-in-Chief t

Image: AP

After the 1929 stock market crash the Dow index took 25 years to hit a new high. This time, it got back there in five years. What's different? Policy.

That's the view of New Yorker writer John Cassidy, who cites Keynesian economics - massive government spending - as key to the Dow's finish last week above 14,000. Activist government policies are responsible for the turnaround.

"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," Cassidy writes.

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."

Compare that pro-active response with the hands-off approach of President Herbert Hoover and Treasury Secretary Andrew Mellon in the early 1930s. "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 spiraled downward until F.D.R. entered the White House."

Via The New Yorker.
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  • u
    Romney_Rube
    !
    The Federal Reserve's debt monetization AKA QE or Quantitative Easing is directly responsible for driving up Stock Market values to 2007 levels. The FED balance sheet will be at $4 trillion by year's end. Truth be told, the FED cannot afford to ever unwind this balance sheet since it will result in a collapse of the very house of cards it has created over the past several years. Likewise, while the stock market, banks, and federal government benefitted both from QE & ZERO % Interest rates, the nation savers have been deliberately screwed out of a fair return for the risk of owning dollars. Needless to say, this will not be a pretty ending.
  • u
    BossTweed
    !
    Brace yourself. Once Obama lets Bernancke stop printing $65 Billlion per month to prop up the equitey market the bottom will fall out of the Market. The challenge is knowing when to get out before the inevitable collapse. Tragically, only Obama's handlers know when they will pull the plug. Everyone but Bureaucrats and Unionistas will see the value of their 401k's plummet and their future prospects melt away.
  • View all 7 replies >
  • bsking
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    Printing monopoly money to "buy" our own debt is why the stock market appears to be doing well. The housing market had a very similar meteoric rise until it crested as well, and then plumeted.
  • o
    Republican5150
    !
    The democrats have not figured out quantitative easing or "stimulus" as they like to call it only devalues all of our dollars. Including theirs.
  • o
    Sonny
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    Actually the United States is barely having trouble just paying the interest on our own debt---I doubt that we are "buying it back" at this time...The stock market (and the 1% of of Americans who own it)---have looked to markets overseas for the most part, in terms of building its coffers ----and, in many instances has not gotten its wealth from America. So if there is any "printing of monopoly money going on"---Its being done by the "Fed" to service the banking industry. And----Unless the US Gov. is heavily leveraged in the stock market (which it is not)---Then your connection of the two is simply not accurate.
  • o
    Sonny
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    @Republican5150 "Quantitative Easing"---is a function of the Federal Reserve System. And you should note that... Mr.Ben Shalom Bernanke is a Republican, not a Democrat. He is also an Economist, graduating from Harvard-- "summa cum laude". And earned his Doctorate Degree at MIT He is a former Chairman of The Council of Economic Advisors. He has taught economics at Stanford, New York University , and Princeton University------I think he just might know a bit more about the economy than both you and "bs king" combined...Thank you very much...LOL!
  • o
    Republican5150
    !
    @Sonny you know what they say about teachers? They are the ones who couldn't hack it in the real world.

    I got my undergraduate and graduate in accounting plus even recieved licensing in a few states. All means precisely dick in the real world. Only thing it means is I was able to retain knowledge and regurgitate lectures, textbooks and notes for tests.

    What does matter is your leader, went against the very principle of "free market."

    From Wikipedia so even you can understand

    "A free market is a market structure in which the distribution and costs of goods and services, along with the structure and hierarchy between capital and consumer goods, are coordinated by supply and demand unhindered by external regulation or control by government or monopolies."

    Why is this important? When your leader made the first bailouts to Freddie Mac, Fannie Mae, AIG, and other banks or financial institutions he took away the threat of failure. Your teammates were trying to control outcomes. Doubled down in Detroit with the second and third rounds.

    Have you actually seen how many of those corporations have actually paid their bailouts back?

    My firm, from day one of the "stimulus", had told all our clients to dump municipal bonds and not invest in them. Why do you think it took GM so long to sell off the remaining portions of their company to fiat and other foreign investors? Because the American populous controlled 29% of the GM's stock through muni bonds. GM stock was and is toxic.

    You could take your investment advice from a guy who is a professor in a college who has never worked a day in the market or you could take your investment guidance from someone that knows.
  • o
    Republican5150
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    @Sonny and just so you're clear when you print money you have to have gold bullion to support it. When your teammate order the "stimulus" the federal reserve printed more money than gold bullion in reserve. Why is that important Sonny?

    When you have paper and nothing to support it, it is essentially worthless. Why is that important for Americans? Because our existance relies on printed money. Unless of course you want to go back to a barter and trade system. But under that style of trafe, he who has the biggest gun makes the rules.
  • View all 18 replies >
  • WMCOL
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    So it is an acknowledgement that Obama's plan and his leadership was successful. Even Rush admits that, after scorning the Stimulus as a failure and claiming Wall Street feared this Administration.
  • stepped_in_it
    !
    Soooo, we now count success before he has actually done much. HMMM.....wondering if Mr. Obama will get awarded a "participant" trophy like they give the "T-Ball" players?
    I NEVER count my eggs until all the hens have hatched them, as some might fall out of the nest and some might be "bad" eggs! Just a little hint of what might be the future!
  • WMCOL
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    @stepped_in_it
    With any conservative President Rush and other right-wingers would call a similar situation with stock market a Presidential success.
  • u
    DrNickels
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    Exactly. If you track for inflation and the devaluing of our currency, then really we are all worse off than we were before the bailouts. I'm still of a firm believe we should have let some businesses fail. Some banks and GM should have underwent bankruptcy with guarantees for financial assistance from the government if they restructured. To just print more money and flood the market with it and throw it at businesses that made poor investments and poor decisions was a horrible idea. When the next bubble bursts (most likely student loan debt) as others have said this house of cards will fall and we will make Greece look like a less than stellar day at the stock market.
  • u
    S-N-A-F-U
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    Another scenario is, that this recent boom is based more on Corporate earnings not Big Govt, and staying away from tenuous investments linked to govt. When Government is spending a TRILLION more than they take in each year, eventually debt will consume itself and this fragile economy.....Stay tuned.
  • u
    Polusalo
    !
    Could we stop with the BS poll answers?

    "Liberal foolishness", really? I realize you guys are all about controversy and trying to get people riled up on the forums, but seriously, could you stop trying to split the country more than it already is?

    What's next, an answer being "Just bible thumping Republicans bible thumping". Just stop.
  • CATTLEPROD
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    Big government is the answer to every problem, this is just proof of it, on wall street at least. On main street I quit counting the number of restaraunts and small shops that have been boarded up and now have for sale signs.
  • u
    Polusalo
    !
    Gotta give some credit where credit is due. Location, management, operating capital, and about 50 other things are all parts of shops (especially restaurants (don't feel bad about misspelling the word, I have to Google it everytime to get the right spelling)) closing down.

    What's the popular stat people like using? 9/10 close within the first year. It's not really true, but it's still a really high number. Something along the lines of 65-70% of restaurants fail and something along the lines of 55-60% of other businesses. It's been like that for quite some time, far before people had issues with the government "helping".
  • PayThatCEO
    !
    You do realize this is a big country, right? Where you might be things haven't improved yet. Where I am, we're seeing it everyday.

    I know some people are angry because they thought every business in America would hold out until that black Democrat was out of office in order to make it look like he made the economy crappy, but that's not happening. Businesses are stepping up now and making a comeback from that president who really DID screw up the economy.
  • CATTLEPROD
    !
    @Polusalo I'm talking about places that have been there for the 20 years I have been driving the streets around here, and in what would be considered upper class areas. Lots of tip based income not there for a whole bunch of employees that aint there either. Meijers is closing stores right and left around here, thats a whole bunch more unemployment to come, and the stores that have been boarded up have been that way for several years now, blighting the neighborhood and inviting plenty of gang tags and grafitti, obamas ghettofication of amerika. (his spelling, not mine.)
  • u
    Polusalo
    !
    @CATTLEPROD

    And things won't recover until people stop blaming the current president, whoever and whichever he may be (was Bush before Obama) and doing what needs to be done to keep their business afloat.

    I used to work a pizza franchise. It's failing hard. It's been there since the 70's. It isn't because of Obama or Bush or Clinton or Bush, it was because the managers there don't know how to manage, employee theft is huge, and the people being hired were friends instead of the best candidate. Nothing to do with Obama, yet people are blaming Obama for it having $5,000 weeks. Things won't get better until people decide they want to do the work to make it better.
  • CATTLEPROD
    !
    @Polusalo I agree with you about the american employee problem, especially in those type jobs, I think when older people get stuck doing a teenagers job with corresponding pay, they feel justified in raiding the cooler, say. I used to do maintanence work for wendys. The franchise I worked for installed cameras in the cooler, and caught a contractor helping himself to hamburgers. So in that case it wasnt even a store employee. I hope he enjoyed his bbq or whatever. I dont ever want that on my resume. But keeping a lid on "shrinkage" was a big problem for them. I think anyone making less than 10 dollars an hour should pay no taxes, increasing the willingness to take those jobs and be happier at it.
  • View all 6 replies >
  • u
    BelinKS
    !
    It looks good on paper. It looks like Bush and Obama might have done the right thing. But flooding the market with money that has nothing to back it up could backfire internationally. If that happens, the DOW will again plummet. We will be back in a bad position. That's why I say it looks good on paper, but if things go down again, people that do not deal with the stock market at all could be affected. Their pay may be the same, but prices will be jacked up and hurt everyone. It's a tenuous situation. I pray that everything will stay normalized. That does mean the DOW will drop some, but this kind of high is not sustainable. Just as long as it only drops to still normalized levels we'll be ok. I pray that the cheapened dollar does not come back to bite us in the rear.
  • Thunderchicken
    !
    " I pray that the cheapened dollar does not come back to bite us in the rear."

    As do I but my rational side says hang on. It's gonna get weird.
  • Ryuo
    !
    Setting credit artificially low leads to bubbles, Mr. Bernanke - read your Mises and Hayek.

    Dotcom Crash, Housing Bubble, and now college loan bubble... these guys are incapable of learning.
  • u
    ErnestPayne
    !
    Short answer? Yes. Long answer? YYEESS. As for the 72 percent (current) that don't believe this? Take some courses in economics. I believe they start teaching it in grade 5.
  • u
    Chromalord
    !
    You have to look at the type of stocks which are doing the best overall. The real estate market is picking up speed in a big way, so the mortgage banks are doing better ( not that the banks are being any nicer). There were $150 billion no-bid defense contracts this year, triple the year before. Oil, communications, medical industries, all up. All of these have something in common: they hire lobbying firms to keep them deregulated. Many of them pay little taxes or no tax at all ( Exon, facebook) Just look at the banking industry this week when Jennifer Warren raked them over the coals about unaccountable money laundering. They pay a fine and keep on laundering. With the assurance from all of the lobbying firms that the mechanics are in place to insure business will continue the same path, due to a bought-out congress to make those methods legal, then the real essence of Wall Street emerges- futures speculations which they are selling at record pace. When the smaller companies and the general investing public sees the big numbers, they too want to be a part of the party. But this time its different. The stock market is as volatile and speculative as it ever was for those type of investors for B-level stocks. B- level would be green tech companies, or retail chains like Federated. A lot of the A-level stocks are priced far out of reach for the average investor and a lot of the pertinent information about them is not made available to John Q Public. This doesn't mean a novice investor cannot make it big, but their chances are the slimmest it has been in a long while, its more mathematical probability then it is planned preparation.
  • u
    AceLuby
    !
    This is how Reagan got out of his recession. Funny how nobody acknowledges this fact when talking about his presidency. The govt has three major tools available to them for stimulus; cut taxes, cut interest rates, increase spending. The Reagan administration did all three.
  • u
    Libertyiskey
    !
    It's artificial, what happens when they stop artificially lowering the interest rates and stop flooding the market with cash (aka printing money)? Market correction and the longer you fuck with the market the angrier it gets and the more harsh the correction will be.
  • Knuckleballer
    !
    Calling a blip in the Dow a Stock Market Recovery is a bit presumptuous, but that's OK so long as the Ministry of Propaganda is willing to accept responsibility for the crash in a couple of months when the market settles down.

    The economy is FAR FROM healthy; like a terminal cancer patient every tiny bit of good news is treated like THE MIRACLE CURE.
  • Bobolinsky
    !
    Anyone looking at the stock market and thinking it's a good sign doesn't understand why the stock market is doing well... for now...

    QE- Infinity anyone?
  • Thunderchicken
    !
    Thank him for devaluing the currency. Setting up the next market correction. Setting up sky interest rates in the future. IOW making the same mistakes as Johnson and Nixon. It's gonna get interesting.
  • u
    Yank
    !
    "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".

    Don't forget that it also led to the 8% real inflation rate. It also led to banks and financial institutions making record profits on the backs of the tax payers.
  • o
    Sonny
    !
    The other thing that this article fails to mention is that more than half of the stock market is owned by only 1% of the population. And when you own that much of the countries wealth and its stock....YOU decide if, when, and how any such "recovery" will take place....Not the "government" or any of the "little investors"...Its the top 1% that can change the economy any time its wants to..
  • View all 6 replies >
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