Saturday, March 07, 2009

Obama & The Stock Market Crash

While stocks barely managed to stay positive for the day after having been down as much as 2%, they (as measured by the S&P 500 index) are still down nearly a third since the November 4 close of 1005.75. As you may remember, November 4 was the last trading day before Obama won the Presidential election.

Many Republican commentators blame this crash entirely on Obama, something which upsets certain Obama apologists, including Robert Reich and Barry Ritholtz.

The correct answer to this question is similar to the answer to the question of whether Herbert Hoover's policies caused the Great Depression. They weren't the main cause of the Depression (the most important cause was instead monetary factors). But they did make the Depression even worse than what would have been the case if monetary factors alone had been at work.

Similarly, Obama is not entirely responsible for the crash, but he is not completely innocent either. The truth is that the main reason for this meltdown is the lagged effects of the housing bubble. So, even if John McCain (or even Ron Paul) had won the Presidential election, the S&P 500 would probably have been trading well below 1005.75 right now. But it would probably have been trading significantly higher than 683. The reason for this is that Obama has proposed an unprecedented increase in the budget deficit, which will reduce future growth, while he at the same time wants to increase taxation of corporations. Both of these factors reduce the present value of future net profits, and so also reduce the fundamental value of stocks.


Blogger Allen said...

One of the things that I appreciate about what you have to write is that you're not caught up in the rhetoric. For example, you don't feel compelled to blame Obama for anything more than what is reasonable and rational. The stock market would be having all sorts of issues right now even under the best of polices. But you have to wonder how Obama, Pelosi and other politicians can claim these policies will make things better when the markets are looking at them, putting their own dollars where their mouths are, and saying they won't make things overall better in the future.

9:23 PM  

Post a Comment

<< Home