Let the Free Market be free!
Gov’t Stimulus: "timely, targeted and temporary"
… Ha!
By Craig R. Smith, CEO, SATC
Jan. 24, 2008
After a week of government stimulus talk and a
Federal Reserve rate cut of three-quarters of a percent, the market is
trying to get everyone's attention. The message it's sending? STOP! The
market has some problems to work through and left alone to do so, it
will.
Look at the facts. Last week the president and Congress floated
stimulus proposals that would refund $800 per taxpayer while possibly
cutting corporate and personal taxes for some period of time to
"save" the economy. This was in response to testimony given by
Ben Bernanke to Congress. The stimulus Bernanke would welcome would be
"timely, targeted and temporary."
So the geniuses in D.C. held a press conference, and the market
reacted by dropping the next day.
The following start of business (overseas on Monday) was met with panic
selling. Mumbai down 11 percent. Heng Seng down 8 percent. London off 5.5
percent. The international markets were in free fall. Markets know full
well the government can't do anything in a "timely, targeted and
temporary" way.
Then the Fed announced a three-quarter point cut in the Fed Funds rate
to avoid what clearly appeared to be a 600 to 1,000-point drop evidenced by
a 600-point pre-market decline. The Dow opened down 400 and recovered with
a loss of only 128 by the end of business on Tuesday.
The market opened yesterday with a 300-point sell off only to recover
at the end the day with a 285-point increase. Volatility has been so
extreme even the most seasoned traders are grabbing for the Maalox. Swings
of 500 points have become an everyday occurrence. Buyers returned when they
identified value. Markets work. Left alone we watched a 600-point rally. No
Fed announcements. No congressional promises. Just traders and investors
trading the market.
So what can be surmised from this activity? The markets always get
things right, and this time will be no different than past market events.
Bonds are setting interest rates. Buyers and sellers are establishing real
estate values, and stock buyers and sellers are moving markets.
There is no doubt that banks and insurers talking to regulators as well
as raising fresh capital to work through these problems have had a major
impact on market activity. But business knows better than the government
how to raise, invest and use capital to make profits.
In 1987 we experienced a virtual meltdown in stocks. The Dow lost 37
percent of its value overnight. Within 20 years, however, the Dow rose from
1,738 (after crash low) to a high of 14,164 in 2007. This was during a time
when the FSLIC that insured our savings and loans went broke and the
Resolution Trust Corporation sold billions of dollars of distressed real
estate at the end of the '80s at pennies on the dollar, costing taxpayers.
Within years, as the market and the banks got a handle on the losses
and worked through the problems, we experienced unprecedented grow in both
equities and real estate. And while the U.S. dollar dropped in value
against all world currencies, investors who hedged portfolios with
currencies and gold did extremely well. This cycle will be no different
… unless the government gets involved.
I am a firm believer in markets. They work. They have to work because
markets are rewarded for performance and punished for lack thereof.
Government, on the other hand, never works. It is slow, costly and much
like a supertanker; it can carry a lot of weight but takes forever to turn.
My one wish for the current market is that it be left alone to work out
its problems without the so-called help of the government or the Federal
Reserve. The government can't take the garbage out efficiently and the Fed
is always ahead or behind the curve. Markets are the only entities that
know how to fix markets.
The moment the market is allowed to drop or increase without artificial
stimulus, the sooner we will see a real recovery. Any tampering will just
postpone the inevitable. Debt can be used like a drug to instill a false
sense of well-being on this market. However, until the underlying
structural problems are addressed and strategies are employed to work
through those problems, fixes will be temporary. Much like drugs. The pain
may go away, but the disease will remain unless treated properly.
It seems nowadays we look to government to fix all the ills of the
world. It is the height of insanity, however, to rely on Congress to fix a
$14 trillion corporation called the United States of America when they
can't even balance a budget or stop spending money on bridges to nowhere.
The government doesn't create anything other than partisan chaos.
The Democratic socialist interpretation of our country's economy can be
summed up in the words of Ronald Reagan in 1986 when he said: "If it
moves, tax it. If it keeps moving, regulate it. And if it stops moving,
subsidize it."
It is time for the country to allow kids to be kids, adults be adults
and markets to be markets. If our markets are truly "free
markets," then let them be free and they will fix themselves.