Now This Makes Some Sense.
Last Monday, September 8, 2008, I wrote about how the US stock market’s response to the Fannie Mae and Freddie Mac bailouts made no sense:
The U.S. government decided to step in and take control of Fannie Mae and Freddie Mac yesterday.
The U.S. stock market responded today by jumping higher: the Dow Jones Industrial Average closed up about 290 points or 2.58% and the S&P 500 was up 25.48 or 2.05%
How can piling on more national debt to “bailout” Fannie Mae and Freddie Mac be considered a good thing for the American economy and American businesses?
True, Fannie and Freddie won’t go bankrupt immediately.
But what about the United States’ taxpayer?
Our national debt is large, our deficit is at an all time high (which means the national debt is growing not shrinking), and the automakers are next in line for their government handout.
Exactly how does adding more to the American taxpayers’ tab improve the underlying economic conditions of the American economy and, by extension, American businesses?
Call me crazy, but a “bailout” of 2 private companies with negative net worth’s by a government with a negative net worth does not sound like a solution to anything (except maybe a bizzaro world riddle).
(http://www.myreferenceframe.com/economics/this-makes-no-sense/).
Over the weekend, Lehman Brothers filed for bankruptcy protection, Merrill Lynch was sold to Bank of America, and AIG raced to raise capital before the clock strikes midnight. [1]
Today the Dow Jones Industrial Average responded by closing down about 500 points or 4.4%. The S&P 500 dropped 4.7%.
Now this makes some sense.
In a free market economy, companies take risks, are rewarded if they are wise, pay dearly if they folly, and at the end of the day, life goes on with a stronger set of players.
While we will have turmoil in the short-term, the events of the last 72 hours are good news for the long-term health of the American financial system.
And really, isn’t it amazing just how fast Wall Street can make things happen when the chance of a government bailout disappears?
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