Is the Grim Reaper masquerading as Tim Geithner?
That’s the emerging storyline. After President Obama’s Treasury Secretary unveiled a new bank bailout plan that sounded more like a plan to make a plan, the stock market went into an immediate funk. Stocks started to plunge while he was still speaking. The Dow Jones Industrial Average ended the day of Geithner’s debut down 4.6 percent, the worst showing of Obama’s nascent presidency. And the press pilloried the performance:
[See what 8 bailout CEOs need to explain.]
I don’t know if Geithner is up to the job or not. Certainly neither he nor Obama planned to kick off a new and improved bank bailout scheme by thrashing the stock market. Like we need any more drama on Wall Street. If Obama and Geithner thought that a vague, incomplete plan would inspire confidence, they badly underestimated how fragile the markets really are.
But Geithner’s first misstep could end up working in his favor. Here’s why:
It’s not about the stock markets. We’ve gotten into the habit of thinking that the direction of the Dow accurately reflects whether the economy is improving or not. Sometimes it does. But not always.
There are many times when bad news about the economy – like a rise in unemployment – sends the Dow up instead of down, because traders guess that the bad news might give the feds more incentive to take action that could be good for stocks. All that reflects is a short-term belief that stocks might go higher tomorrow than today. It doesn’t say anything about whether the economy is actually getting healthier.
Many of the bailout actions up till now have been driven by the need to reassure the markets. That’s one reason for those familiar, weekend-long emergency meetings between government officials and frantic corporate executives that end with a bailout announcement late on Sunday night: Those meetings were timed - and probably rushed - to come up with some kind of reassuring outcome before the Asian stock markets opened, half a day ahead of New York. God forbid we should start the trading week on a sour note.
[See how Wall Street continues to doom itself.]
But it’s not the government’s job to worry about whether the stock markets go up or down. In a crisis like we’re in, the feds should worry about what will get the economy growing again, give banks a reason to lend, and motivate companies to stop firing and start hiring. Stock values might help gauge whether that’s happening, but they’re an indicator that will rise along with the economy – not a catalyst of growth in themselves.
Merely trying to goose the markets is a sucker’s game. If Geithner and Obama shrug off the markets' reaction to their draft of a plan – and eventually produce some real action - the markets will learn to adapt to them. As they should. But if the process happens in reverse, and the Obama administration starts to pander to what the markets want to hear, there’s no end to the potential misuse of the government’s power.
What’s bad for bank stocks might be good for the economy. If Geither had announced that the government was giving away unlimited funds to solve all of the problems at Citigroup and Bank of America and any other troubled bank, the stock markets would have soared. Because the banks would have been off the hook! But does anybody think that’s what Geithner should have announced?
[Here’s one CEO who gets it.]
Instead, he basically said that banks seeking bailout money in the future have to prove they’re healthy enough to put it to good use – the “stress test” – and they’ll also have to abide by conditions that are much stricter than before. Investors hate that, because it’s going to be costly and time-consuming for many banks to solve their own problems. It’s so much easier when a rich uncle materializes with a wad of cash to wave away the demons.
Geithner didn’t say what would happen to banks that need a bailout – but fail the stress test. That produced the dreaded uncertainty, which always sends Wall Street into paroxysms. Once again, it raises the prospect of “nationalizing” some of the biggest, most important banks, which would wipe out shareholders. Hundreds of smaller banks could fail, taking down those shareholders, too. That’s why financial stocks led the market plunge on Geithner’s big day, with Citigroup falling about 15 percent, and Bank of America about 19 percent.
Obviously that’s a major bummer for bank investors. But for taxpayers, it sounds as if bank-bailout money will be doled out more carefully than before. Nationalizing Citigroup or Bank of America is a dire scenario, but it would stabilize the banks and keep them in business, and it might even help with lending. After the excesses we’ve seen so far, should we really complain about Washington turning a cold shoulder to the worst Wall Street offenders?
The Geithner plan lowers expectations. And they need to be lower. The only market-mover capable of sending stocks upward lately has been the government. That’s not good. Investors have been anticipating an Obama stimulus extravaganza and a reformulated bank-bailout plan for weeks. That’s probably kept stocks at higher levels than they would otherwise have been at, given that other economic news has been relentlessly bad. Is it possible that investors have been overoptimistic about Obama’s ability to boost the economy? Sure is.
We’re all learning to expect less. In his first press conference, Obama basically cautioned Americans not to expect much of an economic recovery until next year, despite his huge stimulus plan. Geithner followed that up by saying that fixing the banks “will cost money, involve risk, and take time.” If you were expecting a quick fix, that kind of language is quite a buzz-kill. But we have to accept that the party’s over before we can start nursing the hangover.