If Stocks Are in Turmoil, Blame the Feds

Investors Fear "Regime Uncertainty," Writes Declan McCullagh

(CBS)  In financial and investing circles, it is an article of faith that investors abhor uncertainty. Measurable risks are fine, but unknown risks can be deadly.

Unfortunately, both the Bush and Obama administrations are responsible for injecting a staggering amount of uncertainty into the world's financial markets. If you've given up opening your 401(k) statements, or this week's dismal stock market news has postponed your retirement, thank your elected officials for their contribution to this situation.

Since September 2008 -- a mere five months ago -- the Feds let Lehman Brothers fail while seizing control of Fannie Mae and Freddie Mac and rescuing insurance giant AIG. It temporarily suspended investors' ability to bet on price declines in some stocks, but not others. It has bailed out some failing companies and ignored the pleas of others.

The latest idea: To allow mortgage contracts to be rewritten after they'e been signed. A House of Representatives committee has approved a proposal to allow bankruptcy judges to lower the interest rate and the amount owed on existing loans; a companion bill is pending in the Senate.

Does anyone think this will encourage investors to buy mortgages or the banks that write them? Or that only existing mortgages will qualify? Goldman Sachs CEO Lloyd Blankfein told a House panel that a potential consequence is "less capital flows into this market." George Mason University economics professor Todd Zywicki noted that not only will interest rates rise and foreclosures increase, but it would "exacerbate the already existing uncertainty in the financial system."

Then there's the shapeshifting Troubled Assets Relief Program, or TARP. It was sold to the public as a means to buy toxic assets from banks that nobody else wanted to touch. Then it morphed into the Treasury buying chunks of businesses outright and receiving preferred stock in return.

President Bush initially claimed that TARP couldn't be used for a Detroit bailout, in part because the legislation refers to "financial institutions," but he changed his mind in December and wrote a multi-billion dollar check. Treasury Secretary Timothy Geithner announced yet another set of TARP rules on his first day in office.

Perhaps some of these measures are necessary. Perhaps they're not. But a collection of rules that seem to be constantly in flux is no way to reassure investors already rattled by a worldwide recession that is sharp and severe. Talk of outright bank nationalization, which the New York Times reported is taking place in the Obama administration, isn't helping.

The phrase that describes this situation is "regime uncertainty," coined by Robert Higgs, an economic historian who edits the quarterly journal of the Independent Institute in Oakland, Calif.

Higgs wrote a 1997 article on the Great Depression that highlighted a telling fact: gross private investment dropped from about $1.2 trillion in the late 1920s, remained under $1 trillion for most of the 1930s, and did not resume its usual upwards trajectory until 1946, after President Truman took office and World War II ended. (Figures are in 1987 dollars.)

Early in his presidency, Franklin Roosevelt was sensitive to the possibility of making the depression worse by undermining business confidence. But within a few years, he and his advisors had come to view business leaders as adversaries to be targeted with a host of new laws and regulations -- including 75 percent marginal tax rates. By November 1941, a Fortune poll of executives found that over 40 percent predicted the emergence of a fascist, socialist, or "semi-socialized society in which there will be very little room for the profit system to operate."

Lammont du Pont, the great-grandson of the legendary founder of the DuPont chemical company, said in 1937: "Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don't know. Is labor to be union or nonunion?... Are we to have inflation or deflation, more government spending or less?... Are new restrictions to be placed on capital, new limits on profits?... It is impossible to even guess at the answers."

Sound familiar? How about this quotation about the problems of unpredictable political systems: "If it is changing every week, how can you expect me to have confidence?" That was Lou Jiwei, the chairman and chief executive of China's influential sovereign wealth fund, speaking in December 2008.

Nobody is saying that economic conditions today are the same as the Great Depression; even with the turmoil on Wall Street, they're clearly not. And unemployment has yet to come close to where it was as recently as 1982. Obama's advisors don't seem to share Roosevelt's hostility to business, and it's true that investors always have had to make bets based on expected government policies.

Yet the political unpredictability then is starting to echo today's. "I think there are parallels," said Higgs, the economic historian, in an interview this week. "This situation we're in now is fraught with regime uncertainty... (especially) if private property has no substance because no contracts are durable and enforceable and create stable expectations. I think they're already reacting this way in the financial markets."
Most of today's economic turmoil has been caused by the bursting of a series of historic asset bubbles and prices resetting to post-bubble levels. But it's been aggravated by regime uncertainty under Bush and Obama -- and, alas, there's no indication that our elected officials realize the harm that such erratic actions can cause.

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Declan McCullagh is the chief political correspondent for CNET. Previously, he was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives in the San Francisco Bay area. His e-mail address is [e-mail]

[carlos0064]

Instead of blaming, Tom, Dick, and Harry, I think we should think about the future of America and our families. Lets push ahead and start investing into Wall Street and other areas where needed to grow. Time to move on and think about how we can invest our time and money into this great country of ours. It's to late for regrets, the past is the past, but the future is the future. Think! Think! Think! America and Unite.

[likeitis5050]

FINALLY!!! Someone got it right! THE GOVERNMENT! Both the Dems and Repubs get to share in this disaster. Both Bush and Obama are guilty of ruling by fear....fear we're going under...fear we're in another GREAT DESPRESSION...fear fear fear. What we actually have is anger and it's growing daily. Mad as he11 and not gonna take it anymore....and when the people have had enough...it won't be one party over another getting kicked to the curb....it's all of them. The Government is out of control....and hoping deserately to blame corporate greed (which they fostered and benefited from, by the way). Knock it off. The Government needs to be cleaned out....from top to bottom...s.crew the 'yes we can c.rap' that now has turned into 'crisis crisis crisis...run for your lives'. Enough is enough.

[goodyusa]

Blame the feds?!?!?!?!?!? Blame the slimy democrat politicians, think BARNEY FRANK, DUH UH. What planet do you live on, DECLAN?

[whitemale09]

BLAME THE 1.4 QUADRILLION IN WORTHLESS DERIVATIVES MARKET!!!!

I wish CBS will stop with these silly stories and focus on the DERIVATIVES!!!!!

WE CANNOT EAT 1.4 QUADRILLION IN WORTHLESS DERIVATIVES AND STUPID CREDIT-DEFAULT-SWAPS!!!!

[ne_patriot7]

"Does anyone think this will encourage investors to buy mortgages or the banks that write them? "

In my opinion, there outa be a law that the bank that writes the mortgage, holds the mortgage until it is paid in full by the borrower. In other words, a mortgage should be an unsaleable commodity..
n one fell swoop, this would insure the banks lend only to qualified borrowers at a rate they can afford lest they be stuck with the foreclosed property.

[greeneyes222]

""Unfortunately, both the Bush and Obama administrations are responsible for injecting a staggering amount of uncertainty into the world''s financial markets."

That''s a pretty amazing feat for a President who''s only been in office for 3 weeks. --Posted by mainedoggie

========
You're right, but not in the way you intended. Obama's been fast, unfortunately his plans have been vague and misleading. Governing isn't the same as running for office, and it's starting to show.

[beach671]

Free Trade failed. Letting illegal immigrants start getting mortgages in 2005 failed. Letting illegal immigrants get auto loans with only 2 utility bills, failed. The Department of Defense failed when it didn't prevent the invasion of 1/3rd of Mexico's workforce into the US. Of which they sapped the States dry for school for illegal kids, emergency room service, crime, costs to imprison them.

We've been so generous to the world, now we're bankrupt. That's a Federal Government, fail.

But just look at who the people elected to lead us, not the countries brightest.

[tincup356]

I agree, it''s to change the whole system and take over the banks and oil companies, also the health care system. These three things are just too important to leave in the hands of greedy corporations. Especially since they tend to be run by failed conservatives.

That is where Obama is simply not liberal and progressive enough for the good of We the People.

Posted by noloyalisti at 03:30 PM : Feb 19, 2009,,,,,,,,,,,,,,,,,,the government cannot take care of its OWN business ,,,what makes you think they can run everybody else s?

[tincup356]

I agree, it''s to change the whole system and take over the banks and oil companies, also the health care system. These three things are just too important to leave in the hands of greedy corporations. Especially since they tend to be run by failed conservatives.

That is where Obama is simply not liberal and progressive enough for the good of We the People.

Posted by noloyalisti at 03:30 PM : Feb 19, 2009,,,,,,,,,,,,,,,,,,the government cannot take care of its OWN business ,,,what makes you think they can run everybody else s?

[mainedoggie]

"Unfortunately, both the Bush and Obama administrations are responsible for injecting a staggering amount of uncertainty into the world's financial markets."


That's a pretty amazing feat for a President who's only been in office for 3 weeks.

Calm down there charley.

*********.

[mainedoggie]

Blame the feds... "The Obama administration understands that my generation spends most of its day on a laptop or a BlackBerry, and that using the Web is easy way to communicate their ideas to their constituents," she said. "Until the Republican Party joins the twenty-first century and learns how to use the Internet, its members will keep getting older and the youth of America will just keep logging on to the other side."

Meghan McCain

[samthetvcat]

PS Like what if the best course of action is to nationalize some banks - the stock markets not going to like that at all, is that right? But then if the stock market goes down then peoples' retirement funds go down as well which makes people more incined to save which then contracts the market, so in that sense I guess the market matters. But does it matter so much so that we shouldn't nationalize banks?

Not great options I guess :(

PS Also, you know how they came out with that foreclosure rescue idea yesterday which in the big picture makes a lot of sense and gets broad bipartisan support - would it be feasible to give people who get a modification a percentage share of ownership in the house with taxpayers getting the rest or would that defeat the whole purpose of the rescue package? Assuming it was feasible just as an example of how solutions might evolve as we try them on for size, isn't that the sort of modification people would want to see go forward if it made more sense rather than see the administration locked into an idea just so they could bring more certainty to the market (?)

I don't know . . . so complicated :(

[samthetvcat]

---"dismal stock market news has postponed your retirement, thank your elected officials for their contribution to this situation."---

This writer's articles are usually straight-forward but sometimes people say one thing and really what they're trying to say is something else (?)

Like is the general idea of this piece really that the President has the power to make the stock market thrive because it's all about confidence, and that confidence and demonstrations of certitude are paramount to truth and the best course of action for a problem that's constantly evolving and for which no roadmap exists? And that furthermore a market that likes bubbles that aren't necessarily grounded on underlying value ought to be a primary concern, moreso than healing banks/housing/unemployment?

Or is the author saying more like omg, he like 59% of the population is stressed out about their retirement funds (according to the AP), and that it's super-stressful because his ideology is different from the people in charge so he's got added anxiety, and look he must not be alone because the stock market feels uncertain about whether these moves are a step in the right direction too (?)

I think Pres. Obama's doing as great a job as we could ask of anybody in his situation - I guess we all just have to wait and see how things go . . . GWB left a disaster in his wake :(

[tincup356]

With jobs being lost , industry gone and money short.....the government should consider repealing the prohibition of Marijuana,,,,,legalization would create millions of jobs, and BILLIONS in revenues,,,,prison over crowding would be eased as would court dockets,,,then they could use that manpower to go after real criminals...like corporate and investment fraud,,,,,the oil and hemp fibers could be used to manufacture many things ,,,including diesel.....it could be a cash crop for EVERY state,,,,,,the laws on the books are archaic ,,,enacted in 1914,,,,,time for some change that can make a difference when America needs JOBS INDUSTRY AND MONEY.

[suzyku]

mr. mccullagh, I believe it is people like you, writing articles like yours, that causes more uncertainty. We absolutely must give these programs, under Obama, a chance to work before you start writing these articles! Why don't you try shutting up for a year, this country is in a mess, thanks in large part to republican BAD ideology, go away now please!

[tincup356]

the best thing that could happen to our country,,,Ban BOTH parties from politics,,,,they have been bought and paid for by lobby dollars for over the last 40 years,,,,,Neither party represents the people.

[valwayne]

What uncertainty?, there's no uncertainty. President Obama has said over and over for almost a month that we are in a crisis, that we are on the verge of Castrophe, and another Great Depression. What is uncertain about that?

[noloyalisti]

I agree, it's to change the whole system and take over the banks and oil companies, also the health care system. These three things are just too important to leave in the hands of greedy corporations. Especially since they tend to be run by failed conservatives.

That is where Obama is simply not liberal and progressive enough for the good of We the People.

[grandesign]

Any idiot can look backwards and see a train wreck that already happened. Look forward and tell me what the future holds!! Now that would be intelligent. Posted by labrat9999 at 12:29 PM : Feb 19, 2009

And and idiot can be texting on his PDA just before a train wreck occurs. People become preoccupied with the nonsensical so that their attention is taken away from important activities that have results on many other people's lives.

[markinga]

Taxpayers have been subsidizing corporations for decades. Nationalize the banks and the oil companies. Fire the CEOs and when the economy gets better let the taxpayers have the bonuses as a return for their investment.