We now have a Political Economy

Charles Krauthammer observes that we have shifted from a market-driven economy to a political-driven economy:

Today’s extreme stock market volatility is not just a symptom of fear — fear cannot account for days of wild market swings upward — but a reaction to meta-economic events: political decisions that have vast economic effects.

As economist Irwin Stelzer argues, we have gone from a market-driven economy to a politically driven economy. Consider seven days in November. On Tuesday, Nov. 18, Paulson broadly implies that he’s using only half the $700 billion bailout money. Having already spent most of his $350 billion, he’s going to leave the rest to his successor. The message received on Wall Street — I’m done, I’m gone.

Facing the prospect of two months of political limbo, the market craters. Led by the banks (whose balance sheets did not change between Tuesday and Wednesday), the market sees the largest two-day drop in the S&P since 1933, not a very good year.

The next day (Friday) at 3 p.m., word leaks of Timothy Geithner’s impending nomination as Treasury secretary. The mere suggestion of continuity — and continued authoritative intervention during the interregnum by the guy who’d been working hand in glove with Paulson all along — sends the Dow up 500 points in one hour.

Monday sees a 400-point increase, the biggest two-day (percentage) rise since 1987. Why? Three political events: Paulson’s weekend Citigroup bailout; the official rollout of Barack Obama’s economic team, Geithner and Larry Summers; and Paulson quietly walking back from his earlier de facto resignation by indicating that he would be ready to use the remaining $350 billion (with Team Obama input) over the next two months.

That undid the market swoon — and dramatically demonstrated how politically driven the economy has become.

"Sorry, Bill. Tongue firmly in cheek, here."

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  • Peter Leavitt

    Krauthammer is right. Our nation has become obsessed with national politics. This past presidential campaign was seriously fought over two years with many Americans obsessed by it. Already, we hear talk of 2012.

    The political and economic strength of our nation rests with responsible, moral, hard-working Americans who don’t need a nanny government looking over them.

    Friedrich Hayek in Road to Serfdom points out when any government gets overly involved in an economy the long range effect is to return hard working individual to a modern form of serfdom.

    Obama is basically the sort of leftist who believes more in government than the people as the strength of the nation. He will undoubtedly use this economic crisis, which was mostly caused by governmental softening of mortgage credit standards, as an excuse to further involve the government in the economy.

    Conservatives need to see this reality and oppose it strongly.