Posted by Curt on 11 October, 2008 at 8:50 am. 3 comments already!


A sobering look from Investor’s Business Daily at what is in store for us for the next four years if Obama is elected:

“Why has the market dropped so much?” everyone asks. What is it about the specter of our first socialist president and the end of capitalism as we know it that they don’t understand?

The freeze-up of the financial system — and government’s seeming inability to thaw it out — are a main concern, no doubt. But more people are also starting to look across the valley, as they say, at what’s in store once this crisis passes.

And right now it looks like the U.S., which built the mightiest, most prosperous economy the world has ever known, is about to turn its back on the free-enterprise system that made it all possible.

It isn’t only that the most anti-capitalist politician ever nominated by a major party is favored to take the White House. It’s that he’ll also have a filibuster-proof Congress led by politicians who are almost as liberal.

Throw in a media establishment dedicated to the implementation of a liberal agenda, and the smothering of dissent wherever it arises, and it’s no wonder panic has set in.

What is that agenda? It starts with a tax system right out of Marx: A massive redistribution of income — from each according to his ability, to each according to his need — all in the name of “neighborliness,” “patriotism,” “fairness” and “justice.”

It continues with a call for a new world order that turns its back on free trade, has no problem with government controlling the means of production, imposes global taxes to support continents where our interests are negligible, signs on to climate treaties that will sap billions more in U.S. productivity and wealth, and institutes an authoritarian health care system that will strip Americans’ freedoms and run up costs.

All the while, it ensures that nothing — absolutely nothing — will be done to secure a sufficient, terror-proof supply of our economic lifeblood — oil — a resource we’ll need much more of in the years ahead.

The businesses that create jobs and generate wealth are already discounting the future based on what they know about Obama’s plans to raise income, capital gains, dividend and payroll taxes, and his various other economy-crippling policies. Which helps explain why world stock markets have been so topsy-turvy.

Todd Blumer asks why the IBD ignores what the current government is doing to fix this “crisis.”

The editorial’s shortcoming, sadly more than minor, is that it does not assign any blame to current actions already taken or under consideration by Congress, the Treasury Department, and the Bush Administration. These would include the passage of the so-called “bailout” bill a week ago, and the possibility that the government will take preferred equity positions in certain banks and insurance companies.

Stock values are fundamentally based on discounted cash flows relating to a company’s expected future earnings. Government interventions in companies’ operations have almost always led to reduced, if not disappearing, earnings, simply because profit is no longer the primary driving motive. The massive proposals currently under consideration are especially dangerous in that respect. If earnings expectations dive, so do stock prices. Those, more than an economy that grew by 2.8% in the third quarter, seems to be a more plausible explanation for the recent steep declines in the equity markets.

I agree that the government putting their foot in the doorway of the free markets is what’s behind this nosedive. Their actions are not the actions of a capitalist society, instead its the action of a Socialist one. Bush and Congress made a huge mistake, and a bigger mistake is looming. If Obama is elected it will be a disaster for capitalism. Stock owners, buyers, and businesses both large and small understand this. So I think its a combination of both. The present “fix” and the future “fix” combined is the reason behind this rollercoaster of a drop during a time when our economy is fundamentally sound:

Although banks perform an essential economic function — bringing together investors and savers — they are not the only institutions that can do this. Pension funds, university endowments, venture capitalists and corporations all bring money to new investment projects without banks playing any essential role. The average corporation gets about a quarter of its investment funds from the profits it has after paying dividends — and could double or even triple that amount by cutting its dividend, if necessary.

What’s more, it’s not as if banking services are about to vanish. When a bank or a group of banks go under, the economywide demand for their services creates a strong profit motive for new banks to enter the marketplace and for existing banks to expand their operations. (Bank of America and J. P. Morgan Chase are already doing this.)

It’s important to keep in mind, too, that the financial sector has had a long history of fluctuating without any correlated fluctuations in the rest of the economy. The stock market crashed in 1987 — in 1929 proportions — but there was no decade-long Depression that followed. Economic research has repeatedly demonstrated that financial-sector gyrations like these are hardly connected to non-financial sector performance. Studies have shown that economic growth cannot be forecast by the expected rates of return on government bonds, stocks or savings deposits.

It turns out that John McCain, who was widely mocked for saying that “the fundamentals of our economy are strong,” was actually right. We’re in a financial crisis, not an economic crisis. We’re not entering a second Great Depression.

How do we know? Well, the economy outside the financial sector is healthier than it seems.

One important indicator is the profitability of non-financial capital, what economists call the marginal product of capital. It’s a measure of how much profit that each dollar of capital invested in the economy is producing during, say, a year. Some investments earn more than others, of course, but the marginal product of capital is a composite of all of them — a macroeconomic version of the price-to-earnings ratio followed in the financial markets.

When the profit per dollar of capital invested in the economy is higher than average, future rates of economic growth also tend to be above average. The same cannot be said about rates of return on the S.& P. 500, or any another measurement that commands attention on Wall Street.

Read the rest from Professor Casey Mulligan at the New York Times (of all papers)

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