That's a sell-off of everything, including stocks that have nothing to do with mortgages (though I guess every public company gets financed). Political crises have often seemed to be a challenge to the efficient markets hypotheses. We bomb Libya, the Dow plunges. Today, traders hit refresh on their House vote screens, the Dow drops 700 points. I'm sure they're just pricing the political risk into their purchasing decisions - and not panicking at all.
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1. Posted by fedgovernor on September 29, 2008 @ 12:13 | Permalink
Secretary Paulson, who has failed utterly and totally, must now resign.
2. Posted by Mike Guttentag on September 29, 2008 @ 14:47 | Permalink
Not sure what your saying here David. This would seem to be one of those rare cases when a significant, but not phenomenal drop, can be explained by political developments. Absence of a large transfer of government funds into the debt markets probably will reduce corporate earnings over the short term.
3. Posted by David Zaring on September 29, 2008 @ 14:57 | Permalink
Well, it is the largest drop ever, by points, and I'm not disputing the hypothesis too seriously here - I know it permits minor variations in price. But couldn't some of the risk of failure have been priced into this a little earlier? Do we really think that 777 points is the market pricing the future possibility of a bailout discounted by the time it will take? I mean, was the information really so different on Friday? And so on.
4. Posted by Mike Guttentag on September 29, 2008 @ 15:26 | Permalink
Just as a side note, “largest point drop ever” is irrelevant and just a headline grabber. The meaningful number is percentage change.
5. Posted by fedgovernor on September 29, 2008 @ 17:16 | Permalink
Yes, don't be fooled by the press, which is attempting to sell newspapers with BIG SCARY HEADLINES.
The market has dropped just slightly more on a percentage basis than it's dropped on other less memorable days. The market held up substantially well, considering the circumstances.
I think there will be further drops, but merely shouting "largest point drop ever" is alarmist and, sadly, fairly typical for the nation's news media.
For God's sake, don't sully your reputation by parroting them.
Today's legislation died because it's a bad deal for America, and 94 Democrats voted against it believing that.
Nancy Pelosi can't even convince Democrats in her own Party that this bailout is a good idea.
6. Posted by fedgovernor on September 29, 2008 @ 19:56 | Permalink
Ahhh,
Now here is a true student of history who isn't caught up in the news media's spin-o-the-day.
Ilya Somin notes at Voloch that "today's drop in stock values, while the largest in absolute terms, is not even in the top 10 relative to total shareholder value.
"The 1987 stock market crash was much more severe - a 22.6% loss in share value on the Dow Jones in one day - three times today's 7% drop.
"Yet the economy recovered swiftly, in part because policymakers were wise enough to let failing firms go bankrupt and free up their resources for use by more efficient industries.
That system, once known as capitalism, might work even today!
http://volokh.com/archives/archive_2008_09_28-2008_10_04.shtml#1222725061
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