Shoddy thinkers...

I came across a blog today that trumpeted the fact that the Dow breached 10,000 and implied that that was “proof” that Obama’s policies were effective. Wow, what shoddy thinking.

The fact that the Dow hit 10,000 is hardly proof-positive that the president’s policies are effective. The Dow reflects, but is not an absolutely accurate gauge, of the real economy. If the market was that efficient, we never would have had a market crash to begin with because the Dow would have reflected the deteriorating real economy. It obviously didn’t and market participants were caught with their pants down. The Dow reflects expectations in the short-run, not necessarily actual reality.

One also needs to keep in mind that when emotions run wild, the market tends to overshoot. It can be argued that the panic that ensued late last year and early this year was overdone and the Dow overshot on the downside. So the fact that it is at 10,000 has to be kept in context. It does not necessarily mean that Obama “saved” the economy. Maybe the overshoot is just correcting and we are at a normalized level now, and just because we’ve recovered from potentially “insanely” low levels to merely “sane” levels is not necessarily a reflection of the president’s policies.

Anyone who has taken basic statistics knows that correlation does not imply causation. It’s a basic mistake that sloppy thinkers make. They see causation when there may only be correlation. To draw a conclusion that the president’s policies are effective merely because the Dow hit 10,000 is a triumph of hope over reason.

So, I think the blogger’s implied conclusion was faulty, but regardless of where the Dow is, do I actually think the president’s policies have been effective? I’m not convinced.

First, the bulk of the stimulus package hasn’t even been spent yet, so the jury is still out on whether or not all that pork spending will actually benefit the country. The economy has apparently stabilized but it can’t be because of government spending which hasn’t even happened yet. Could the market be discounting the stimulus spending? Possibly, but markets tend to react to recurring improvements in earnings, not one-time spending spurts like the ones that government generally propose.

Second, earlier in the year, the president claimed that the stimulus package he wanted so desperately would keep unemployment capped at 8% this year. We’ve seen the unemployment rate hit 9.8% already. How can any rational person think that someone who claimed that unemployment would peak at 8% only to have it race past to almost 10% to be effective?? The president totally misread the economy so to give him any credit for effectively managing the economy strains belief.

Confidence is a fragile thing. There was hope that Obama taking office would lend a sense of confidence to the markets, but we saw the opposite happen. The stock market continued to crater after he took office and only leveled off in March. I do think that government policies did put a floor to the market, but not the wasteful economic policies that Obama pushed. I think the policies put in place by the government late last year, which included essentially zero interest rates, a government backstop to large financial institutions and sponsorship of short-term debt and commercial paper markets were key to stabilizing the markets. It took time and the markets definitely overshot, but once investors realized that banks would not go out of business and that they could earn nice spreads on corporate debt that was essentially backed by the taxpayers, confidence and greed returned driving the market higher. The monetary policies we enacted was more important than the poorly though-out fiscal policies of Obama in stabilizing the economy in my opinion.