Market Realities

On a Townhall blog, Philip D. Nathanson writes:

….The stock market rallied nearly 1,000 points (Dow Jones) on Monday October 13 on news that Paulson and Bernanke were moving away from their poorly-conceived $700 billion bailout purchase of toxic assets and toward a plan bolstering the capital positions of the stronger banks. This was the first sensible proposal to come out of Washington in some time. It would have helped them weather the crisis. Unfortunately, on Tuesday the actual plan presented was one geared toward helping the weakest financial firms. Even worse, the stronger ones were arm-twisted into participating to avoid stigmatizing the weak. When this plan was correctly percieved by investors as a continuation of the bailout strategy, the stock market stalled.

In an opinion piece in the October 14 Wall Street Journal, Fed Chairman Ben Bernanke wrote, ” the root of the problem is a loss of confidence by investors in the strength of key financial institutions and markets.” This isn’t quite correct. The root problem is a loss of confidence by investors in the remedies of Bernanke and Paulson. They don’t want any companies to fail. Theirs is an extremely-costly policy and it won’t work. The markets know it.

As economist Russell Roberts explains in an NPR article on the Bear Stearns Debacle:

Wall Street is all about profit. All about the bottom line. And profit does play a major role in making our world go round. Without profit, there’s no point in taking risks. Without risk-taking, there’s no investment. Without investment, there’s no growth. Profits are the cornerstone of our economy and our way of life.

But as Milton Friedman liked to point out, our economic system isn’t just based on profit. It’s a profit and loss system. It’s the combination that sustains and enhances our standard of living.

Yes, the potential for profit encourages people to take risks. But without the potential for loss, you have reckless risk-taking. You have risk-taking without prudence. Without the potential for loss, irresponsibility goes unpunished.

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