by Deb Cupples | Two interesting things happened yesterday: 1) the U.S. House voted against a bill that would have funneled 700+ Billion tax dollars partly into the pockets of banking executives who helped drive our nation's economy to the cliff's edge; and 2) the Dow Jones Industrial Average (Dow) nose-dived, because masses of stock owners apparently rushed to sell off their shares -- thereby driving down stock prices.
Some media carelessly discussed the two events in a way that implied that the House vote had caused the Dow to dive. For example, CNN stated:
"The stock market immediately dipped hundreds of points after it became apparent that the [bailout] bill would fail. The Dow closed down 777 points at the end of trading Monday, a record plunge." (CNN)
CNN didn't actually state that one event caused the other, but readers who lacked time to question and analyze CNN's statement might have got the impression of direct causation.
I question the accuracy of such an impression.
Frankly, I wonder whether some stockholders' emotions contributed to the Dow's tumble yesterday. Seriously.
It seems to me that the first question a rational stockholder would ask before dumping a stock in the hope of cutting imminent losses is this: did something happen to make the actual value of that company's stock decline?
If a car company's biggest plant was blown up by terrorists, then the answer might be "yes." If an accounting firm got indicted for fraud, the answer might be "yes." If a financial institution just filed for bankruptcy protection, the answer might be "yes." You get the picture.
That said, what concrete events transpired yesterday -- during the hours between the opening and closing of our stock markets -- that directly caused a decline in the actual value of companies listed on the Dow (companies that aren't finance related, I mean)?
The Dow tracks stock prices of 30 companies, including four finance-related companies (CitiGroup, American Express, Bank of America, and JP Morgan).
The other 26 Dow companies are from different industries or sectors, including Exxon, Microsoft, General Electric, Boeing, Pfizer, Disney, Wal-Mart .... Of those 26 Dow companies, the stocks of three either stayed the same or went up yesterday. The other 23 companies' stock prices declined between 3.04% and 12.81%. (See NASDAQ flash Quotes.)
I don't have time to research the news on each of those 23, non-finance-related Dow companies, but I have trouble believing that events occurred yesterday that directly diminished the actual value of every one of those 23 companies.
It seems more likely that masses of Dow-company stockholders simply panicked after learning that the bailout bill would likely fail in the U.S. House.
And why wouldn't they panic?
Wanting to gain public support for its proposed $700 billion boondoggle bailout, Bush Administration officials spent the last week actively trying to scare the be-Jesus out of us ordinary folks.
Essentially, they told us that our markets and economy would crumble like a bombed building if their bailout plan were not approved.
How could Administration officials not expect a chain reaction that strongly resembled self-fulfilling prophecy?
Now, a political benefit may flow to Bailout Plan proponents. When The Plan comes up for another vote in Congress, Administration officials can point to yesterday's nose-diving Dow as evidence that The Plan must be approved.
Unfortunately, millions of ordinary investors who suffered seemingly self-inflicted losses yesterday will likely believe said officials' specious arguments.
Here's a bitter irony: when panicking investors scrambled to sell off their shares of decent Dow companies, cooler-headed investors hovered around the scene and picking up those shares on the cheap. Chances are, those cooler-headed investors will hold their cheap Dow-company stocks and reap solid returns some months down the road.
Am I saying that we taxpayers should do absolutely nothing in terms of bailing out the Wall Street firms that drove our nation's economy toward possible ruin? No, that's not what I'm saying.
As I discussed yesterday, I think Congress should let its own panic subside and resist the urge to knee-jerk pass the Bush Administration's $700+ billion proposal.
Instead, Congress should 1) determine what the credit market's actual cash needs are; 2) proceed with caution while attempting to meet those needs (i.e., dole out our tax dollars in smaller increments).
This is not unreasonable, given that U.S. Treasury officials have admitted to being clueless about the actual price tag of the proposed bailout. When asked last week how Treasury officials came up with the $700 billion figure, for example, a spokesperson said this:
"It's not based on any particular data point.... We just wanted to choose a really large number." (Forbes)
In other words, Administration officials simply made unsubstantiated claims and tried to manipulate us taxpayers and our representatives in Congress.
Naturally, I don't know the actual numbers, either. And I don't have to, because I'm not one of the Administration official's who's trying to persuade us taxpayers to part with $700 billion.
But I like Sen. Chuck Schumer's idea: pass a bailout package that gives a far smaller amount of money right now -- then later assess the situation and dole out more money only if it's needed and only if the bailout show signs of actually working.
One Buck Naked Politics reader advised: measure twice, cut once.
Memeorandum has commentary.
Other buck Naked Politics Posts:
* Bush Administration Tries to Dupe Congress into Approving Bailout
* Fed to the Rescue: $630 Billion Pumped into Economy
* House Finally Passes Contracting Reforms
* Is Lehman's CEO Stonewalling Congress?
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