Monday, March 16, 2009

Why Wall Street needs to be put in Time Out.

Say what you will about Wall Street types - at least they are committed to a battle to the end so that they remain "relevent" to modern economic policy. But look at this graph,and ask yourself - how much do we really need to pay attention to these guys?

See, the data (from the work of Robert Shiller who lets you copy his data sets and then do your own graphing) makes the case clearly that 1) we haven't fallen as far as we did before, and 2) once you take all the "noise out" stocks are still likley to see growth in the future. How did I arrive at this conclusion? I just fitted the blue trend line to the graph. And it's the trendline that we all need to keep in mind, not the bounciness around it.

Every time one of the Wall Street brokerages, or their friends in the MSM or cable, gets on TV and talks about the market, keep this in mind - PE ratios (one o fthe best measures of the stock market's soundness) have not yet fallen as low as they did in the 1980's rcession under Ronald Reagan. In fact, by the time the Great Depression started in 1929, they were on a substantial climb from their earlier collapse. PE also hasn't fallen that low yet, and the trend line tells us even if it does, the rebound is likely to keep us on a slow but steady upward climb.

given that, why don't we let a few banks go into receivership and start the auctions? If history is our guide, the stock market will do just fine, and so will the economy.

3 comments:

Thomas Joseph said...

Now you're starting to sound like a conservative.

Philip H. said...

No, a conservative - at least these days - woudl argue that all our policies should revolve around keeping Wall Street happy now, and recoverying "lost" stock value as quickly as possible. Rather, I'm arguing that Wall Street, in the current economy, is irrelevant because the long term trends show us stock prices will recover very nicely on it's own.

Thomas Joseph said...

I guess I'm not making the connection.

Every conservative I've heard/read has said that this bailout is a waste of money and the market will eventually correct itself. Let the bloated companies fail, and let the better managed companies swoop in and clean things up.