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The Blind Leading the Blind

Wall Street and Bernanke

by DAVE LINDORFF

Free market aficionados, particularly in the media, have long been wont to tell us that the "market knows best." That was always the line when progressives (remember when there used to be progressives in government?) would come up with some do-good scheme like a public jobs program during the Johnson War on Poverty, or Medicare, or bigger subsidies for urban mass transit. If the stock market sank, they’d pronounce whatever program or bill it was as a bad idea, because "the market" (meaning investors), had nixed it by selling shares.

The same kind of analytical brilliance has been routinely ascribed by economic pundits to investors when it comes to business decisions–particularly mergers and acquisitions, or divestments and breakups. If Bank of America announces that it is going to buy the foundering Merrill Lynch and shares of B of A fall, then the merger is a bad idea. If the shares rise, it’s a good idea. And so it goes.

The whole idea that a bunch of people who sit around at computer screens betting on stocks and eating cheese doodles all day really know much of anything, or that taking their herd responses collectively as some kind of delphic oracle has always seemed the height of folly to me. But if you really wanted proof that investors taken collectively are idiots, you could simply look at today’s stock market. Yesterday, every index plunged by about 4%, pulling the overall market to lows not seen in 12 years, because of concerns that the recession was deepening, that the big banks were toast, and that the government’s economic stimulus plan was not going to help much.

There was every reason to expect the downward trend to continue, but up stepped Federal Reserve Chair Ben Bernanke, and, in a statement presented in Congress, said that in his considered view, the current recession could be over by the end of this year.

Relieved investors jumped back into the market and bought stocks, pushing the Dow and the S&P indexes back up by almost as much as they’d lost the day before.

But wait a minute! Isn’t Ben Bernanke the same guy who was chair of the Fed last year and the year before? The same chair who completely failed to see the coming credit crisis and global financial collapse? And if that’s the case, why on earth would investors take seriously anything he says about the future direction of the economy?

You’d have to be in a state of glycemic overload to believe anyone who told you that this recession, which is just starting to really roll downhill, is going to be over by the end of 2009. Why, we’re also getting reports that earlier estimates that official unemployment this year would hit 8 percent are far too low, and that it will actually be closer to 9 and rising by year’s end. (Real unemployment–that is as measured the way the Dept. of Labor used to measure it before the Carter administration changed the methodology to hide how bad things were in the late 1970s–is about 18 percent already.)

We don’t even know as of today what the fate of the three so-called US automakers will be. One may end up sold, or partly sold to China, one may go bust, and the other may be belly up a year from now. And as for the banks, there are plenty of smart people who are pointing out that banks like Citibank and B of A are really, at this point, zombies, and that the government may end up, against its will, having to take them over, break them apart, and sell off the parts that still float, using the rest for kindling.

I’m no economic prognosticator, but I do know that this economy is not about to bounce back. The whole American public is now in a hunkered down, defensive position, hoarding money, worrying about losing employment, struggling to pay bills. Consumers, whose activities accounted until recently for 72 percent of US GDP, have lost upwards of $8 trillion in lost investments and shriveled home equity. That’s not an environment that sets the stage for a recovery.

Bernanke is talking through his hat.

The only rational reason to buy today on Bernanke’s comment would be if you surmised that the average investor is an idiot and would likely buy based on the Fed chairman’s comments. But then, of course, you would only be buying to ride the short bump those comments would cause, jumping back out soon afterwards, before common sense returned and the market continued its downward slide.

Of course, looking more broadly, there is a theory that market behavior can be predictive as a leading indicator. Major economic downturns have generally been preceded by major market crashes (just as recoveries have been preceded by market rises). We had a roughly 40% crash in the market in 2008, which, judging from history, would be predictive of a serious recession. But we’ve also had an additional slump of 16-18 percent just since Jan. 1. In normal times that would almost qualify as a "bear market" (a serious market crash, defined as a fall of 20% over a two-month period) in itself, and as such, would be considered a "leading indicator" of a coming economic slowdown.

Far be it for me to say investors know anything about the future of the economy, but I’d guess that their longer-term lack of confidence in the stock market is giving a far more accurate and honest assessment of the likely direction of the US and global economy than Chairman Bernanke’s latest comments to Congress.

I’d also be willing to bet that they weren’t taking Bernanke seriously in Congress or in the White House, where the whole premise of the stimulus packag–a two-year affair–is that things will not start to look better until at least the end of 2010 or sometime in 2011.

DAVE LINDORFF is a Philadelphia-based journalist and columnist. His latest book is "The Case for Impeachment" (St. Martin’s Press, 2006 and now available in paperback edition). His work is available at www.thiscantbehappening.net