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The Dow Tanks as Bank Bailout Fails to Restore Confidence

It’s official!  The bank bailout has not worked.

Global stock prices are in a panic rush to the bottom.

The bank bailout cannot fulfill its primary mission to restore investor confidence, because it does only half the job.

The bank bailout will provide banks with much needed liquidity but it does not address the compensation and management practices on Wall Street that drove irresponsible decisions and gave rise to the crisis.  It does not address the void of sound leadership at the top of major financial institutions like Citigroup and Merrill Lynch.

Since 2000, corporate profits have jumped sharply but stock prices were down, even before the subprime mess of recent weeks took them to new depths. The fact is most of the gains have gone to private equity funds, hedge funds, investment bankers, executive buyouts, and the financial engineers that run the deals. These put together firms, take them a part, get paid up front, extract billions in shareholder value, and then leave shareholders with vague promises about future synergies and depressed stock prices.

Worse, the wizards of Wall Street leave companies too poor to take care of their workers decently. Like the Flim Flam Man in the George C. Scott classic, the con artist is in the next county before the ruse becomes visible, and ordinary Americans are left with vanished dreams in their retirement accounts and prospects of a mean old age.

Obama’s tax and redistribution policies will not resurrect jobs, wages or the price of stocks in American retirement accounts. Ordinary Americans who have to earn their livings outside the cosseted confines of Wall Street will be not much better off two years from now. In fact, Obama’s policies may make economic conditions worse. However, middle class distress gives populist promises enjoy strong appeal. If Obama wants to make Americans better off, he would serve them better by straightening out the banks and taking substantive action on the trade deficit with China. Also, he would be less politically correct on energy and the environment. His platform is full of platitudes and generalizations but not enough substance.

Nancy Pelosi stated, last week when the bailout bill passed, the party is over on Wall Street, referring to compensation reforms in the new law. Those reforms are simply too weak to have meaningful effects.

Come January, the Democrats will likely control both the White House and the Congress. Until Pelosi and other Democrats recognize the problem is in the way the banks are run and get serious about fixing the banks, look for things to get worse before they get better.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

 

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PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

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