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**MAY 13, 2022**
Kuttner on TAP
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**** The Stock Market's Slow Collapse
What it means for the real economy and the fortunes of Democrats
The broad stock market is down nearly 20 percent from its January 2022
peak. Worse is likely to come. What's going on?
The simple explanation is rising inflation and rising interest rates.
When interest rates go up, bonds become a more attractive investment
than stocks. The Fed is likely to keep raising rates, so stock prices
are likely to keep falling.
But there is a lot more to it. Until the recent outbreak of inflation,
the Federal Reserve kept short-term interest rates at close to zero for
much of the past decade to fight lingering effects of the Great
Recession. Markets convinced themselves that this would last
indefinitely. That's why banks would lend mortgage money for 30 years
at bargain rates of under 4 percent.
In this climate, financial engineers could borrow money for next to
nothing. To prevent dangerous speculation, the Fed and other regulators
should have combined cheap money (which is good for the real economy)
with tight regulation. But instead, we got loose money and loose
regulation, which always sets markets up for a crash.
The past decade was a predators' picnic-private equity doing
takeovers on cheap borrowed money; record corporate mergers and profits
for merger and acquisition specialists; stock buybacks to further hype
share prices; new gimmicks like crypto.
Tightening interest rates abruptly stunned investors. A bear market
feeds on itself, as sellers outnumber buyers.
The crypto crash
is a
leading indicator. Crypto was always a kind of pyramid scheme. As
super-investor Warren Buffett says, you never know who's swimming
naked until the tide goes out.
The market's current dive has something in common with the epic
financial collapse of 2008. Like today's situation, the 2008 crash was
driven by the toxic combination of cheap money and financial
speculation. But in that era of unfunded credit default swaps and
fraudulent subprime securities, the leverage ratios were almost
infinite. Today, thanks to the Dodd-Frank Act (which did not go far
enough as anti-speculation), banks at least have more of a cushion.
So today's market crisis is more likely to be a slow-motion crash.
Even so, the victims will be the vast majority of Americans who work and
live in the real economy and not on Wall Street.
Like the supply chain crisis, this financial mess is the result of
legacy policies that long antedate the Biden administration, which has
embraced good financial regulation more than any since FDR's. But
maybe too late.
Just as voters don't like inflation, they don't like a collapsing
stock market or its spillover effects. And voters, justly or not, have a
habit of punishing incumbents for bad economic news. Unless he becomes
even more of a populist, another victim could be Joe Biden.
****
~ ROBERT KUTTNER
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what they say with the truth) after quoting them BY ERIC ALTERMAN
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