BrianGarst.com

Given the media coverage the last few days, I have come to believe that reporters are able to read minds. It is, after all, the only logical explanation for these headlines:

Stock market rallies amid bailout hopes
Stocks Move Higher On Hopes Bailout Bill Will Be Revived
US STOCKS-Futures rise on hopes for reviving bailout
Wall Street rallies on bailout revival hopes

And it’s not just American stocks supposedly placing their hopes and dreams in the U.S. Congress:

Toronto stocks bounce back on bailout hopes
Russian stocks gain on US bailout hopes
Indian shares close higher on hopes of new U.S. bail-out package
Mexican stocks, peso bounce back on bailout hopes
European, Asian markets improve on US bailout hope

On and on it goes. How do they know what drives investors?  These headline are not reporting news, they’re interpreting it.  That should not be the function of the media, but they do it whenever they want to make sure you evaluate the actual news appropriately and learn what you are supposed to learn (what they want you to learn).

Here’s what they want you to think: “See, everyone is pulling for government intervention. If you damn conservatives will just let big government intervene, stocks will rise and all will be well!” This narrative is predicated on the assumption that every time the stock market goes up it is good, and all drops are bad. As a rule of thumb, this is a fairly adequate framework to help people evaluate what’s going on most of the time. It is not, however, completely accurate. Rises and falls are good or bad in so far as they signal that the economy is strengthening or weakening. Only when prices reflect an honest evaluation of market strength, then, should it be assumed that stock increases are good.  When they do not, they create “bubbles,” and the inevitable result is an eventual downward correction.

One such bubble, in the housing market, has just been popped.  This bubble was created by government intervention, the primary culprit (there are many) being the Fed’s holding of interest rates at levels lower than the market otherwise would have accorded.  It did this, let us not forget, after another bubble, the 90’s dot com bubble, collapsed.  The lesson one should take here is: we should not attempt to fight corrections with more interventionist policies that will only create yet more bubbles.  Even if we assume the media is correct, that investors want an infusion of taxpayer money to prop up flailing business engaging in risky practices, that is not a sound reason to formulate government policy.  We should not make bad long term decisions just because stocks might fall in the short term.  If that fall reflects a realignment of capital toward more efficient uses, as it does in this case, the end result will be much better in the long run if it is allowed to happen.