Politicians Are the Not Solution, Nor the Cause

Some history is in order for all those who like to reward and blame politicians.

Go back to the first war in Iraq. President Bush (the Older) had a 89% approval rating on February 28, 1991. Then the economy tanked. His fault? No. Real estate crashed in the early 1990s. What happened next? President Clinton won the Fall 1992 election. However, Clinton’s election did not signal roaring economic times and Democrats lost the House and Senate to the Republicans for the first time in 40 years during the Fall of 1994. Did Clinton sink the economy in that short time? No.

Then magic happened. During late 1994 the Internet started to roll and in August 1995 Netscape went public (the trigger we are still feeling today). Stock markets boomed during 1995-1999. The Dot-com bubble was on. However, this bubble was a problem and people knew it. Federal Reserve Chairman Greenspan uttered the phrase ‘irrational exuberance’ in a December 1996 speech, but simply pointing out a bubble was only so useful.

The good times kept rolling. President Clinton had an approval rating of 73% on December 19, 1998 — six years into his Presidency. Did he or the Republican Congress have anything to do with record tax receipts coming into government coffers? No. The Dot-com bubble was spinning off cash to everyone. America was feeling rich.

Party over. The Nasdaq crashed March 2000. The Fed knowing the massive problem on their hands, and deathly afraid that the Dow would deflate, started cutting the Fed Funds rate of over 6% on May 16, 2000 to a low of 1% in June 2003. If the Dot-com bubble had not popped in the Spring of 2000 would Al Gore have been President? Of course, but the Fall of 2000 instead brought another President Bush.

President Bush (the Younger) inherited the Dot-com bubble implosion and less than a year into office, 9/11 hit. Two wars followed. However, all of that Fed rate cutting had started problems. This time real estate and the Dow were zooming up. People rewarded Bush for the economy (even though we were just in the middle of another bubble). His second term started in January 2005.

All is well until summer 2007 when the new bubble starts to deflate. It finally crashes in October 2008 and President Obama wins the Presidency standing at the right place at the right political time. If the economy had not sunk over 2007-8 would McCain be President? Of course. Now the economy is poised to crater again. If it crashes is it all Obama’s fault? No.

So are you really sitting there still thinking Presidents change your financial life? Presidents have all been irrelevant for the last 20 years. Behavioral finance answers our market questions, not the behavior of politicians. There are sheep in my film for a reason.

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12 thoughts on “Politicians Are the Not Solution, Nor the Cause

  1. agree with the content but your title then should be changed to “presidents”, and not say politicians. politicians en masse cause excesses and voids within the economy, from local issues like rent controls in NYC to massive structural issues like fannie and freddie.

  2. @Sandwah,

    Michael is dead on. You miss the point. It’s the same cycle for all politicians. Politicians are slaves to the mob and the mob is slave to the politicians. What the mob demands the politician attempts to deliver(or take credit for random events).

    Hindsight is a funny thing. i.e. the mob wasn’t complaining of fannie and freddie when they were buying homes they couldn’t afford for zero down, nor was the mob crying of excesses in the economy, or high rents, when times were good. Context matters and the mob reacts to changes in context strongly and emotionally.

    “Every nation has the government it deserves.” – Joseph de Maistre

  3. “There can’t be any preconceived ideas about depressions or booms. There is no right or wrong that needs to be vindicated. To read the markets in a neutral manner, you have to let them do the talking. There are technical views as well as cyclical views. Turning-points are the key. The markets will speak clearly and they are never, ever wrong. Those who blame the loss of their home value on Wall Street fail to realize the real estate peak was carved in stone for 2007 anyway.

    Wall Street followed the trend. They were part of it. But they did not create a trend out of nothing. They contributed to the volatility, but even derivatives were at the heart of Tulipmania 1634-1637. That was a futures market trading options. Derivatives even existed in ancient times. It was a high long in the making – 51.6 years to be precise.”

    – Martin Armstrong

  4. Joe, I like that quote.

    To begin anything is easy because we are in charge, but to end anything is difficult because then we are not in control.

    Control means being aware of ones process while performing it.

  5. Tax law is a monopoly maker and a behaviour modifier. It is codified by polititions for reasons. Those that spend to influence the congress are largely successful. Though they don’t control the market or the bubble machine they do to a great degree dictate how investments move. When a president pushes for a fed chairman and that fed chair leads the fed to lower intrests rates it effects investors decisions. When Gov’t cuts the pot it limits mooney in the game. I could go one and on. Is true that the market pre dates govts however govt and by extention Presidents efect the market.

  6. @Jim Rohrbach

    It’s not so much that the removal of the “Uptick Rule” caused the ensuing volatility in the markets as much as record historically low volatility levels lulled all participants, including the SEC, into comfort and complacency while ignoring the increasing build-up and concentrations of risk in the system. The removal of the Uptick Rule didn’t cause market havoc as much as market havoc caused the removal of the “Uptick Rule”.

    Having said that, the Uptick removal may move markets toward more efficiency in the long-run but at the cost of much higher short-term volatility. But people generally don’t want that.

    When we’re not on top of our process we fall behind what’s happening.

    Quotes from Wikipedia:
    “The SEC concluded from the study cited above: “The general consensus from these analyses and the roundtable was that the Commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation. In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test.”[6] Commenting on the scrapping of the uptick rule, The Economist reported that “short-sellers argue [it] was largely symbolic, and it remains in place at only a few of the world’s big stock exchanges.”

    “SEC actions commencing in 2004 leading to the end of the uptick rule” followed by a “Proposals for restoration of the uptick rule” on April 8, 2009

    http://en.wikipedia.org/wiki/Uptick_rule

  7. Ish in the context of what this post is about …reexamining Bush’s two wars makes as much sense as reexamining Clinton’s blowjob. Come on! The whole point of my post was to show why politics is irrelevant. Bubbles were not caused or fixed by these Presidents.

  8. Right on. Politics has nothing to do about anything. Say, what is it they and you do do anyway?

  9. @Ish

    I like Mike’s Bush & Clinton comment.

    We routinely endow our leaders with powers they do not posses.

    Bush Junior is a war time president. The war owns Bush more than Bush owns the war.

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