I overheard a conversation in the gym last night wherein the comment was made, “The Dow is up from a low of 6500 because of administration policies.” The comment was made in reference to the Dow breaking 15,000, in the context of a recovering economy and in support of the administration. I refrained from making any comment of my own and to instead vent here where readers have the same right to discard my opinion and stop reading just as I stopped listening.
I think a quick look at the real facts are in order. Prior to the debt crisis, the Dow reached a high of 14,164.53 on October 11, 2007. As we came to learn, that was an artificial high achieved through the spending of money that never existed. Money that was created out of thin air.
At that time, money needed to fuel the stock market and the economy, was acquired through loose money policies – an artificial supply. Home prices were a prime example. Home values were greatly exaggerated, thus allowing people to borrow against equity that really did not exist. The markets and the economy became dependent on this money supply. So much so that when the supply was exhausted and the economy began to waiver, they had to concoct things like “No-Doc” Loans, “Stated-Income” Loans and “Cash-Out” Financing.
Cash-Out financing was one of my favorites. It allowed people to buy a house (or several) without a down payment and without any documentation of assets and without the need to verify any income. Ironically, the income was to be derived from the purchase of the home, which was based on overstated appraised values.
These windfall profits were then lured into the rising stock market, where stock investing was believed to be a no-brainer. It was magic. Everything was rising in value, fortunes in paper wealth were blossoming. Indeed it was magic and as we all know, magic is nothing more than an illusion with smoke and mirrors thrown in to further deceive. Nobody in their right mind, today, believes the credit crisis was not caused by artificial liquidity – the creation of money out of thin air.
Then for a number of reasons – too many to go into here and now – this supply of money dried up as quickly as a drop of water on a hot tin roof. As the bubble burst, home prices collapsed and by March 2009 the Dow lost nearly 60% of its value. The loss of fake wealth sent unemployment skyward as Wall Street scrambled to maintain profitability in a failing economy. The markets and the economy were in a death spiral.