We’ve all heard the same tragic stories. Some of us have even seen it played out. A couple decides to make their lives happier by drinking heavily. It works nicely for awhile. Then one partner sees the dangers and backs away, while the other doesn’t have the will or the ability to do so, leaving his or her mate to mourn a foolish collective error.
We’re seeing something akin to that when it comes to prognostication about an economic recovery. Wall Street and Washington, the long attached at the hip couple in this particular drama, both began prattling this March about the end of the recession and better times just over the horizen. Wall Street did it for the money (why else does Wall Street do anything?). Washington did it out of fears that national despondence might have nasty political consequences for those in power and endanger a legislative agenda.
Together their green shoots, glimmers, stabilization, stronger banks, profit bounce back barrage worked well for both parties in this power couple. Worked well, that is, for a few months. But of late, as it has become obvious to so many people on Main Street that there won’t be an easing of this recession’s many torments any time soon, the Washington crowd has begun to back away from its recent flagrantly optimistic assessments about the economy. Just in the last few days Summers. Geithner and Bernanke, along with a number of their in-house and affiliated economists, have been at pains to make very clear that any real recovery will take a lot more time.
The other end of this couple, Wall Street, however, isn’t going along. They aren’t tempering the market binge they have done so much to create. Because what they want, what they care about, the only thing they care about, is feathering their own nests with short-term bonuses and higher salaries that only come in train with a rising stock market, whether or not this rise is justified.
Hence, on the Wall Street end of things, we have scenes like the one in yesterday’s stock market, where there was a “Caterpillar rally.” That company reported profits for the second quarter that were down 66 percent, but its stock went up a whopping 7.7 percent for the day because this profit level “beat analyst expectations.” Other big winners yesterday included Merk whose profits for the quarter were down 5.7 percent but whose stock price went up 5 percent because it “beat analyst expectations.” Dupont reported quarterly earnings off 62 percent and its stock rose almost 2 percent yesterday for guess what reason.
For a stock’s price to soar these days, all its management needs do is let analysts know terrible numbers are coming, the analysts respond by dropping their estimates precipitously, and then they and market movers play at being surprised when expectations are surpassed. A process that raises market irrational exuberance to pre-2007 levels—and then some.
Wall Streeters will get fatter and fatter on bonuses and ratcheted up salaries from the present short term bubble until the very last moment when even they can no longer avoid fessing up to economic reality. By then their wealth will again be stratospheric and cunningly socked away, however. The other part of this couple, Washington, will end up losing badly needed credibility and have a diminished ability to act in all our interests.
Washington still hasn’t learned the lessen when it comes to its Wall Street buddies. When you visit the boys on The Street, bring a whip and a chair. Bring a desire to advance the public interest and they’ll rob you (and the rest of us) blind.