expecting smaller corporate profits makes stocks go down, right?

[skolem_hull]

On last night's Daily Show, Jon Stuart talked about Obama's recent announcement about limiting the trading activities of banks, "taking on" the banking industry. There was some joking about how the banks should give up because the guy has an army, leading up to the big reveal of what their strategy is: taking the economy "hostage" (he replayed a

Comments

[q10]

here's the here's, as i understand it (i'm not saying i'm convinced of every detail of this picture - but i think something like this has to be the charitable reconstruction of the kind of reasoning that has to be involved

[skolem_hull]

That seems like basically the bail-out situation: they took risks (for which they made big profits) that resulted later in a very bad situation for them, so we had to help. So there's been all this talk about how we were held hostage by needing them not to fail.

That much makes sense. And so if we're going to bail them out every time they're about to fail (say by assumption we have to), I see the argument for passing laws that limit the risks they can take.

And that's what Obama's announcement was about.

But the 'taking us hostage' line this time, was not about what you're saying or what I repeated in the first paragraph above, but about the response to Obama's announcement. The drops in the stock market were supposed to be as if they're saying "If you pass these laws to limit our profits, we'll keep the economy in the tank! Hah!"

And that's the part that confuses me. Because of course the stock prices in the widget or any other sector go down when you threaten to stop handing out free money (or whatever these limits would be

[q10]

but (i think - i admit not to having done the research) the claim here is supposed to be that stock prices in a lot of other sectors have also taken a hit from this. that is, that when you stop giving free money to the bankers, it hurts the widget makers much more than it would hurt the bankers if you stopped giving free money to the widget-makers.

this isn't at all surprising - it's a natural feature of the basic economic order that we signed up for.* but it's still an effect above and beyond the ‘when you aversely affect profits, stock prices go down’ effect that we see in all industries.

*i'm leaving aside the question of whether we might do better to try to get ourselves a different basic economic order, although there is of course no shortage of suggestions along these lines.

[skolem_hull]

Oh, okay. (Other sectors have taken hit. Stuart was talking about the Dow Jones average...)

I was taking a simplistic view of the joke where someone was magically deciding, as a response, to lower the stocks as an incentive for Obama to change his mind. That lowering the stocks over the past three days, was the action they took, to take us hostage.

But seeing it as still being about how they 'took us hostage' by, in the past, getting so depended-on by other sectors, makes more sense. I think I'm less bothered now.