Mussolini and World Equity Markets
By Arnold Kling
It’s not a good idea to try to interpret stock market moves as if they were rational. It’s also not a good idea to refer to the U.S. Treasury Secretary as “Mussolini.” I’ll consolidate both of these ideas in this post.
Under the new financial order of Il Duce and his overseas counterparts, shareholders have no rights. The new order works like this:
1. If you want to have a viable corporation, particularly in the financial sector, you need a government guarantee.
2. If you want a government guarantee, you have to accept government restrictions.
3. The government restrictions can be changed at any time. There are no rules.
Do you want to be a shareholder in that environment? Today, banks are allowed to pay dividends, but lots of people think that’s not fair, given that taxpayer money is at risk. In any case, shareholders and managers can no longer determine dividend policy without at the very least wondering what Il Duce will think.
If Mussolini says “lend,” then that is what banks have to do. If he says “Don’t lend,” then they’d better not.
When I was at Freddie Mac, we were keenly aware of “political risk.” As long as we had our government guarantee, we could compete with depository institutions. See the duelling guarantee. This summer, though, investors started pricing Freddie Mac’s debt as if it were not necessarily guaranteed. Ironically, this forced government to take over Freddie Mac (and Fannie Mae). Live by the guarantee, die by the guarantee.
Now, a huge proportion of the U.S. stock market faces political risk. When everyone depends on a government guarantee, and when the rules for keeping the guarantee could change at any time, shares of stock have questionable value.