Those avidly watching the rollercoaster ride that is the stock market had a chance to breathe a sigh of relief on Monday when the Dow rose 936 points — marking the highest one-day rise ever for Wall Street. And although Tuesday’s Dow dropped 77 points to 9,311, a decrease falling at less than 1 percent of the Dow’s total, professor of economics John Lapp said it is likely the market will continue to improve both in resiliency and loan availability.
“Certainly the big increase [Monday] was a good sign,” Lapp said, adding the rise was largely in response to the Treasury Department’s move to prop up failing banks and buy out loans those banks had made. “It would seem to indicate that, in general, the financial community thinks that the government’s plan was a good one.”
The motion will provide $700 billion to failing banks, or those that were hurt by the financial crisis, so “chances are limited” that in-trouble banks will actually be forced into bankruptcy.
“It’s more than just the president saying things are going to be OK,” he said. “The stock market also goes up when there are lots of both people and financial institutions that decide they want to own stock in an American company.
“This is a worldwide market, so it’s a measure of the considered opinion of the worldwide community.”
But although “some of the panic that was palpable last week has certainly been allayed by this,” the state of the economy is still a topic on many people’s minds.
Two of these people, whose opinions on how to fix the economy could be the loudest at least until the beginning of November, are Republican presidential nominee John McCain and Democratic presidential nominee Barack Obama.
The third presidential debate is scheduled for Wednesday at 7 p.m. in Hempstead, N.Y. The topic, domestic concerns, is likely to include the state of the economy and each candidate’s economic platform.
And to sway undecided voters, associate professor of political science Michael Cobb said the McCain and Obama campaigns have each been implying their opponent’s connection to the straw that almost tumbled an entire industry.
“McCain is not arguing that Obama’s support from, say, Fannie Mae caused the crisis, but he’s implying it,” Cobb said. “Obama’s strategy has been to not get speculative but to point out that John McCain, in general, favors deregulation and that deregulation of the banking industry is what led to the problems.”
Cobb said McCain’s strategy aims to link Obama to Congress’ 2004 push to give out sub-prime, or 100 percent, mortgages to those with credit scores that, in previous years, would not have qualified them for such loans.
Although Obama did not assume office until 2005, Cobb said McCain is looking to link the nominee to his party, which was a major part of the push toward lowering credit requirements. Obama, he said, also accepted $123,000 in lobbying money from Fannie Mae.
“The truth is that all of the bad loans that Fannie Mae has made could not have caused the crisis that were experiencing,” he said. “That’s a separate issue, although maybe it was a bad idea to extend credit further than it probably should have gone.”
Lapp, however, said banks taking “big positions in mortgage-backed securities” — in which banks bundle polls of 1,000 or so mortgages and sell them to other companies in the financial industry at a higher profit — is one of the main reasons for the crisis.
“Many banks, for the last 10 years, have been making these mortgage-backed loans,” Lapp said. “A share of these were sub-prime mortgages. Those mortgages are now not being repaid, and banks are losing money because they bought that debt.”
And the trend had been going steadily over that time.
“It is the impetus that started all these current difficulties,” Lapp said. “This is the single biggest factor in creating the current crisis.”
Obama’s move to imply McCain’s connection to the downfall, Cobb said, holds slightly more weight.
Phil Gramm, who Cobb said is McCain’s key economic adviser, was “largely responsible for the laws that allowed banks to speculate without enough capital reserved to back up their bet.”
In 1999, Cobb said Gramm spearheaded efforts to repeal laws that mandated banks must have in capital a certain percentage of the loans they give out.
The Gramm-Leach-Bliley Act deregulated banks, an action that Cobb said “is what led to the problems” because banks could lend out more money to customers than the total amount of capital they had on hand.
Either way, the crisis has led to inflation rates for items such as groceries and, Lapp said, it has stalled risky student loans, mortgages and bank-to-bank loans. This has also affected construction projects that had been started but that companies do not have funding to complete — seasonally adjusted unemployment rates for construction workers jumped from 8 percent in July to almost 10 percent in September, according to the Bureau of Labor Statistics.
And Cobb said the candidates, especially McCain, have more to overcome than the accusations that link them to such effects.
Party identifications, and the stereotypes associated with them, are what have started influencing polling percentages that occurred after the Dow plunged more than 3,000 points from the the days between Sept. 28 to Oct. 12.
“McCain’s problem is a two-fold one. One, his party identification is Republican, and currently Democrats are seen as better on certain kinds of economic issues,” he said. “In addition, McCain has some personal disadvantage in arguing it’s Obama’s fault. People don’t necessarily believe him, but they will have a hard time getting past party Id. People think Obama will do better whatever it is he’ll do, and they don’t know what he’ll do.”
Obama’s party identification has bumped him up four percentage points nationally, Cobb said, just based on economic issues alone.
