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Don't Kid Yourself About Today's Wall Street Rally

It's not exactly a new critique, but it's maddening to see political commentators (and, for that matter, business commentators) so obsessed with the Dow. The daily (not to mention minute-to-minute) movements of the Dow are almost meaningless as a measure of the strength of the financial system, which is what we're really worried about. The problem is not that the stock market is gyrating. It's that the credit markets have seized up--meaning borrowing by banks (from one another), investment firms, and businesses in general is becoming so expensive it's shutting down economic activity. It's a bit like the whole economy is massively constipated. (Which reminds me of that great Dudley Moore line from Crazy People: "Metamucil. It helps you go to the toilet. If you don’t use it you get cancer and die." Think of the bailout as Metamucil.)

The main thing the Dow reflects these days is expectations about the chances of a bailout. When traders think a bailout is forthcoming, they bid up stock prices and the Dow rises, as it did today. When they think the bailout's prospects are grim (e.g., yesterday afternoon), they bid down stock prices and the Dow plummets. But, again, it's not a great reflection of the underlying problem. Whether the Dow is rising or falling, the credit markets are still in terrible shape. It would be an egregious misreading of the situation to somehow think that, with the rally on Wall Street today, a bailout becomes less necessary. That would get the causality exactly backward.  

P.S. I found this nugget from The Wall Street Journal's market wrap-up potentially amusing:

The market's gains came despite the absence of some participants because of a religious holiday and a round of glum economic data. New measures of home prices, consumer confidence and regional manufacturing activity were all downbeat.

So maybe the market rallied because we didn't have a bunch of neurotic Jews dumping stocks amid today's bad news...

--Noam Scheiber