Arnold Kling  

Kipper- Und Wipperzeit Update

Summers Way Off on FDR and 194... Schools without Classrooms...

Apparently, the resolution of the debt ceiling restored the dollar's status as a safe haven in the eyes of the world's investors. That accelerated the flight from European sovereign debt and European banks. That in turn raised fears in financial markets, driving down stocks, including in the United States.

They told me if I did not fall in line for a debt ceiling increase the stock market would tank, and they were right!

My instinct with the Eurozone crisis is the same as my instinct with the U.S. housing crisis. If it were me, I would want to make folks take their losses as soon as possible and try to move on. The European attempts to "manage" the crisis remind me of the U.S. attempts to prevent foreclosures. In my view, those sorts of interventions only keep the crisis in front of you rather than behind you.

COMMENTS (4 to date)
Chris Koresko writes:

It seems that people like you (and, increasingly, like me) look at these events and see reasons to reject strong intervention as more likely to exacerbate problems than to solve them. And others will see the same events as proof that stronger, more centralized authority and greater discretion is needed to prevent excesses and secure stability.

Does economics as a science really have a role to play here, other than propping up and elaborating peoples' prejudices?

david nh writes:

There is really only one substantive solution in the EU and that is to split up the monetary union in some manner. I wish for the sake of everyone's stock portfolio they would just get on with it. Monetary disequilibrium is the problem and they can't get around it with a continent wide currency.

Georg Felis writes:

I'm really torn. There are two possibilities that spring to mind.

1) The US budget is screwed, the Democrats have gone into full-bore screaming panic at the thought that some semi-wealthy person somewhere might keep some of their own money, and a number of smart people are quietly slipping their money out of a system doomed to smash into the rocks. So the market will continue to slide until it goes BOOM!

2) The US has not sold bonds in a while, and the recent giant "Plop" of bonds into the market has displaced cash from the easiest place to shift it: Stocks. So the market will slide a bit, stabilize, and then return to its normal pattern of trying to screw over my 401K no matter where I try to hide it.

postlibertarian writes:

I had similar thoughts yesterday. Not that I believe the reasons for drops and jumps in the financial news anymore anyway, but I did think it possible that some of the stock market drop in the week before Aug 2 was related to the debt ceiling, although the continuously lower rates on Treasuries cast some doubt on that... where else was all the money going to go? The stock market did rise a bit Monday morning as the deal was finalized, but it's pretty much been a dead drop all week, accelerating after the bill was passed.

At least now the silly news narratives can't blame the lack of a debt ceiling bill. But I don't think they're smart enough to make the connection that perhaps the market was dropping anyway on general economic concerns but there was no else to go except Treasuries, and some investors weren't sure about that either. Now that they're all assured, they're all beating down the door. For now though that just means our debt interest payments go down, right.....?

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