Obama's War on Capital Caused the Market Meltdown

Obama's War on Capital Caused the Market Meltdown

(2/1/10) U.S. stock prices have dropped like a stone over the past two weeks. Total market capitalization of U.S. stocks was $13.1 trillion at yesterday’s (1/31) close, down $885 billion from its $14.02 trillion peak on 1/19.

Some analysts think it was China’s monetary tightening that caused the drop in stock prices. Some think it was Obama’s announcements of new taxes and new regulations on banks. Some think that investors have simply lost their nerve.

It was Obama’s war on capital that caused the meltdown. The numbers below show total U.S. market capitalization–the total value of all stocks trading in all markets–at several key dates over the past 2 weeks.

U.S. Market Cap

On 1/11/10, before any of these things happened, the U.S. markets were worth $14.02 trillion, which we will use as a benchmark for our analysis.

On 1/12/10 Chinese officials announced they would tighten monetary policy. There were sharp changes in individual stock prices but on 1/13/10, two days later, U.S. market cap was essentially the same at $14.02 trillion. No big deal.

On 11/13/10, the evening before Obama announced the punitive tax on big banks–$117 billion collected over 12 years. On 1/19/10, six days later, U.S. market cap was essentially unchanged, at $14.02 trillion. This makes sense. An ostensibly one-time tax of $117 billion, collected over 12 years, is only worth $66 billion in today’s dollars at a 10% discount rate–a rounding error in market cap numbers.

Obama Bank Tax Estimates
Obama Bank Tax
On 1/21/10, Obama dropped the bomb. He essentially announced the breakup of the banking industry, imposing limits on the allowable size and business activities of a bank, measures that would force banks to divest many of their most profitable operations. U.S. market cap fell by $740 billion (6.3%) from $13.88 trillion to $13.14 at yesterday’s close. Altogether, market cap fell by $880 billion since Obama started meddling with the banking system. This $880 billion was sucked directly out of the value of U.S. pension assets and household net worth. An anti-stimulus plan if I ever saw one.

Way to go, “O”.

It is obvious why Obama is attacking the capital markets. Republican wins in Virginia, New Jersey and Massachusetts driven by public rejection of his health care plan have undermined public support and put the mid-term elections in jeopardy. The public is angry. Obama would like to redirect that anger on someone else. Hence the war on banks.

We can’t afford Obama’s war on capital. The cost of punitive policies, in lost net worth, slower growth and fewer jobs, will fall directly on the people he claims to want to defend–the middle class. Unfortunately, this may be just the beginning of the Obama Inquisition. Stay clear of the stock markets until it is over.

JR

John Rutledge

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