Stocks fall lower than 8 years ago

9/16/2008

The day before George W. Bush s inauguration as the United States 43rd president, the Dow Jones index of 30 industrial stocks stood at 10,588 points. Yesterday, it closed just a few hundred points higher than that, at 10,917.50, after a sharp one-day drop precipitated by a financial industry panic.

The Standard & Poor s 500, a broader measure of stock-market performance, is even worse off: its 1,192.70-point close was 150 points below that of Jan. 19, 2001.

At this same point in the election cycle on Sept. 15, 2000, the Dow index finished at 10,927.06 and the S&P 500 closed at 1,465.81

As a result of the latest stock-market plunge, small investors who might have expected eight years ago that their 401(k) accounts and retirement stocks would earn 5 to 6 percent annually for a compounded yield of about 50 percent by now are going to have a lot less, especially considering that break-even doesn t accommodate price inflation, Professor Jeremy Bulow, of the Stanford University Graduate School of Business, said yesterday.

Some people presumably will work longer to pay for their retirements, while others will just to have to live more frugally, the professor said.

Tyler Shumway, an associate professor of finance at the University of Michigan s Ross School of Business, said the actual return over that time has probably been closer to 1 percent, because stock indices don t reflect dividend payouts, but he acknowledged that 1 percent is far less than stock investors had come to expect.

Assessments of how the investment economy went wrong vary, but experts interviewed last night agreed that a mix of private behavior and public-policy failings are involved.

Mr. Bulow, an economics professor and senior economic policy research fellow at Stanford, said the combination of a low national savings rate and soaring federal deficits have left Americans especially ill-prepared to deal with the current economic storm.

Too many people, he said, relied on the notion that real-estate values could continue to rise the way they did during the 1990s and early part of this decade to plan their financial futures.

And the Bush administration, he said, did essentially the same thing as it ramped up military spending for wars in the Middle East even as it cut taxes, ostensibly to stimulate the domestic economy.

Counting on good luck, that s not a good strategy, Professor Bulow said. Regardless of what you think about going into Iraq, people were asked to go shopping instead of having to pay for it [the Iraq War].

While tremendous growth in the United States during the 1990s cannot be attributed to the Bill Clinton administration by any means, he said, that the White House employed very responsible economic policies that resulted in budget surpluses and, had they been continued, might have eventually erased the federal debt.

They had top-notch people, and a president listening to the best advice he could get and making tough decisions, Mr. Bulow said, citing in particular Mr. Clinton s 1993 tax increase that was politically unpopular but beneficial to the nation s fiscal health.

Michigan s Professor Shumway, meanwhile, honed in on the real-estate market, whose runaway lending was cited as the undoing of now-bankrupt Lehman Brothers Holdings, Inc., and before it, Bear Stearns, the two federal home-loan firms Fannie Mae and Freddie Mac, and other banks and investment houses.

Better regulation of loan originators mortgage sellers who, for a fee, turned over their loans to institutional investors and thus had minimal incentives to accurately assess borrowers creditworthiness might have headed off the current financial-sector crisis, Mr. Shumway said.

To be fair, there were very few people at the time who were saying, We need to be careful about the loan-origination thing, the professor said.

And easy credit helped drive up real-estate prices to create false prospects for future growth that prompted many property owners to obtain second or third mortgages that became unmanageable when the market collapsed, he said.

Federal regulators loosened the reins on real-estate credit during the latter years of the Clinton administration, Mr. Shumway noted. Concerned that computer problems associated with the turn of the millennium might hurt the economy, he said, they lowered interest rates, and those lowered rates were retained after the Sept. 11, 2001, terrorist attacks on New York and Washington to try to offset an ensuing stock-market slump.

Steven Dawson, a professor of finance at the University of Hawaii s Shidler College of Business, said that at present it s hard to tell what more the Bush administration could be doing to mitigate the current crisis.

So far, however, the federal government s current tack of not bailing out firms such as Lehman Brothers Holdings Inc., after having already helped out Bear Stearns, Fannie Mae, and Freddie Mac, keeps the incentive for institutions not to make bad decisions.

I think they are basically on the right track, to not jump in and bail out any other companies, Mr. Dawson said.