Earlier today the US Treasury Department announced the latest government’s economic stimulus package and bailout plan. However, instead of reviving confidence in financial markets, the move caused US stock markets to fall again.
The Dow Jones industrial average (DJIA), for instance, plummeted 4.62% to close at 7,888.88. It was the biggest drop for the Dow since December 1, when the blue chips fell 680 points, or 7.7%.
The Standard & Poor’s 500 index fell 4.91% to 827.16 while the NASDAQ fell 66.83 points or 4.20% to 1,524.73.
Interestingly, this public reaction is no different from a story in a Calvin and Hobbes comic strip published several years ago. Here’s a copy of that cartoon.
Here, Calvin set up a lemonade stand with a sign announcing that his lemonade is $15 per glass. Calvin’s neighbor, Susie, sees the sign and asks, “How do you justify charging $15?”
Calvin’s response: “Supply and demand.”
Noticing that no one was actually lining up for the lemonade, Susie says, “Where’s the demand? I don’t see any demand!”
Calvin points out there’s actually lots of demand: “As the sole stockholder in this enterprise, I demand monstrous profit on my investment! And as president and CEO of the company, I demand an exorbitant annual salary! And as the sole employee I demand a high hourly wage and all sorts of company benefits! And then there’s overhead and actual production costs!”
“But it looks like you just threw a lemon in some sludge water,” Susie replies.
“Well, I have to cut expenses somewhere if I want to stay competitive,” defends Calvin.
Looking disgusted, Susie says, “What if I got sick from that?”
“Caveat emptor is the motto we stand behind. I’d have to charge more if we followed health and environmental regulations.”
Susie walks away, saying “You’re out of your mind. I’m going home to drink something else.”
Calvin yells after her, “Sure! Put me out of a job! It’s you anti-business types who ruin the economy!”
The last frame shows Calvin walking over to his mother pleading: “I need to be subsidized.”
This cartoon may have been published several years ago but it surprisingly summarizes what’s currently going on in the financial markets. Like Calvin, the automobile industry and several financial institutions in the US have been pleading for bailouts after being affected by the subprime mortgage problem.
The US government, in turn, has rushed to their side, claiming that not helping them might cause bigger economic problems and more companies to file for bankruptcy.
Most people are not really against bailouts per se. It just seems difficult for them to accept that these dole-outs are offered to industries and companies whose executives enjoyed millions of dollars as salaries despite their companies’ declining profitability. These are the same companies that, perhaps due to greed, pursued higher profits by investing in risky investment instruments. And yet when the subprime mess took its toll, they are now turning to the government for redemption.
Like Susie in that Calvin and Hobbes comic strip, traders and investors “walked out” by unloading their stocks. That’s the reason why stocks fell today after the announcement of the government bailout and economic stimulus plans.
