The IUSB Vision Weblog

The way to crush the middle class is to grind them between the millstones of taxation and inflation. – Vladimir Lenin

Markets Soar!

Posted by iusbvision on September 19, 2008

NEW YORK (AP) – Wall Street extended a huge rally Friday as investors stormed back into the market, relieved that the government plans to rescue banks from billions of dollars in bad debt. The Dow Jones industrials rose more than 375 points, giving them a massive gain of more than 785 points over two days, and Treasurys fell as money flowed into equities.

The Dow-Jones today looks like it will close AHEAD for the week (at the end of the day the Dow only lost 34 points this week). That is good news. It means that investors have some confidence in the market in spite of the press and partisan doom and gloom.

There are other reasons why this is happening. There is a temporary ban on short selling in the market. This is important because short selling makes for some bad incentives in the economy. When a smart investor sees that a company is making big mistakes as Fannie and Freddie did and Lehman Brothers did. Instead of sounding the alarm which may help save the company and the people invested in it, they have an incentive to game the system and HOPE the stock fails by selling short and keeping their mouth shut.

There needs to be some new regs to monitor short selling and make it more transparent for anyone who is doing it so all can see it. I will ask some of our econ profs about my idea, but clearly something must be done to make destroying a company or a stock less appealing.

Short-selling is the common practice of betting against a stock by borrowing shares and then selling them in the open market. A short-seller’s hope is the stock will fall; if it does, the stock can be bought back at the lower price. Those cheaper shares can be returned to the lender, allowing the investor to pocket the profits. Traders can lose, however, if the stock rises.

Another reason stocks are doing well is that a great deal of good companies had their stock price knocked down due to market panic. A good company with an undervalued stock price is a buying opportunity and right after the market crashed smart buyers seized the day.

The country will get buy this crisis, BUT there needs to be new rules and ethics laws. There needs to be new ethics laws in Congress to make sure that the influence peddling (bribes) that caused this problem does not happen again. That will take leadership because corrupt members of Congress will fight such reforms tooth and nail.

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