The Obama Markets

by: Mark Hines

Barack Obama believes his administration can allocate resources better than free markets, and on Thursday he moved one step closer to trying. Obama’s new budget proposal seeks to increase taxes by $1 trillion on America’s wealthiest, including a $24 billion increase on hedge fund and private equity execs via carried interest tax reform. You know how I feel about Obama’s approach, but it’s valuable to review the thoughts of others. I've included the opinions of three highly regarded capital market participants, and then I describe how Obama continues to create one of the easiest trades in recent history...

In this recent article, Eugene Fama suggests government bailouts are unlikely to achieve their goals. A direct quote from the article is worth repeating.

Even when there are lots of idle workers, government bailouts and stimulus plans are not likely to add to employment. The reason is that bailouts and stimulus plans must be financed. The additional government debt means that existing current resources just move from one use to another…with no effect on total current resources in the system or on total employment.

As another example, Rudy Giuliani doesn’t think very highly of Barack’s resource allocation efforts. Specifically, he recently said limiting Wall Street bonuses will cause unemployment in New York. I’m not going to defend the Wall Street execs themselves, but Giuliani makes a pretty compelling argument about the way resources are efficiently allocated in New York.

Sadly, George Soros thinks our current crisis signals the end of a free-market model. Trying to allocate resources better than the free markets is a daunting task, but Obama seems to think he can do it.

Ironically, the only capital market participants Obama seems to be helping are the short-term traders. Over the last month, the Obama Administration has created several of the easiest "Buy the Rumor, Sell the News" trades in a very long time, and there are more to come!