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Why the Wall Street nose-dive?

President-elect Barack Obamaddresses national medipress conference after presiding over TransitiEconomic Advisory Board meeting HiltChicago Friday. To left Obamis Vice President-elect

President-elect Barack Obama addresses the national media at a press conference after presiding over a Transition Economic Advisory Board meeting at the Hilton Chicago on Friday. To the left of Obama is Vice President-elect Joe Biden; to the right is newly named chief of staff Rahm Emanuel.

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Updated: May 3, 2013 12:14PM



The stock market is always right. Nonetheless, I must admit to being more than a little annoyed that the stock market greeted the election results with a two-day nose-dive of more than 929 points, the worst two-day performance since 1987.

On Friday, the market staged a small rebound of 250 points. Still, the markets made their point.

It smacked of Wall Street pique that President-elect Barack Obama appears to be no friend of "the Street." But the economic platform of our new president came as no surprise, so why the sell-off?

Yes, he promised to tax capital gains at the same rate as ordinary income, which would represent a huge hit to those who still have any capital gains remaining. But the smart money had already priced that fact into the stock market, selling earlier in the campaign as the candidate's momentum picked up.

Certainly Obama will take a more populist approach to digging America out of its economic mess. But realistically, how much more could Wall Street have expected in the way of aid from the government? More than a trillion dollars have already been injected directly into the banking system by way of guarantees and capital stock purchases.

With the global financial markets resisting transparency, clarity, and centralized clearing of transactions, all the liquidity in the world won't restore trust and spur lending. So why not try from the other end -- by helping the debt-ridden consumer?

On balance -- priceless!

The stock market -- as measured by the Dow Wilshire 5000 Index -- lost $1.2 trillion in the two days following the election. Part of that came from fear of the unknown impact of the next president's (and Congress') planned policy changes and spending programs.

It reminds me of the Mastercard commercials that tot up the price of components of an event: "tickets $100, parking $20, popcorn $15." But remember: The punch line is always the sum total of the experience.

And in the case of the global impact of the election of Barack Obama as the next president of the United States, the overall impact is indeed PRICELESS!

America now has the opportunity to regain global trust in our basic principles of equal opportunity. If one picture is worth a thousand words, we have demonstrated the true strength of our democracy, with a capital D. We didn't have to go to war to spread democracy. All we had to do is demonstrate beyond a shadow of a doubt -- and beyond hanging chads -- our national commitment to our unique political system.

And in doing so, we have visibly inspired millions of people around the world to give us the benefit of all the doubts that have been raised in the last eight years.

Priceless, but costly

Now comes the tough part. As we try a different approach to restoring our economic growth, all the hope in the world can't deny economic reality. The jobs figures last Friday demonstrated the immediate need to grow the economy. Now there will be even greater expectations of some sort of government-directed public works program.

The real issue is how to pay for all of this spending. And on that score, Obama may have a very appropriate role model in the actions of President John F. Kennedy.

It was Kennedy who famously said: "Paradoxically, the way to increase tax revenues is to cut tax rates." Those are my italics.

When Kennedy became president, the top personal tax rate was 91 percent. That's not a typo. Almost every penny of the last dollar earned by top wage earners went to the government -- and the economy was stagnant.

Kennedy became the largest tax-cutter in American history at that time, cutting the top personal tax rate from 91 percent to 70 percent. He also cut the top corporate tax rate from 52 percent to 48 percent. Unfortunately, he did not live to see the resultant spurt in growth, which came to be known as the "Kennedy Boom."

Cutting taxes to spur economic growth is not a Republican vs. Democrat issue. It is a growth vs. stagnation issue. And since the top 10 percent of tax returns produce 60 percent of the tax revenues, that is where rates will have to be cut in order to produce more jobs, more economic growth, and then more tax revenues.

Obama has given ample demonstration of his insight, intelligence, and his appreciation of his place in history. That is why the world -- and the markets -- should be filled with hope, even in the midst of this very real economic slowdown. And that's The Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd. Visit www.terry savage.com and suntimes .com.



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