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In the wake of nearly a month of devastating financial losses, though amid signs that panic is receding from the financial marketplace, the leaders of the world’s richest nations, including the United States, announced last night that they have agreed to an unprecedented plan to “reset the clock” on global stock markets. If the plan is fully implemented, key indexes like the Dow Jones Industrial Average, the CAC 40 in France, and Britain’s FTSE 100 will be restored to their historic highs (in the Dow’s case the high water mark, 14,164.53, was achieved on Oct. 9, 2007) at some mutually agreed upon date in the near future.
The move would be the boldest of the measures discussed at this past weekend’s meeting of the G-7 group of industrialized nations in Washington. It would instantly restore trillions of dollars to investors. “The past year has been like a bad dream,” said Prof. Gilbert Ross of Yale University who is credited with the basic idea of direct government intervention to raise the indexes. “This would give us a chance to wake up and start again. It’s like a time machine.”
The Ross Plan appeared to be winning initial support in Congress, as well as in the White House. Rep. Barney Frank (D-Mass), the Chairman of the House Financial Services Committee, has been one of its strongest advocates. “It has the virtue of simplicity. And it would give us a second chance to avoid most of the unpleasant drama of recent days. For instance, we can fix Fannie and Freddie Mac before they break. And this time, we’ll be on the lookout for problems at Bear Stearns and Lehman Brothers, even when they seem to be doing well.”
One of the strengths of the idea is that there have been so few winners in the market downturn, that there are almost no credible opponents to it. “Oh, the short sellers may scream,” said Jeremy Hamburg, the chief economist of the beleaguered Morgan Stanley investment bank, “But people stopped listening to them weeks ago. The vultures don’t have a lot of standing in the discussion over rescue measures.”
Although resetting the markets may seem obvious, it has never been tried before for two basic reasons.
Firstly, the government has traditionally been reluctant to intervene directly in the markets for capital beyond adjusting interest rates through the Federal Reserve and, secondly, a basic understanding has prevailed that eliminating risk from the market exposed investors to a “moral hazard.” “If there are no negative consequences for poor decisions, ultimately the market reinforces good and bad actions equally,” Mr. Hamburg explained. “But once Bush and Paulson stepped in to rescue Fannie and Freddie and AIG and take an equity position in endangered banks, well, it’s a brave new world.”
What Prof. Ross calls the “No-Downside Economy” is possible, according to his theoretical work on the subject, only through fairly drastic action, like ordering the Dow rebuilt. But, he explains, the abstract nature of modern high finance does make such severe action a viable option when the political will is strong enough, as it seems to be currently. “All of the components of modern economies, from currencies to stocks and bonds to derivatives, are all valued by consensus,” Ross said. ” The days when a dollar was worth a certain number of ounces of gold or silver are long gone. A dollar’s worth a dollar because we agree it’s worth a dollar. If all it takes to rescue our economy is deciding that a dollar is worth two dollars, then that’s what we must do.”
According to insiders, the precise mechanics of the plan have not been fully worked out but it is believed that, in addition to the stock indices, currency values, interest rates, and bond prices will all be adjusted to their level at the time of the stock market high. Mr. Hamburg of Morgan Stanley said those moves “should reinflate the housing bubble nicely.” He added that the bubble can then “either be deflated gradually or inflated further.”
Transactions from the intervening time period, however, will not be undone, however. “That’s a reward for investors who sat tight and didn’t panic,” said a Treasury official speaking on condition of anonymity because he was not authorized to speak publicly about the matter.
Congressman Frank, House Speaker Nancy Pelosi and their Senate counterparts promised speedy approval for the plan. “We’ve had a meltdown,” said Frank. “What we’re talking about is nothing less than a complete ‘melt-up.’ It’s going to be popular on Wall Street and Main Street, not to mention Elm Street, Martin Luther King Boulevard, Cesar Chavez Square, and the Provincetown Country Mart.”
