I'm not really sure what to think about the new Treasury plan. But I do know that the fact that the stock market rallied upon its announcement is not proof that it's a good plan, just as the market drop was not proof that the last iteration of the plan was bad. I made this point in my TRB column:
Stock prices represent the market's guess at the profitability of corporations. While that's related to the health of the overall economy, it's not the same thing, and sometimes the two diverge sharply. During the Bush administration, for instance, corporate profits soared while wages for most families flatlined.
One clear instance where Obama hurt the stock market came when Tim Geithner announced the administration's financial rescue plan. Stocks dropped that day. Was this a fair indictment of the plan? Or a reaction to the possibility that the government might wipe out shareholders? In other words, was the market drop a signal that Obama's plan was bad for the economy as a whole or just bad for bank stocks? The two propositions mean very different things.
Keep this in mind when you read passages like this, from today's New York Times coverage of the market rally:
“This is the free-money rally,” said Barry Ritholtz, chief executive of Fusion IQ, an investment and research firm. “Traders like the fact that there’s a boatload of cash headed their way.”
Look, if the plan works, then I can live with subsidizing rich folks. But the fact that the market is rallying doesn't mean it will work, it just means that the rich folks think they'll come out ahead.
--Jonathan Chait