It was another rough day for global markets. The major indices in the United States were down nearly three percent, and European markets fared even worse. That much is undebatable. The reasons, however, are. And the reasons initially given were, today at least, totally wrong.
Most major news outlets ascribed the drop to a negative market referendum on President Obama’s jobs speech last night. U.S. markets were weak but plunged even further when Obama reiterated the main points of his congressional address in a speech to the University of Richmond that was broadcast on CNBC. That was then taken as proof that Wall Street and the financial world were not only less than impressed with the proposals but downright hostile.
It’s no news flash that whatever love had existed between Wall Street and Obama has largely been lost. Many people who trade the markets are disenchanted with the White House and with Washington, and they view the prospect of more stimulus spending dimly. That said, the story told—not just today but distressingly often—is not necessarily a story that’s true.
The weakness of U.S. financial markets this week has almost nothing to do with what is going on in the United States economically or politically. It has everything to do with the endlessly unfolding drama in the European Union over the fate of Greek debt, peripheral countries, and the euro.
For more than a year, the prospect of Greece defaulting on its debts has been looming over the European Union. In the past months, those fears–combined with real concerns about the solvency of Italy–have been intensifying. European leaders, meanwhile, have been divided about what to do and divided. They have ricocheted between stern warning to Greece to stern warnings to the Germans and French governments that the costs of a Greek default would be economically catastrophic. The result has been increasing difficulty in the Eurozone, not just in the shares of companies listed there but bonds and financing as well.
None of that is a secret on Wall Street, but two factors combine to keep it less than front and center outside the professional investing class: one, that class tends to blame Obama for current economic issues and pinning a market plunge on him and the Democrats has a certain perverse appeal. Two, for news outlets, Greek debt and the arcana of the euro are still a bit to “over there,” whereas debt crises in the U.S. and stimulus debates are very much over here.
But the market action now is a reflection of the interconnectivity of the world of capital, which knows no borders and which reacts to a major crisis anywhere in the world as an immediate threat. For the world of stocks, bonds, currencies, and traders, a crisis of Greek sovereign debt is as threatening as the collapse of Lehman almost exactly three years ago. The reverberations are global and not confined to the Eurozone. While the actual consequences of a Greek default might not be as dire as feared, the fear is a contagion for all financial markets, everywhere, and the United States is not immune.
So we have one easy but false narrative–the markets don’t like Obama’s plan–that trumps a more complicated but true story–the markets are roiling from the fear of what is happening in Europe and a post-traumatic syndrome unhealed from 2008 that leads to extreme panic at the first sign of systemic faults. Most financial cognoscenti know that the current issue is Europe, as do many who write and speak about such things. But the American desire to be the center of all things makes the story of markets selling in reaction to Obama too tempting. The problem isn’t just that it’s the wrong twist; it’s that even after the financial crisis of 2008-2009, we still can’t accept the degree to which the world of capital and finance has gone global and is beyond the control of even the world’s richest country. Of course, the Europeans–older and just as rich--can’t accept that either. That is no comfort. For now, let us hope that Europe is having its debt ceiling moment and will at the 11th hour avoid the worst outcome. If it does not, this week’s sell-off may look mild in comparison.