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inthemoneystock (< 20)

Does The President Really Control The Economy?

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January 23, 2013 – Comments (2) | RELATED TICKERS: IEF , TBT , TLT

Throughout history, many U.S. presidents have had their legacy engraved by the way the economy behaved during their time in office. For example, President Ronald Reagan is credited for a stellar economy, yet the crash of 1987 took place while he was in office. At the start of President Reagan's  first term in January, 1981 the highly followed Dow Jones Industrial Average (DJIA) was trading around the 950.0 level. Throughout 1981 to 1987 the Dow Jones Industrial Average rose to a high of 2746.70. This is quite a surge in the stock market when DJIA can rise by nearly 200.0 percent in just six years. Did President Reagan implement policies that were so good for the economy that the stock markets just took off to the upside? I would not be so sure about that.

President Bill Clinton will most likely be remembered for a robust economy as well. Under President Clinton's leadership the Dow Jones Industrial Average climbed from 3232.00 at the start of his first term in 1993, to a high of 11,750.28 in January 2000. That is a gain of more than 250.0 percent in just seven years. Did President Clinton implement policies that were so good for the economy that the stock markets simply took off to the upside? I would not be so sure about that either.

As we all know, the president of the United States does not control interest rates, the Federal Reserve Bank does that. When President Reagan first entered office the fed funds rate was around 19.0 percent. The fed funds rate is the overnight lending rate to the large banks not the prime rate which the public pays for a loan. At the time, Paul Volcker was the Federal Reserve Bank chairman. Once he began to cut interest rates the stock markets soared like eagles to new all time highs. By September 1987, the fed funds rate was as low as 6.75 percent. This is a drastic reduction in interest rates, as the easy money flowed so did the stock market.

Now under President Bill Clinton the fed funds rate was around the 3.0 percent level. The Federal Reserve soon started to raise interest rates into July 1995. At that time, the fed funds rate was at 5.75 percent. Then the Federal Reserve started to lower interest rates, and the stock markets began to climb once again. In 2008, the fed funds rate was as low as 4.75 percent. Once again, the central bank started to raise rates to 6.0 percent in 2000 and the stock markets made their final high before starting a new bear market.

Now, let;s fast forward to modern times. President Obama is now getting credit for a four year stock market rally. Remember, in March 2009 the Dow Jones Industrial Average was as low as 6470.0. Today, the DJIA is trading as high as 13,766, which is a new four year high. Please understand the Federal Reserve has held the fed funds rate at zero to a quarter percent since December 2008. There is also about $90 billion dollars a month worth of bond buying going on by the Federal Reserve.

So I believe it is safe to say that the president of the United States has very little to do with the economy and the stock market. The Federal Reserve has everything to do with the stock market. So the next time someone tells you that Bill Clinton and Ronald Reagan were great leaders you may just want to replace those names with Paul Volker, Alan Greenspan, and now Ben Bernanke.   

Nick Santiago
InTheMoneyStocks.com

2 Comments – Post Your Own

#1) On January 23, 2013 at 2:15 PM, elektrotherapy (80.93) wrote:

Generally, Presidents only get part of their agenda passed into law. Many of their decisions as the chief executive of the federal government, especially the decisions of their appointed cabinet, are unquestionably decisive. But I agree with your point. Most policy changes take years and perhaps decades before they take effect. Many other important political actors have an opportunity to adjust them.

 

Some presidents are uniquely situated in that they have to make many urgent critical decisions. Hoover and FDR come to mind here. Overall, I think those instances are rare. But if we consider the consequences of Bush's policies (tax cuts, military spending) and we look at ourselves today I think we can make a direct connection with the activity of the market with all the talk of the fiscal cliff. Clearly, Bush's policies pushed us toward the edge.   

 

 

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#2) On January 25, 2013 at 2:36 PM, Louebsch (< 20) wrote:

"The Federal Reserve has everything to do with the stock market."

And who controls the Fed Reserve? Congress gives them the power. Or should we blame Woodrow Wilson for the last 100 years?

How about taking the country off the gold standard? Is Nixon to blame for the last 40 years?

While the president may not directly control the economy, the laws enacted or not enacted directly effect the economy. I would argue that the effects are felt more immediately today with the advance of the internet, than they were even 10-20 years ago. But to flat out say that Bush was to blame for the last four years is ridiculous. If the laws were so bad why did Obama go along with them? (I think both Obama and Bush are to blame, just fyi, i.e. I'm not Republican or Democrat because neither represent the people anymore.)

Obama could have stopped bailing out companies the day he got into office, but he didn't. He continued the bad policies of the Bush era.

Furthermore, I would like to say that most presidents are just figure heads anyway. There is a not so secret group that stands behind the curtain telling the president what to do or else you won't get anymore re-election money, or god forbid, threats on his family.

In the end the policies are written by the coporations without thoughts of how it will effect the whole country in 5 years, but just their business specifically as soon as the bill is enacted. The policies are then signed by the figure head president, and the companies make millions off of the new policy.

Don't believe me, research who runs the FDA and where they came from. Why are drugs getting passed through the FDA that have more side effects than cures?

Follow the money!

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