The primary cause of this recent stock market decline is the fact that credit markets have pretty much completely frozen over, and businesses are having a difficult time acquiring the credit needed to meet working capital demands. During this time, a significant percentage of businesses of all sizes had to cut back spending in order to offset the lack of available credit. This in turn affected virtually every other business and likely created a negative synergistic effect on the entire economy. Although some businesses have actually seen revenues increase, many businesses saw their revenues decline significantly. Earnings announcements over the next few quarters will clearly indicate this. This was rapidly being reflected in stock prices to the extent that it was expected (efficient markets hypothesis). In fact, it was announced yesterday that retail sales declined 1.2%, almost twice as much as the expected 0.7%. This is why the Dow tanked again yesterday, and will likely continue to tank today. The Dow dropped almost 750 points yesterday to close at 8577 after a week that saw the Dow gain around 800 points on Monday.

The 800 point gain on Monday was primarily due to the fact that Europe announced a bailout plan in excess of $2 trillion, along with various other measures taken around the world, combined with approximately $2 trillion of US bailout packages that have already been passed in the form of $300 billion for homeowner assistance, $700 billion financial institution bailout, $900 billion in term auction facility loans to banks, and several other small components passed concurrent with various other legislation. This gave the market hope on Monday, which led to the 800 point gain. However, the greater than expected declines in retail sales figures released yesterday almost completely offset that gain.

This greater than expected decline in retail sales is a sign that things have yet to hit the bottom. Due to financial theory that is deeper than I care to get into here, the fact that the Dow actually hit a low of 7900 during the intense volatility of intraday trading on Friday is quite significant. In short, the housing boom that just busted, along with Bush's tax cuts, is primarily what propped our economy up and brought us out of the Dow's low of around 7300 in the fall of 2003. That housing bubble was all our economy had going for the last five years, except for a few emerging bubbles in pharmaceuticals, oil/energy, and gold. That housing bubble just burst wide open, which in turn ended the pharmaceutical, oil/energy, and gold bubbles. Now that that housing bubble has burst, it appears that when the Dow hit 7900 last Friday, it was testing new lows that were set during the last bottom of 7300 in 2003. This sort of rationale is supported by financial theory and historical experience. During the great depression, the Dow fell almost 90%. So far, we have seen the Dow fall from a high of around 14200 in the fall of 2007 to a low of around 7900 during intraday trading last Friday. This represents a drop around 45%. The market is extremely susceptible to negative news right now. Unfortunately, Wells Fargo, the company that just acquired Wachovia, may have financial trouble in the works. I think the low of 7300 in 2003 is in danger of being beaten, big time.

I will stop with my analysis there. The point is, things are likely to get worse. Most economists agree with that right now. Furthermore, most economists agree with the principles of Keynesian economics. Essentially, Keynesian economics suggests that government spending (fiscal liberalism) will help the economy recover more quickly from a downturn. While the most recent variants of Keynesian theory suggest that the benefits are less than previously hypothesized, the benefits are still present and will benefit an economy in the short term with probable inflationary consequences in the long term. However, moderate monetary policy through long term management of treasury auctions can somewhat diminish the potential for long term inflationary effects of Keynesian economics.

(On an aside, this point is why I am neither a fiscal conservative, nor a fiscal liberal. I believe that during a down economy, responsible/ethical fiscal liberalism will help boost the economy. However, fiscal conservatism should be exercised during expansionary periods in order to fight inflationary pressures and help prepare for the next downturn.)

This point is where Obama has just won the presidency. While research is suggesting that Obama and McCain are both fairly liberal (according to Bob Sheiffer's question during last night's debate), they are quite different in their approaches to liberalism. Although both are proposing tax cuts to most individuals, both of their tax plans may be irrelevant at this point considering the deficit created by the total bailout package. However, Obama wants to promote larger tax cuts for the middle class, while McCain primarily wants to reduce taxes at the corporate and wealthy individual level. While McCain's plan may have positive long-term consequences, this is inefficient for a short-term remedy. The inefficiency is due to the fact that a corporate tax cut has to flow through the corporation before it helps the individual, and it is consumed heavily by executive bonuses awarded for improved performance. A wealthy individual tax cut has to flow through that individual, be invested in a business, and then flow through that business to the individual in need. However, at this point in time, the individual is frequently in need of immediate help. The fact of the matter is that all demand for goods ultimately relies upon demand created by the individual. If the individual continues to suffer, all of the economy will continue to suffer and probably to a greater degree. Tax relief at the individual level will help alleviate needs and increase demand more rapidly on a short-term basis, which in turn will have a multiplier effect throughout the economy.