Commentary Magazine


Contentions

The Krugman Rally

Yesterday the stock market was in the doldrums. It opened about sixty points down on the Dow from its previous day close and drifted downward from there to be off about 130 points at 12:30. It then struggled upwards, recovering about fifty points by 3:15. At that point it shot up seventy points in a few minutes and closed up fifteen points on the day.

What happened?

According to Bloomberg News it was a speech by Paul Krugman at the London School of Economics in which he predicted the end of the recession at some point this summer.

What makes markets rise and fall in the short term can never be known for sure. But, assuming causation and not just post hoc ergo propter hoc, this is highly reminiscent — except moving in the other direction — of the famous Babson Break of September 1929.

The market had reached an all-time high on September 3rd, 1929, closing at 381.17. No one knew it at the time, obviously, but that high would not be surpassed until 1954. Then, on September 5th, a perennially pessimistic financial advisor of no great note named Roger Babson told a luncheon group in Wellesley, Massachusetts, that “I repeat what I said at this time last year and the year before, that sooner or later a crash is coming.”

This rather innocuous remark crossed the broad tape at 2:00 PM and all hell immediately broke loose on the floor of the Exchange. By the time trading ended an hour later (the market closed at three o’clock in those days) major issues had plunged five percent or more and volume in the last hour of trading was a fantastic two million shares. It proved to be the start of the great crash that climaxed seven weeks later on October 29th.

Whether the Krugman Rally will prove to be a harbinger of things to come, as the Babson Break did, only time will tell. It might be noted, however, that the Babson Break occurred at a stock-market peak and the Krugman Rally follows three months in which the market has risen by fully a third from its dismal lows in early March.

In both cases, however, it was almost certainly not the influence of Krugman and Babson that moved the market. Rather it was a case of the market wanting to move and any excuse would do.



Join the discussion…

Are you a subscriber? Log in to comment »

Not a subscriber? Join the discussion today, subscribe to Commentary »





Welcome to Commentary Magazine.
We hope you enjoy your visit.
As a visitor to our site, you are allowed 8 free articles this month.
This is your first of 8 free articles.

If you are already a digital subscriber, log in here »

Print subscriber? For free access to the website and iPad, register here »

To subscribe, click here to see our subscription offers »

Please note this is an advertisement skip this ad
Clearly, you have a passion for ideas.
Subscribe today for unlimited digital access to the publication that shapes the minds of the people who shape our world.
Get for just
YOU HAVE READ OF 8 FREE ARTICLES THIS MONTH.
FOR JUST
YOU HAVE READ OF 8 FREE ARTICLES THIS MONTH.
FOR JUST
Welcome to Commentary Magazine.
We hope you enjoy your visit.
As a visitor, you are allowed 8 free articles.
This is your first article.
You have read of 8 free articles this month.
YOU HAVE READ 8 OF 8
FREE ARTICLES THIS MONTH.
for full access to
CommentaryMagazine.com
INCLUDES FULL ACCESS TO:
Digital subscriber?
Print subscriber? Get free access »
Call to subscribe: 1-800-829-6270
You can also subscribe
on your computer at
CommentaryMagazine.com.
LOG IN WITH YOUR
COMMENTARY MAGAZINE ID
Don't have a CommentaryMagazine.com log in?
CREATE A COMMENTARY
LOG IN ID
Enter you email address and password below. A confirmation email will be sent to the email address that you provide.