Markets Can Recover Downward, Too

-- by Dave Johnson

Brad DeLong defends the current Geithner plan, in Grasping Reality with Both Hands: The Geithner Plan FAQ,

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

I hear a lot about how the markets need to "recover" and how they are trying to "stabilize" the housing and stock markets.

I submit that they are recovering. The markets are recovering from huge bubbles, and they are stabilizing to pre-bubble trend lines.

This means they have a ways to go - down - and then they will be "recovered" and "stabilized."

For example, the other day I had a post, A Long Way To Go Still,

Stocks have fallen to where they were in 1996/7. Here is a chart that shows where stocks were in 1996/7.

Does anyone else see the problem?

Specifically, that chart shows where the market was in 1996/7. It was in a bubble, and it still needs to recover to the trendline that preceded that bubble.

Posted by Dave Johnson at March 22, 2009 10:14 AM