One of my many friends working for President Obama sends me this email, along with permission to share it with my blog readers:
My perspective here has given me an unusual window into the looking-glass mirror of how things I see on the inside are interpreted on the outside.
The most vivid case in point is the recent policy announcements about implementing the Volcker ideas about separating investment and commercial banking.
This policy process has been in the works for months, and it came to fruition in the normal course of policy operations after extensive meetings and consultations among Treasury, NEC, the PERAB board, and other parties.
Regardless of how one evaluates the wisdom of the policy (and I fully acknowledge that reasonable people can differ on this), in practice the timing of the announcement (coming after the loss of the Massachusetts Senate seat) is being interpreted as "the Administration has finally decided to cave in to the populist temptation." As a result there is a lot of uncertainty about whether Bernanke will be reappointed and whether the new policy signals that the Administration is going to dump him. Honestly, dumping Bernanke was NOT the point of this announcement.
But it seems like Wall Street is interpreting this as "Summers, Geithner, and Bernanke are on the way out because Obama has finally decided to go populist." Honestly, that is truly not right, though I can see how from the outside it would look like it.
Oddly enough, this is one of those cases where the whole thing could be a self-fulfilling prophecy. The policy announcement had nothing to do with Bernanke, but now the sharks are scenting blood, inTrade is putting Bernanke's odds of confirmation much lower, and a lot of Senators are starting to waver and back off and say they won't vote to confirm him, so now maybe he can't get through. If not for the misinterpretation of the get-tough-on-banks move, though, Bernanke's standing would not have changed.
PS I know it's a fool's game to try to explain moves in the stock market, but I have a friend on Wall Street who tells me that the selloff in the last couple of days is more due to uncertainty caused by the sense that Summers and Geithner are losing out to populism than to specifics of the bank plan.
Thanks for helping to get the true story out.