Talk about mixed signals:

The economy is fundamentally sound despite the temporary “mess” it’s in, the White House said Sunday in the kind of upbeat assessment that Barack Obama had mocked as a presidential candidate.
[…]
During the fall campaign, Obama relentlessly criticized his Republican opponent, Sen. John McCain, for declaring, “The fundamentals of our economy are strong.” Obama’s team painted the veteran senator as out of touch and failing to grasp the challenges facing the country.

But on Sunday, that optimistic message came from economic adviser Christina Romer. When asked during an appearance on NBC’s “Meet the Press” if the fundamentals of the economy were sound, she replied: “Of course they are sound.”

When no other explanations make sense, you can always count on a little pop psychology to soothe the American soul. Here is what Psychology Today has to say about the economy:

People cheat more when they aren’t dealing with real money. Abstractions—whether it’s a poker chip or a stock option—make people more comfortable with fudging the rules. Start trading fancy derivatives and your morals just might come unmoored.

When people feel at the mercy of a volatile market, they’re more likely to see false trends in financial data. Lacking control causes the mind to spot patterns in order to regain a sense of agency. When the patterns are illusions, bad trades can result.

The Dow Jones Industrial Average is down over 1,300 points since “The” Bailout passed the House on Friday. This bill was suppose to save the markets at the expense of the people, but what if the markets and the taxpayers both dont like it? Too bad we are not in a parliamentary system where a vote of no-confidence like this means the current regime will likely be gone in the near future.

Nothing like a midnight press release from the SEC to let us know that all is well:

SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets

FOR IMMEDIATE RELEASE
2008-211

Commission Also Takes Steps to Increase Market Transparency and Liquidity

Washington, D.C., Sept. 19, 2008 — The Securities and Exchange Commission, acting in concert with the U.K. Financial Services Authority, today took temporary emergency action to prohibit short selling in financial companies to protect the integrity and quality of the securities market and strengthen investor confidence. The U.K. FSA took similar action yesterday.

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Additional Materials

 

• Emergency Order, Release No. 34-58592.pdf
• Emergency Order, Release No. 34-58591.pdf
• Emergency Order, Release No. 34-58588.pdf
• Form SH
• Form SH Instructions

 

 

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The Commission’s action will apply to the securities of 799 financial companies. The action is immediately effective.

SEC Chairman Christopher Cox said, “The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets. The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress.”

I visited China in the summer of 2007 while everything was bubbly and beautiful in their equities markets. Our group met with a representative of the Shenzhen stock exchange, who told us how the Chinese government had taken steps to ensure that China’s markets would always be stable and prosperous. The government knows who is buying and selling every position, so they can identify “market manipulators.” Most importantly, the government has outlawed short selling.

How has this transparency and forbidding short selling helped the Chinese market over the past year?