Does Bloodletting Boost Stocks?

Daily we are told by the pundits that consumer confidence is back and that the worst of the economic crisis is over. It is not hard to find stories such as yesterday’s at where Paul La Monica told us:

The market rally keeps chugging along. And even though some are concerned that stocks have moved up too quickly from their March lows, there is one undeniably healthy thing about this surge: Investors are not nearly as afraid about the economy as they were a few months ago.

What is the cause of this optimism? The Washington Post tells us today:

The improvement [in the financial system] reflects the combined impact of a wide range of actions, many of them taken with little public attention, according to government officials and private economists. But more important than any single program, the sources say, is a deepening confidence from financial markets that the government is prepared to take aggressive action — a confidence that Obama officials have repeatedly worked to cultivate in speeches and public appearances.

In other words, the good guys are in office, they are very smart, and they are willing to act. So now, we can all be confident.

Treasury Secretary Geithner told the Washington Post: “A huge part of getting out of this crisis is about confidence. And it’s the impressions, the impacts, not just by the quality of policies themselves, but by the sense of action by the government . . . that’s critically important to confidence.”

According to Geithner, it doesn’t even matter what he, Bernanke, and Obama do, as long as they do something. Can this really be true?

A classic logical fallacy is post hoc, ergo propter hoc which means “after this, therefore on account of this.” In other words, Geithner, Bernanke, and Obama took action; therefore, since the stock market is going up, it is because of their boldness. Of course, this negates obvious questions, such as “Why did the markets go down until March?” And other explanations, such as “the market is in a classic, countertrend, bear market rally that many expected and predicted,” are ignored.

And what happens in the not-so-distant future when the stock market begins to fall and goes under its March low? First, we can be sure that the media will not apply post hoc, ergo propter hoc to Obama, Bernanke, and Geithner. We will be told that the market is going down despite all of their heroic efforts. And those “heroic” efforts will continue—despite evidence that they don’t work.

Consider bloodletting. The “art” of bloodletting as a medical treatment persisted for over 2500 years until the 19th Century. Here is one account of an unfavorable outcome—the death of George Washington:

According to his physician’s notes, Washington was afflicted with an inflammation of the upper windpipe on a Friday night. As it progressed, he developed a fever and difficulty breathing. Following medical standards of the time, he had someone come to bleed him that night. Twelve to 14 ounces of blood were removed, but he did not improve. The next afternoon, he was bled “copiously” twice more. When that proved ineffective, another 32 ounces of blood were removed. In addition to bleeding, his physicians also tried purging. By Saturday night, he was dead.

While here is an account of a “successful” treatment in 1824:

One typical course of medical treatment began the morning of 13 July 1824. A French sergeant was stabbed through the chest while engaged in single combat; within minutes, he fainted from loss of blood. Arriving at the local hospital he was immediately bled twenty ounces (570 ml) “to prevent inflammation”. During the night he was bled another 24 ounces (680 ml). Early the next morning, the chief surgeon bled the patient another 10 ounces (285 ml); during the next 14 hours, he was bled five more times. Medical attendants thus intentionally removed more than half of the patient’s normal blood supply—in addition to the initial blood loss which caused the sergeant to faint. Bleedings continued over the next several days. By 29 July, the wound had become inflamed. The physician applied 32 leeches to the most sensitive part of the wound. Over the next three days, there were more bleedings and a total of 40 more leeches. The sergeant recovered and was discharged on 3 October. His physician wrote that “by the large quantity of blood lost, amounting to 170 ounces [nearly eleven pints] (4.8 liters), besides that drawn by the application of leeches [perhaps another two pints] (1.1 liters), the life of the patient was preserved”. By nineteenth-century standards, thirteen pints of blood taken over the space of a month was a large but not an exceptional quantity. The medical literature of the period contains many similar accounts-some successful, some not.

Bloodletting persisted so long because favorable outcomes were attributed to the treatment, while unfavorable outcomes were deemed to have occurred despite the excellent treatment.

Bloodletting is an apt comparison to the bailout orgy that Washington is giving us. Unfortunately, the “blood” of healthy and productive economic contributors is being “let” and it is being transferred to those who are already dead, such as Chrysler.

Can that work? Of course not! But not to worry! The treatment, according to Geithner, doesn’t matter. The public will become more confident with every quart of blood he takes.


7 Responses to Does Bloodletting Boost Stocks?

  1. Tesh says:

    I still find it Orwellian that many of the talking heads still speak of “confidence” rather than “trust”. Confidence is what scam artists (con men) manipulate, trust is built on honesty, clarity and information.

    We don’t need confidence, we need trust.

    I don’t trust these people any further than I can kick them.

  2. Tesh,

    You make a very important distinction.

    Trust is earned or destroyed with every action. See James Surowiecki’s brilliant essay on trust; “A Virtuous Cycle”

  3. James D says:

    The markets are trying to go up because, as a nation, we are much more tied to the market than we used to be, with our pensions, 401k’s, IRA’s and stock options. After watching the plummeting values, we are desperate for improvement, and we (as the “sheeple” often do) are willing to blindly turn to whoever promises to have the answer, no matter how wrong it may be. Ignore what economists, history, and a multitude of others have to say, the market needs to go up!

  4. Jim,

    You’re right, many are desperate for stocks to go up and they will be sucked in again. Yesterday I was astonished to see a forecast on Bloomberg that the the S&P will go to 1700. Sadly some people will “invest” based on this.

  5. Steve Pilotte says:

    “Bloodletting”. What a womderfully apt analogy. Thank you for that one!

  6. PT says:

    So the medical profession has made some progress since bloodletting days. However, doctors still today have to try things and hope for the best. Would you expect them to say to a patient, “we really don’t think this is going to work but hey, what the heck, give it a try.” Although some probably do say that, I harken back to the earlier comments in this blog about optimism. Trying to stay positive can probably help. What can we say in this regard about economics? Messrs Bernanke and Geithner are both economists of a sort and presumably are leveraging their education and experience in the field to come up with the way forward. Are there any proven alternatives coming from the discipline? Why don’t more economists speak up?

  7. Steve,

    Let’s hope they don’t drain the patient (the productive taxpayer). When bloodletting was the norm, if a little didn’t work they called for more.


    You hit it on the head. Many individuals forfeit their individual responsibility and thus their freedom when they expect their doctor or politician or Fed chair to figure things out for them. The reward: they get to blame when things go wrong and be an “innocent victim.”

    There are alternatives, but you are right many economists support some variation of the “official” view. The Mish Shedlock blog is updated daily and is a must read, as is and

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