WASHINGTON -- In the old days -- from the Venetian Republic to, oh, the Bear Stearns rescue -- if you wanted to get rich, you did it the Warren Buffett way: You learned to read balance sheets. Today you learn to read political tea leaves. You don't anticipate Intel's third-quarter earnings; instead, you guess what side of the bed Henry Paulson will wake up on tomorrow.

Today's extreme stock market volatility is not just a symptom of fear -- fear cannot account for days of wild market swings upward -- but a reaction to meta-economic events: political decisions that have vast economic effects.

As economist Irwin Stelzer argues, we have gone from a market economy to a political economy. Consider seven days in November. On Tuesday, Nov. 18, Paulson broadly implies he's only using half the $700 billion bailout money. Having already spent most of his $350 billion, he's going to leave the rest to his successor. The message received on Wall Street -- I'm done, I'm gone.

Facing the prospect of two months of political limbo, the market craters. Led by the banks (whose balance sheets did not change between Tuesday and Wednesday), the market sees the largest two-day drop in the S&P since 1933, not a very good year.

The next day (Friday) at 3 p.m., word leaks of Timothy Geithner's impending nomination as Treasury secretary. The mere suggestion of continuity -- and continued authoritative intervention during the interregnum by the guy who'd been working hand in glove with Paulson all along -- sends the Dow up 500 points in one hour.

Monday sees another 400-point increase, the biggest two-day (percentage) rise since 1987. Why? Three political events: Paulson's weekend Citigroup bailout; the official rollout of Obama's economic team, Geithner and Larry Summers; and Paulson quietly walking back from his earlier de facto resignation by indicating he would be ready to use the remaining $350 billion (with Team Obama input) over the next two months.

That undid the market swoon -- and dramatically demonstrated how politically driven the economy has become.

We may one day go back to a market economy. Meanwhile, we need to face the two most important implications of our newly politicized economy: the vastly increased importance of lobbying and the massive market inefficiencies that political directives will introduce. Continued...