Six months into a stock-market rally, Wall Street apparently saw more good news last week when a Labor Department report showed employment had jumped to 9.7 percent in August. Exactly why Friday’s news — joblessness at a 26-year high — produced a 97-point gain in the Dow Jones Industrial Average is a good question, but if the stock market were perfectly predictable, we’d all be rich.
Alas, we are all much poorer than we were two years ago. The Dow, which peaked above 14,000 points in October 2007, fell below 6,600 in early March — a 53 percent decline in 17 months. Even with the summer rally that has taken the Dow back up to 9,400, the net loss of asset value still exceeds 30 percent.
It’s not just fat cats who have suffered. Because of 401(k) accounts and other investment vehicles, stock ownership has never been more widespread, and millions of ordinary Americans were traumatized by the quarterly mutual-fund reports that detailed their losses to the penny. This pain was intensified by a meltdown in the housing market that undermined the very bedrock of middle-class financial security.
The full extent of the losses in asset value cannot be adequately estimated, if only because policy interventions by Washington — including programmatic efforts to halt mortgage foreclosures — have prevented the kind of market-clearing function that would tell us what things are really worth.
First the Bush administration and now the Obama administration have pumped hundreds of billions of borrowed dollars into the system, justifying the stimulus-and-bailout policy as necessary to avert a financial cataclysm. Yet the augurs who study the entrails of the economy are muttering darkly about the inauspicious omens.
Last week, Vice President Joe Biden gave a happy-talk presentation — “Rainbows! Unicorns! Recovery!” — about the miraculous effects of the $787 billion stimulus package that President Obama rammed through Congress in February. Once more trotting out the administration’s rhetoric about jobs “saved or created” (pick a number, any number), Biden declared, “In 200 days, the president’s Recovery and Reinvestment Act isn’t just working…it’s working toward something: It’s working toward a more resilient, more transformative economy.”
Surely, many economists greeted this declaration with arched eyebrows. What, exactly, is a “transformative economy,” and in what sense is it “more resilient”? Never mind. Being liberal means never having to define one’s terms.
Biden showed himself adept at the art of ambiguity when he proclaimed to his Brookings Institution audience: “The Recovery Act has played a significant role in changing the trajectory of our economy, in changing the conversation about the economy in this country. Instead of talking about the beginning of a depression, we’re talking about the end of a recession eight months after taking office.”
Well, who is “we”? It is by no means universally agreed that the U.S. economy is now bound for the sunlit uplands of prosperity, and many of the financial augurs perceive that we may be approaching an economic abyss. Here are just a few of the recent portents of potential disaster:
• An analysis last month by Deutsche Bank estimated that by 2011, 25 million American homeowners — nearly half of U.S. mortgage borrowers — would be “underwater,” owing more on their mortgages than their homes are worth.
• In a story on Friday’s Labor Department report, Bloomberg News quoted a financial strategist explaining that continued high unemployment — which shows no sign of declining before 2010, if then — was putting “downward pressure” on wages. “The key ingredient for a sustainable recovery is still absent,” said Tony Crescenzi of Pacific Investment Management.
• Investors Business Daily and the Wall Street Journal reported a rise in delinquencies on home loans guaranteed by the Federal Housing Administration, indicating the danger of another mortgage meltdown and the possibility of yet another bailout at taxpayer expense.
• Regulators shut down five banks Friday, bringing to 89 the total number of U.S. bank failures this year, and Bloomberg News reported that recently “a total of 416 banks with combined assets of $299.8 billion failed the FDIC’s grading system for asset quality, liquidity and earnings.”
• Examining a chart of job losses in the current recession, Henry Blodgett of BusinessInsider.com declared, “Unless employment rebounds rapidly (it’s still falling), it’s hard to see how we’re going to get the v-shaped recovery that the bulls are now expecting.”
• A Chinese official attending a weekend economic conference in Italy said that if the Federal Reserve “printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard.” This was seen as a signal that Beijing, a major holder of U.S. debt, has tired of endless federal deficits and may be more reluctant to purchase Treasury bonds going forward.
• Gold reached its highest price in six months Tuesday, and silver hit a 13-month high. Oil prices also spiked more than 4 percent, and the dollar hit a new low for the year against the euro.
• A Federal Reserve report Tuesday showed consumers cutting back on credit, widely interpreted as a sign of weakening consumer demand.
Such gloomy evidence hardly testifies to the “transformative” power that Joe Biden attributed to the stimulus. But there can be no doubt the administration has succeeded in “changing the conversation.” With so many troubling omens, some analysts are now predicting a “W-shaped” recovery — a so-called “double-dip” recession with another significant downturn before the economy bottoms out and begins a genuine recovery.
Those who put little faith in Biden’s economic acumen are watching for the second dip of that “W,” perhaps as painful as last fall’s collapse that led Democrats to enact the $787 billion stimulus. However severe the financial damage of another downturn, one certain effect can be easily predicted — the final bankruptcy of Obama’s economic credibility.