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.
topics:
Joe Biden, Obama's Financial Crisis, Federal Reserve
