It's A Hit - Don't Give Me That Do Goody Good Bullshit

Perhaps the clearest indication of the new financial reality isn't anything in Washington (which, counterintuitively, may be the one local economy experiencing growth), but the stock market: since January 1, the Dow Jones Industrial Average has lost more than 1,500 points.

What's remarkable is that the downward slide - which this week passed the floor we hit last November at the worst of the initial cliff dive - is how consistent it's been: whatever happens, no news is about the only good news to be had. Any other news... and the market slides some more.

Which is why a good way to understand the problems we face with the Obama budget go well beyond its good ideas and good intentions: pretty much from the moment it was revealed, the selloff began.

From falling home sales (and home prices) to a decline in homes for sale (as Dean Baker notes, a bizarre turn of events that suggests people have started pulling their homes from the market), to the failures of the car companies (not just Chrysler and GM, but internationally with almost every maker), to the generally dismal economic news (Bernanke's Fed revealed this week that 2009 is pretty much a lost cause... next up: downward revisions of 2010)... there's pretty much no reason to think we're not just not out of the woods... but that the forest is actually over there, somewhere, and we're still heading for it.

As much as I'm trying to not revel in doom and gloom - really - this post is pretty much meant to be misery central: the point is it's not just as bad as it seems... it's much, much worse. And not only do we seem to not realize it fully, but the idea that we can slow or halt it seems to be crumbling by the minute.

Let's just look at a few of our current failing approaches:

• Bank rescue: since Tim Geithner's pretty disastrous attempt to redefine the bank rescue program, things have essentially gotten worse: almost everyone thinks Citigroup is probably bankrupt, that Bank of America can't be far behind and that the most optimistic assessments of the good ones - JP Morgan Chase and Wells Fargo - are probably just that, optimistic. "Nationalization" - as the concept of insolvent bank takeovers has come to be known - is no longer a dirty word... but actual nationalization of the banking system - which would involve a more sustained and comprehensive intervention by the Fed, Treasury and FDIC - is pretty much off the table.  Or in other words... no one has a clue what to do next.
• The Foreclosure mess: Similarly, limp response to Obama's mortgage proposals (which really need the fleshing out they're supposed to get next week), has unleashed a well of suppressed populist rage that's getting harder to ignore: despite its good intentions, the mortgage plan is, as feared, probably too small, and by not being comprehensive enough is highlighting a sense that some people get breaks while others don't. And all of it is wrapped in the American idea that some people got "good" debt while others were "bad", and ought to be punished; and by not taking the issue head on, the Obama team has simply cast all recipients as "good", which doesn't help. But by the way, the bigger problem here is really the financial one: we aren't admitting that many homes are still simply overvalued. It's the failure to address milions of "underwater" mortgages (where the loan principles exceed the home's current value) that are the real unsolved problem - and the reason why the current plan can't really solve the mess; and the fact that "cram down" legislation to adjust mortgages in bankruptcy has stalled again is a good indication that bank opposition to rewriting principles may yet prevail... to all of our dismay.
• Poverty planning: from unemployment to food stamps to housing issues, what's really not discussed is that, just in the past few months, needs for poverty programs have exploded; state after state is reporting depletion, or near depletion of funds to provide benefits, while the rolls of the needy only begin to expand. Obama's budget includes some increases... but already it seems clear they won't be big enough, and don't address systemic problems with how we deliver aid to the poor (especially since welfare reform in the nineties). While the refusal of some governors to accept the unemployment aid in the stimulus has caused controversy, it's turning out they have a point - changes that would increase benefits as part of the money leave state governments on the hook when federal money runs out, with no way to pay. And almost no one sees any sign (back to Bernanke's Fed report about economic conditions) of any recovery in 2009.  Which means next year's problems are already bigger ones.
• Healthcare reform: if healthcare reform hasn't caused a crisis yet... it's probably because no one knows what it looks like; despite suggestions of various facts and figures, the exact shape of insurance changes, and the expected costs, are not at all spelled out, yet. Moreover, though there's talk - especially from Peter Orszag - about reining in healthcare spending (which has only gone up for the past 20+ years), there's no actual details on any move to limit Medicare spending, or Medicaid funding - and in Medicaid's case, there better not be limited funding... or see above about how poverty is increasing.

The point to all of this is that Washington, despite its self-centered thinking - which is a real side benefit of Obama's win that even conservative wonks secretly thrill to - isn't the place to watch; what looms over every government decision is the collapse of our economy, and the main thing that underpinned it: headlong increases in consumer spending, good times or bad. With no real way to reignite consumer spending, there's less demand for products, less demand to manufacture them, less need to ship them... and voila, you have a global economic whirlpool that keeps spinning and growing. The stimulus can't fix that, even with good investments into road and other construction; there's just too much energy going the other way.

More people without jobs (as Dean Baker also notes, the "bank stress test" worst case scenario is 8.9% uneployment; we should be there by June) means more people unable to pay mortgages means more foreclosures means more poverty... and on and on. There are thousands of points left to fall out of Dow Jones (I heard a suggestion today that the S&P 500 should be in the 400s; today it closed above 700), there's still a lot of economic pain to flow through the economy... and we're hoping the government's budget can fix it. Wrong question... wrong answer... wrong number. Progressives may scoff at complaints like the ones Rick Santelli made on CNBC about the foreclosure plan... but Santelli, however blinkered and overcaffinated, has a point: a bad plan that atempts to fix a few mortgages and fails will be about as bad as anything for the economy because after it fails... we got nuthin. And mostly...we've got no money... and we don't seem to know it yet.

Comments

[Leigh]

"leave state governments on the hook when federal money runs out, with no way to pay"

My understanding is this is not true - that the changes states would have to make expire at a specified point. There's a formal term that I am blanking on right now.