Bleak Friday

There's an awful lot of shrillness going 'round today.

Floyd Norris:

This week Citigroup’s already depressed shares have lost half their value, and shares of Bank of America and JPMorgan Chase are down 30 percent.

Those declines have come despite reassuring comments from Treasury Secretary Henry M. Paulson Jr., who told National Public Radio a week ago that people were no longer worried about the possibility of a major bank failure. “I’ve got to tell you,” he said. “I think our major institutions have been stabilized. I believe that very strongly.”

The Standard & Poor’s index of 500 stocks fell by more than 6 percent on two consecutive days, Wednesday and Thursday, something that had not happened since July 20 and 21, 1933, in the midst of the Great Depression, when panic was brought on by collapsing commodity prices. Such prices have fallen rapidly this week as well, as evidence mounted of a world recession. The index is now at its lowest level in 11 years.

By resigning from the Senate before the current session began and allowing it to appear that a sense of drift could prevail until he is inaugurated, Mr. Obama may have missed an opportunity to exert leadership.

The renewed sell-off in the stock market this week has been stunning, with some of the worst declines coming in the financial stocks and the shares of retailers. The credit markets are again shaky, with junk bond yields soaring.

In retrospect, the decision to let Lehman Brothers fail had devastating consequences, and not just to the financial system. Shares of some major retailers — for which the season now beginning is critical — have lost nearly three-quarters of their value since that mid-September decision.

There is fear of a wave of corporate bankruptcies that will strain banks’ balance sheets and make them even more hesitant to make the loans that could keep struggling companies alive.

A stimulus package is needed quickly, said Gerald Holtham, a British economist and hedge fund manager, but for it to be effective a way will have to be found to revive credit markets, and to assure that tax cuts have an economic impact greater than would come from simply enabling overleveraged consumers to pay down their credit card balances.

Paul Krugman:

There is, however, another and more disturbing parallel between 2008 and 1932 — namely, the emergence of a power vacuum at the height of the crisis. The interregnum of 1932-1933, the long stretch between the election and the actual transfer of power, was disastrous for the U.S. economy, at least in part because the outgoing administration had no credibility, the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action. And the same thing is happening now.

It’s true that the interregnum will be shorter this time: F.D.R. wasn’t inaugurated until March; Barack Obama will move into the White House on Jan. 20. But crises move faster these days.

How much can go wrong in the two months before Mr. Obama takes the oath of office? The answer, unfortunately, is: a lot. Consider how much darker the economic picture has grown since the failure of Lehman Brothers, which took place just over two months ago. And the pace of deterioration seems to be accelerating.

Most obviously, we’re in the midst of the worst stock market crash since the Great Depression: the Standard & Poor’s 500-stock index has now fallen more than 50 percent from its peak. Other indicators are arguably even more disturbing: unemployment claims are surging, manufacturing production is plunging, interest rates on corporate bonds — which reflect investor fears of default — are soaring, which will almost surely lead to a sharp fall in business spending. The prospects for the economy look much grimmer now than they did as little as a week or two ago.

Yet economic policy, rather than responding to the threat, seems to have gone on vacation. In particular, panic has returned to the credit markets, yet no new rescue plan is in sight. On the contrary, Henry Paulson, the Treasury secretary, has announced that he won’t even go back to Congress for the second half of the $700 billion already approved for financial bailouts. And financial aid for the beleaguered auto industry is being stalled by a political standoff.

Dean Baker:

This is important. We know how to keep the economy from collapsing. We didn't have this information 80 years ago. The secret is to spend money, lots of it.

CEPR just circulated a letter that garnered 375 economists' signatures arguing for a stimulus between $300 billion and $450 billion. This might be too small given all the bad news that we are seeing. We may need to spend $500 billion or $600 billion a year to get the economy back on its feet, possibly more. The key point is that we can get the economy back on its feet; we just have to spend the money to do it.

The stock market is driven by fear and greed. Today fear dominates. That should not be our concern. We must force the politicians to do what is necessary to get the economy moving. They must spend lots of money.

I sympathize with President-elect Obama's desire for an orderly and undramatic transition, which so far has been impressive. I realize he doesn't want to act in concert with an administration that has been inept in its handling of the economy or with a Treasury Secty who didn't anticipate the collapse of the housing bubble or the fragility of our financial system and still seems like a deer in the headlights. And yes, there's only "one president at a time."

But it may be time for him and his still forming team to ignore the "-elect" and start taking control. While he is very good at providing reassurance, it may take some real arm twisting to get Congress and the Treasury to start doing something. Anything.

Otherwise he may not have much of an economy to fix when he does move in to the White House.