Yesterday, Monday, August 8, 2011, the recovery officially died. True, we are not technically in a recession yet, but yesterday was as good a day as any to draw the line separating our faintest remaining hopes for restoration of economic normalcy from a general sense of foreboding (or for some of us, resignation) about what is to come.
2 numbers are likely to be oft-repeated in news items in the coming days: 634.76 and 1 trillion. The 1st of those is the number of points by which the Dow Jones Industrial average fell on Monday, which amounts to a 5.6% drop in its total value; the 2nd is the total value of investor assets that were lost in Monday’s domestic market tumble. The S&P’s downgrade of the United States Federal Government’s credit rating from a perfect AAA to AA+ may have erred on the side of hasty, but even if Monday’s dismal market performance is an overreaction to an overreaction, there’s really nothing to restore the lost value of those investments, because these days there’s just no apparent good news to stamp-out the bad. The New York Times observed that bank stocks were hit the hardest:
“…Bank of America fell 20 percent. Citigroup fell 16 percent. Morgan Stanley dropped 14 percent. JPMorgan fell 9 percent. And Goldman Sachs fell 6 percent.
“Investors feared that banks could be hit by the economic slowdown and that, with government spending constrained, lenders would be less likely to receive official support in the future should they need it, as they did during the financial crisis.”
Mind you, I’m not with those grumbling about the S&P’s downgrading of our government’s credit rating. The S&P’s report on its decision gave 2 reasons for the slight but real decline in its confidence–a prognosis of deficits not managed, which I think is as-yet unjustified, and frank doubts about whether our political system and current politics will always provide for the reliable payment of our debt service, which I think is a fair question after House Republicans’ bizarre brinksmanship with the Federal debt limit.
I’m really curious how Wall Street investment bankers and hedge fund managers feel about how the loss of $1 trillion in domestic investments in a single day compares to the aggregate amount by which President Obama has proposed raising their taxes. The fact that 1 rating agency downgraded the Federal Government’s credit rating from its highest to its next-highest rating and it caused the sharpest drop in the value of the Dow since the 2008 Financial Crash vindicates the President’s dark prognosis about what a “technical default” would have done to the economy. This demonstrates the truth of the President’s insistence that House Republicans were holding all of us hostage when they held up the vote on increasing the Federal debt limit. I’m not gloating about this sudden shock to the market, I simply wonder if Wall Street investment bankers and hedge fund managers feel the fools for their massive fundraising rally for the radical Conservatives of the Tea Party movement in 2010.
I also don’t mean to say that the President has exhibited any great insight into this problem. At this rate the public is likely to blame him for the emergence of the Second Recession during his watch, and this will be a very hard charge to shake. President Obama’s recriminations at the S&P over its decision to downgrade our government’s credit rating are uncompelling to put it mildly. A friend of mind was shrugged the grim portents off yesterday: “Taking off my Marxist hat”–Oh, did I mention this friend is a Marxist?–“if you’re living in a market economy, you’re living in a market economy. If the relevant professionals judge that you aren’t as creditworthy as you used to be, the way you feel about their judgment has no bearing on it.” The President’s bitterness over the damage to our credit rating is pointless, and unbecoming. The World has changed a little once again, that’s all.
Maybe President Obama is expressing frustration over a development that will damage his re-election prospects. If one actually wants to be President, one probably wants to be re-elected President. The outlook for his re-election has now become dim, and he must suspect that this is owing to the foolhardy actions of others. This is true–but it isn’t the whole story. The President of the United States is both the most powerful man in the World and doomed to constant reaction against a kaleidoscopic diversity of crises from all corners. It’s true that a great many factors beyond his control have undermined our economic recovery from the start. It’s also true that President Obama predicted that unemployment would peak around 8% by fall 2009 and begin to fall thereafter; with unemployment at 9.8% that September, the President declined to give the most-dismal economy in generations his full attention.
The great irony of the S&P’s downgrade of the government’s credit rating is that it actually drove investors to buy more US Treasury bonds. With the Dow taking a 634.76 point plunge in 1 day, many investors concluded that stocks aren’t a safe asset in which to keep their money. They turned instead to the investment they considered the most-reliable–the debt of the US Federal Government, somewhat-diminished from its unblemished reputation as an unshakeable source of sustainable interest, but still a more-stable investment than that of any private company or any other sovereign country. Effective interest rates for all private-sector borrowers may rise on the news as investor confidence fades, and there simply is nowhere to stow massive financial assets more-securely than in US Treasury bonds. (Talk of the Euro serving as a replacement currency for the dollar to denominate international financial transactions is dead, as the European Union grapples with the financial bailouts of several less-industrialized members–first Greece, Ireland, and Portugal, and now implausibly, Spain and Italy, 2 of the largest economies in Europe.) So a market rating agency understandably censured the Federal Government for signaling that it lacked the political will needed to pay its own bills, which pulled the floor out from under many recently-cautious private financial actors, thus leading investors to put their cash in US debt, thus making deficit-spending cheaper for the Federal Government. Why would the market do this?
The answer, of course, is the same motivations that drive the market at all times–self-interest in its most-Hobbesian of manifestations, profit and fear.