Economic gloom spreads to Wall Street

What happened

Wall Street officially entered a bear market last week, in the midst of a number of gloomy signs for the U.S. economy. The Dow Jones Industrial Average closed more than 20 percent below its October peak, meeting the commonly accepted definition of a bear market. “It’s a validation that all hell has already broken loose,” said economist Keith Hembre. The sell-off was partly a reaction to skyrocketing energy costs, as oil hit a record high of $144.15 a barrel and a gallon of gas reached a national average of $4.11. Last month’s stock drop was the market’s worst June performance since the Great Depression.

The Labor Department reported that 62,000 people lost their jobs in June—the sixth straight month of job losses and the longest such period since 2002. Sales of new homes also dropped precipitously. Acknowledging that the credit crunch is not abating, the Federal Reserve this week extended a program to provide struggling investment banks with low-interest loans and readied new rules to restrict high-cost loans to people with poor credit. Fed Chairman Ben Bernanke said he now believes the economic slowdown will extend well into next year.

Economic issues dominated the presidential campaign. John McCain pledged to jump-start the economy by cutting taxes and balancing the federal budget within four years through spending cuts. Barack Obama said McCain’s approach would help only “big corporations and multimillionaires,” and he renewed his call for a $50 billion stimulus package for working families that includes a taxpayer rebate.

What the editorials said

“The economy has shifted into reverse,” said The New York Times. The 438,000 jobs lost this year won’t come back until consumer confidence improves, and that won’t happen as long as the housing crisis continues. The Fed’s moves could help, but Congress needs to stop playing politics and pass a foreclosure prevention bill. If Washington doesn’t act soon, “things will get worse before they get better.”

McCain’s policy of “competitiveness, prudence, and growth” is just what the doctor ordered, said National Review. It was heartening to hear him revive his promise to balance the federal budget, and he’s right that it can be done without raising taxes, as long as wasteful spending is targeted. But first, “he must get elected,” and he’ll have a hard time doing that unless he offers direct benefits to the middle class, such as their own tax cut.

What the columnists said

McCain’s economic plan is dependent on “a vast number of ‘magic asterisks,’” said Ed Kilgore in Salon.com. To make his numbers work, he promises undefined “reviews” of federal programs and, most laughably, counts the money we’ll save from achieving “victory” in Iraq and Afghanistan. Not that it matters—since the entire policy is built around private-sector-oriented reforms in health care, energy, and entitlements that no Democratic Congress would ever agree to. McCain isn’t making a serious proposal, he’s just trying to shore up the Republican base.

If you believe that any president “will instantly reverse the decline of housing prices, bring gasoline prices crashing back to earth, and generally kick the economy back into gear,” said Daniel Gross in Slate.com, “I’ve got some subprime mortgages I’d like to sell you.” History shows that the economy expands and contracts according to cyclical factors beyond any leader’s control. About the only thing a president can affect is “the short-term national mood about the economy.”

That mood is gloomier than it needs to be, said Chris Lester in The Kansas City Star. The 5.5 percent unemployment rate is nothing compared to the 10.8 percent peak of 1982, and our 4.2 percent inflation is dwarfed by 1980’s high of 14.76 percent. Even the housing crisis doesn’t really affect many ordinary people who bought their homes to live in, rather than as part of some “highfalutin” investment scheme. “It sometimes seems like we’ve completely forgotten what hard times really feel like.”

What next?

Wall Street rallied in response to the Federal Reserve’s actions and a slight decline in crude oil prices. But most analysts expect any recovery to be slow. Historically, it takes investors more than three years to recoup their losses after a bear market, said Adam Shell in USA Today. The current market is really only “a cub bear. The question now is whether the slide will turn into a grizzly bear.”