AIG, Lehman, Washington Mutual, Bear Sterns, Merrill Lynch, Wachovia - it keeps getting worse. Stocks tank as Congress struggles to pass the $700 billion bailout for Wall Street. But whether it passes or not, this will get worse.
The decline in the real economy - the economy where people work and live and shop - has only just begun. For months, people have juggled to make do. They maxed out their credit cards. They spent the stimulus checks. They maxed out their home equity lines of credit. Private industry started shedding jobs, but states and localities kept hiring.
Now it will get worse. Consumers have no choice but to cut spending. States and localities are starting new budget years mandated to postpone construction projects, layoff workers, and cut back spending. Housing prices continue to sink. Export markets slow as Europe stalls. Unemployment is rising; layoffs are rising. That will accelerate the decline in retail stores, with more layoffs and more unemployment. And if that happens, the banking crisis will get worse - bad mortgages will be joined by rising defaults on credit cards, auto loans, personal loans, small business loans. This is likely to get a lot uglier before it gets better.
Washington still doesn't get it. The $700 billion plan to bailout Wall Street is an outrageous sum of money - but it isn't bold enough to do the job. Worse, the president and Republicans in Congress are stalling on even a token stimulus to help kick-start the economy. And Democrats are too timid to understand the stakes.
The $700 billion plan was voted down in the House on Monday - largely by conservative Republicans. House Republicans are anxious to distance themselves from Bush, appeal to populist anger in the public, and posture as the saviors of taxpayer money. These lifelong deregulators who have repeatedly lowered taxes for the wealthiest Americans and carried water for the financial community are now going to sound like Kansas populists railing against the cross of greed.
The problem is that Congress can't just do nothing. We really are in trouble. And the conservative Republican plan is a joke. They want to suspend capital gains tax cuts in a downturn when precious few have capital gains to report. They want to deregulate the banks even further - suggesting that they not have to admit the current value of the assets they hold. That isn't likely to instill confidence.
What we have here is a Roosevelt moment. We need bold federal government action to forestall a Depression. Or like Hoover, the president can sit on his hands, offer reassurances, try to just bail out Wall Street, and bring a much more serious global decline on us all.
Senator Obama shows signs of getting this. He has argued repeatedly that the reason we are in this mess is because of a "failed philosophy," the idea that if we just rewarded folks at the top, it would trickle down to the rest of us. Instead, the pain that most Americans have been feeling has started to shoot up to the top.
Paulson's failed plan was simply a version of that failed philosophy. Bail out the banks and the rest of us will benefit. Meanwhile working and middle class Americans are getting squeezed, their homes are losing values, their salaries aren't keeping up with the soaring costs of health care, gasoline, home heating, and educating their children. And now it is their pain that will make Wall Street's situation worse - and made Paulson's plan a non-starter.
Many call for bold leadership. That, of course, is difficult for presidential candidates. On the one hand they have a big pulpit; on the other, they have no power. Bush is still the president. Paulson is his appointee. Roosevelt in the thirties made a point of not advising Hoover so that he wouldn't be responsible for the mess. For Obama, it is even harder, since Bush would clearly prefer to have McCain elected, since his policies are so similar to those of the president.
But the Roosevelt dodge won't work in the era of 24/7 news coverage. Nor will the economy wait for the election. The candidates can't escape. It is time to put forth a bold plan - first to invest in the real economy and get people back to work and then to create an independent agency to sort out Wall Street, closing the insolvent firms, merging and purging leaders, and putting the authority of the federal government behind regulated firms that are solvent. The country needs a Roosevelt, not a Hoover. It is time to step up.