The Washington Post had a front page article touting the improvement in the financial sector based on the trillions of dollars of low cost loans that the government made available to it through various channels. The article notes the 34 percent run up in the stock market from its low earlier this year, and then presents a quote from an economist saying that the markets are forward looking and are anticipating economic improvement. It is worth noting that the markets were not forward looking in anticipating the downturn. The plunge in the market came only after the economy had entered the recession and in fact most of the downturn did not come until after the rate of economic decline began to accelerate last fall. So, if the market is now accurately projecting the future course of the economy, that would be a sharp departure from its recent behavior. The article also quotes Treasury Secretary Timothy Geithner saying: "A huge part of getting out of this crisis is about confidence." It is not clear that Geithner, who completely missed the onset of the crisis, is correct in saying this. The falloff in demand has been due to huge overbuilding of residential housing and the loss of around $15 trillion in household wealth. The main reason that consumers are not spending is the same reason that homeless people don't spend, they don't have any money. It is not clear that attitudes have much to do with it. It would have been helpful if the Post had presented the view of an economist who had not been completely surprised by the collapse of the housing bubble and its consequences.
--Dean baker
