Stocks collapse, threaten to go even lower than our opinion of Congress

Here’s Krugman:

It’s not the whole story, but something like this threatens to develop:

1. US debt is downgraded, sparking demands for more ill-advised fiscal austerity

2. Fears that this austerity will depress the economy send stocks down

3. Politicians and pundits declare that worries about US solvency are the culprit, even though interest rates have actually plunged

4. This leads to calls for even more ill-advised austerity, which sends us back to #2

Behold the power of a stupid narrative, which seems impervious to evidence.

Or, as David Frum tweeted earlier:

Markets are saying: We fear recession and deflation. Washington consensus: now is the time to fight debt and inflation.

Are we entering the double-dip recession? Were we never out of the recession to begin with? Has the Tea Party’s austerity-only zeitgeist brought us here, or is this a failure of the president’s leadership? Or did the more sensible members of the GOP let the clown out of the bag when they embraced so wholeheartedly the uncompromising right?

All of the above maybe?

All I know is that after the plunge in markets last week, today’s even deeper dive is bad news.

Silver lining of the day: oil is down (thanks to Alex Knapp for the tip). Still, we’re left talking about deficits, tax hikes, and spending cuts when we should be talking about getting people spending money again.

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26 thoughts on “Stocks collapse, threaten to go even lower than our opinion of Congress

  1. And yields on treasury bonds just keep falling.

    Personally, I’ve come to grips with austerity. But if it’s an inevitable political reality, we might as well be smart about it, and cut back more heavily on transfer payment spending while using increased revenues to boost investment.

    Unfortunately, more often than not what “austerity” translates to is gut discretionary and leave the old people’s entitlements alone.

    States spend less on education because rising medicare costs crowd it out of the budget. As a result, nothing bothers me more than older Americans who furrow their brow and talk about not sacrificing our children’s futures in one breath while reserving the next to reassure seniors and themselves that social security and medicare will remain intact, at least for them.

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    • States spend less on education because rising medicare costs crowd it out of the budget. As a result, nothing bothers me more than older Americans who furrow their brow and talk about not sacrificing our children’s futures in one breath while reserving the next to reassure seniors and themselves that social security and medicare will remain intact, at least for them

      In the interests of precision, it ought be noted that Medicare is a federal program and not incorporated into state budgets, so is not crowding out state and local spending on schools. Medicaid, administered by states and with a compound of state and federal funds, might be crowding out state education spending, not Medicare. As a rule, however, elder beneficiaries of Medicaid are not receiving the ministrations of hospitals, clinics, and pharmacies. They are residents of nursing homes. Residents of nursing homes do not tend to be articulate about much outside of their mundane life, or, in many cases, about much of anything at all.

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  2. It’s pretty crazy to watch. Like Keynes in reverse; spend during the good times and cut during the lean.

    But how much lower can congressional ratings go? They aren’t allowed to go below zero are they?

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  3. I’ve never really expected there not to be a double dip and moreso. When we were in the thick of it, all I ever heard from the experts was something like, “We thought the economy was doing great, but it was all a bubble, and now things have crashed… let’s try to get back to how things were right before they crashed!” There seems to be a real resistance to the idea that the fundamentals simply have to change. I’m even questioning those decades in which we heard that switching from a manufacturing to a service-based economy would work mathematically. It seems to me that it either was working or a lot of easy credit gave the illusion that it was working, and I’m not sure it’s not the latter. If so, there’s a heck of a lot more to fix than just inflation or deflation.

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  4. The broken windows theory of economics is wrong, just as the digging and filling holes theory is likewise wrong. If you need links just Google the phrases.

    Fundamentally we need to examine the TRUE role of government. Smart people posting here need to start a zero baseline definition of “the state”.

    I’ll get the ball rolling.

    The state needs to:
    1) protect property (there’s a good reason this is 1st)
    This means rule of law (simple laws, not the billions of pages of crap we’ve accumulated over 200+ years). If property rights are not protected, man’s natural response to investment of time, effort and treasure will be limited to bare minimum to non-existent. BTW, I’ve personally seen how this works in some of those backwater eddies where the value of the currency and life are so low. No one ‘tries’ because as soon as you do, someone else comes along and takes it from you.

    2) protect the ability to protect property
    This means police and ultimately armies. Police to keep thieves from stealing your property and armies from organized thieves across the borders. This does NOT include police-state nor army adventuring far from home.

    3) protect life

    ok, you’re all up…

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    • ” protect property”

      And then there’s the millions of pages written on this subject. As a baseline this doesn’t really help cause no one knows what it means.

      Protect everyone’s property? How do we know who had what? Protect people’s ability to protect property? Does that mean educate them? Pay for people to have lawyers?

      Protect life? So we need to regulate the sale of potentially harmful substances? Bad eggs, alcohol, and flammables?

      Am I needlessly complicating this?

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      • Damn, and I thought I was keeping things simple. There’s the rub with that whole ‘creating a state’ thing. Since I haven’t seen Cahalan here for a while I can feel reasonably safe to mention that years ago, in the very very early days of the Internet, I used to give talks about the Internet becoming the 5th Estate. This necessitated explanation of the French 3 Estates and so on. Going back to the 1st Estate got me to thinking of how a state got formed in the primordial soup days of human civilization Greek city-states and all that. Religion, monarchy, democracy, wider democracy (the press) and now the 5th Estate, the Internet (a vastly superior press). A quick wiki-look shows me someone has even written a book on the meme, something that would have made the younger me strut proudly for a bit. The older me just yawns and sees it as the inevitable conclusion of memes finding their own way into the world.

        So, property makes sense and in contrast to the first 2 Estates, you actually get to own it. Under priestly castes and military monarchies you were essentially a slave and could own nothing. This evolved over time until you could own yourself (and maybe a few less-well-armed neighbors). Interestingly each subsequent estate finds a way to trump the previous ones, although they all stick around to some extent. You can own yourself, but God owns your soul (or the devil depending on your orientation). The monarchy (and eventually the democratic republic) owns your body when it comes time to fight for the nation. My forebears likely spent far more centuries as serf-slaves than any blacks imported from Africa with the added burden of having to provide for their own subsistence while supporting the local Lord. Technically they couldn’t even own the shirts on their backs (which they made themselves).

        Long winded aside, yes, but you can see where I’m coming from better now.

        1) Should the ‘state’ protect property? Yes, including intellectual property.
        2) Should the ‘state’ protect the state? A definite maybe, because it loses its right to exist if it isn’t doing its job properly.
        3) Should the ‘state’ protect its people? Yes, because the people are an asset. I am thinking here more of what we observe with several failed or failing type states who can’t be bothered to protect their citizens than a nanny-state that concerns itself with ingested food and recreational items. Poisons shouldn’t be given to children, but worrying about statistically limiting a person’s potential lifetime maybe not, but it’s an excellent point E.C. and proves I didn’t really give this much thought. That’s why I was hoping others would run with the ball. :)

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          • Doh! I KNEW IT!! When I was reading your posts I kept thinking “this guy reminds me of Cahalan”. But of course now that you have your own sub blog and the keys to the kingdom, you’ll no doubt use that super fine mind to peel the last few onionskin layers off my hidden identity and out me to the world at large.

            BTW typed this last night, went off to go out to dinner and never hit the submit key. Umm, welcome back Mr. Cahalan ;)

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  5. I don’t understand what happened given that Timmy Geithner promised that there wouldn’t be a down grade. From what I’ve read S&P wanted $4 trillion in cuts so why did he and Barry think that the paltry cuts that they agreed to would suffice? Then the best response that Barry can give us is the platitude that “markets will rise and fall, but this is the United States of America. No matter what some agency may say, we’ve always been and always will be AAA country.” It sounds like something that you would say to the high school football team. Maybe that played well with the less sophisticated crowd when he was a community organizer but he really has to do better than that to reassure the markets.

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    • Each side offered 4 trillion cut sized deals. Neither side would accept the others versions. Each side’s version have their respective strengths; the Dems version would have decreased the deficit more/ The GOP’s version would have kept taxes lower.

      And that’s as even handed as I can be even though it’s a gross oversimplification.

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