Paul Krugman: A Slow-Mo Meltdown

An update on the state of the economy, a call for aggressive fiscal stimulus “to sustain employment while the markets work off the aftereffects of the housing bubble,” and the question of why “the lousy economy hasn’t yet had more impact on the campaign”:

A Slow-Mo Meltdown, by Paul Krugman, Commentary, NY Times: A year ago, as the outlines of the current financial crisis were just becoming clear, I suggested that this crisis … wouldn’t end quickly. It hasn’t.

The good news, I guess, is that we’ve been experiencing a sort of slow-motion meltdown, lacking in dramatic Black Fridays and such. … Yet even a slo-mo crisis can do a lot of damage if it goes on for a year and counting.

Home prices are down about 16 percent over the past year, and show no sign of stabilizing. The pain from this bust is widely spread:… millions of American families … haven’t lost their houses, but have nonetheless been impoverished by the destruction of … home equity.

Meanwhile, the job market has deteriorated… The broadest measure of unemployment … has risen from 8.3 percent to 10.3 percent over the past year… And there’s no end to the pain in sight.

Ben Bernanke and his colleagues at the Federal Reserve have cut the interest rates they control… But… Mortgage rates are about the same as they were last summer, and the interest rates many corporations have to pay have actually gone up. So Fed policy hasn’t done anything to encourage private investment.

The problem is fear: private-sector finance has dried up… [T]he proliferation of special rescue packages — the TAF, the TSLF, the Bear Stearns deal, the Fannie-Freddie thing — may have staved off blind panic, but has fallen far short of restoring confidence.

Oh, and those tax rebates … have already done whatever good they’re going to do. Looking forward, it’s hard to see how consumers can keep spending even at their current rate — which means that things will probably get considerably worse before they get better.

What more can policy do? The Fed has pretty much used up its ammunition: nobody thinks that additional interest-rate cuts would accomplish much…

And nothing much can or should be done to support home prices, which are still much too high… Nor can Washington prevent a continuing credit crunch: overextended, undercapitalized financial institutions have to rein in their lending, and it’s not realistic to expect the public sector to pick up all the slack…

There is, however, a case for another, more serious fiscal stimulus package, as a way to sustain employment while the markets work off the aftereffects of the housing bubble. The “emergency economic plan” Barack Obama announced last week is a move in the right direction, although I wish it had been bigger and bolder.

Still, Mr. Obama is offering more than John McCain, whose economic policy mainly amounts to “stay the course.”

Incidentally, it’s surprising that the lousy economy hasn’t yet had more impact on the campaign. Mr. McCain essentially proposes continuing the policies of a president whose approval rating on economics is only 20 percent. So why isn’t Mr. Obama further ahead in the polls?

One answer may be that Mr. Obama, perhaps inhibited by his desire to transcend partisanship (and avoid praising the last Democratic president?), has been surprisingly diffident about attacking the Bush economic record. An illustration:… go to the official Obama Web site and click on the economic issues page, what you see first isn’t a call for change — what you see is a long quote from the candidate extolling the wonders of the free market, which could just as easily have come from a speech by President Bush.

Anyway, back to the economy. I titled that column about the early stages of the financial crisis “Very Scary Things.” A year later, with the crisis still rolling, it’s clear that I was right to be afraid.

Originally published at Economist’s View and reproduced here with the author’s permission.