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Peter S. Goodman

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Stock Market Plunge: Storm Cloud In The Shape Of Timothy Geithner

Posted: 08/04/11 05:15 PM ET

Maybe the stock market freaked out at the talk that Treasury Secretary Tim Geithner is sticking around for more.

Stock market movements are, of course, like the shapes we see in the clouds. You can tell whatever story you like, assign whatever characteristics seems fitting, and no one can prove you wrong. But what is clear about the 513-point dive suffered by the Dow Jones Industrial Average on Thursday is what it most certainly was not: An affirmation of the happy state of the economy, or a vote of confidence that those in power in Washington have a plan to improve our national fortunes.

Whatever the market had on its mind, it was not happy about it. Recent days have featured a ceaseless barrage of uncomfortable data attesting to an abrupt slowdown on the American factory floor, the resumption of a pullback in consumer spending and fresh claims for unemployment insurance at a level that suggests continued retrenchment.

And the glum sense of stagnation seems to stretch on as far as the horizon. Of most immediate concern: the government's report on the July job market, to be released Friday morning. Most economists expect a slight improvement from the last couple of months, with the economy adding somewhere in the order of 100,000 net jobs. But that is not enough to absorb even new entrants to the labor force, let alone sufficient to dislodge the sense that the economy has no engine for growth.

Longer-term, prospects appear awful, with serious economists now debating the likelihood of a double-dip recession, and some assuming that a Japan-style Lost Decade may now be an inescapable experience.

Earlier in the week, as President Obama assented to slash government spending to trim the federal budget deficit, Treasury Secretary Geithner said this would restore "confidence" to the market, indulging a word with mystical powers among econ-geeks. But the Confidence Genie has yet to emerge from the bottle, and the market keeps recoiling. The less mystical factors are too big to ignore: Not enough Americans have money to spend, making government a crucial source of what spending takes place. And the government just agreed to take $2 trillion-plus out of the economy over the next decade.

In some sense, the economic population has been consolidated. Workers and consumers were once two separate groups of people. Until the Great Recession, spending and wages traveled on two different tracks. Even if your wages were inadequate to finance your needs and desires -- electronic gadgets, groceries, education for your children -- there were other ways to make the payments, not least borrowing against your home. But in a time when being underwater does not mean enjoying the shore, workers and consumers are now the same people. And worker-hood is generally not a great place to be these days -- not with hours getting cut and anxiety about layoffs again on the rise.

This is something that employers clearly understand, hence their unwillingness to hire.

The question is whether anyone in Washington understands this dilemma, or is willing to focus on it in place of pandering to the usual interest groups as the 2012 presidential election jockeying takes shape. Austerity is the recipe for Republicans trying to argue that they cut spending and made the government smaller. Austerity is the ransom the administration just paid to prevent the Republicans from triggering an American default.

Or maybe it's much simpler than all that. Maybe investors woke up on Thursday, read in The New York Times report that Geithner is apparently staying and decided to put their cash in Mason jars.

If Washington operated anything like the rest of the world, Geithner would be, as they say, pursuing his other opportunities in the private sector. As a primary architect of economic policy in the White House, he carries the stench of abject failure. He bet that protecting banks would put them in a magnanimous mood, and they would distribute capital to the real economy. This was the logic of a housing rescue program that has done little to help homeowners, while enabling banks holding second mortgages to pretend they still hold value, evading the necessary write-offs. Geithner has carried the torch on deficit reduction, a strategy that has failed to restore confidence anywhere -- certainly not in the realm of household finances, and apparently not in high finance either.

This is the story that seems to emerge from the rout in the marketplace on Thursday: Even the people who control money have figured out that the real economy has some influence over that pursuit. If no one can afford to buy anything, then there is less money to be made.

And the people in charge of the government seem either unwilling to change, intellectually bankrupt or -- much like the rest of the country -- too shell-shocked to figure out what to do next.

 
 
 

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