As the Economy Melts, Washington Tunes in to Rush Limbaugh

Sunday, March 8, 2009

WE HAVE no idea whether this economic crisis will be equal to, milder than or worse than the Great Depression. But evidence of extraordinary, historic distress is growing. The Dow Jones industrial average has slumped 54 percent in the past 16 months. General Electric, Berkshire Hathaway and Hewlett-Packard -- proud flagships of U.S. capitalism -- have lost half or more of their market value since 2007. General Motors? Its auditors say that there's "substantial doubt" about its viability, despite billions in government aid; U.S. auto sales are running well below the minimum that GM and other automakers need to survive. Unemployment is at 8.1 percent and rising. As bad as things are here, they are worse almost everywhere else. Japan's gross domestic product plunged almost 13 percent in the last three months of 2008, double the U.S. rate. Several Eastern European countries seem about to go the way of Iceland.

The risks -- economic, social, and political -- of an unchecked global downturn should not be underestimated. The essence of the problem is that the financial system has quit doing the job upon which all other economic activity depends: converting savings into capital. Known as "financial intermediation," this process is to the economy what the circulation of blood is to the human body. But because they are illiquid, insolvent or unwilling, neither large commercial banks nor the so-called "shadow banking system" -- private equity firms, investment banks, hedge funds and the like -- can extend normal levels of credit. If not for the Federal Reserve's aggressive action as "lender of last resort," things would be even worse.

Like a human body on life support, the U.S. economy cannot survive on Fed-generated liquidity indefinitely. Restarting the private financial system is the foundation of economic recovery. It is more urgent than any of the new priorities, however laudable, embodied in President Obama's $3.6 trillion budget proposal -- over which Congress, and legions of lobbyists, are preparing to battle. It is also a condition of realizing any of his long-term goals.

Mr. Obama has set in motion a bank recovery "stress test," to be followed by a public-private partnership aimed at taking toxic assets off the banks' books. The Federal Reserve, too, has started to subsidize private investment in asset-backed securities. We understand that these initiatives won't bear fruit immediately. Yet the president cannot relax his focus in the meantime. Nor can he dismiss the market's negative reaction, justified or not, to his financial rescue plans. For better or worse, stocks are crucial to the well-being of tens of millions of Americans via pension plans, 401(k)s and IRAs.

To restate: America's economy faces disaster; averting it depends on financial rehabilitation. That is government's most urgent task -- as urgent, in its way, as responding to Pearl Harbor or Sept. 11, 2001. For the president, this does not mean abandoning all other tasks and priorities. It does mean subordinating them to the task that matters most: ensuring that his understaffed team is putting as many resources as possible toward financial recovery and being ready to adjust his plans if, as seems likely, his budget forecasts soon prove overly rosy. For his opposition, it does not mean abandoning principle. It does mean working with the president for the good of the nation, even at the expense of partisan gain.

And yet for the past several days, Washington has been consumed by the point-scoring possibilities of a flap over commentator Rush Limbaugh. It is almost unbelievable that grown men and women in government, of either party, are spending time and energy on this. The whole world is watching, counting on Washington for leadership. The president and lawmakers of both parties must provide it.

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