How to close America's confidence gap
Obama's actions, more than his speech, will have a big role to play in easing the historically bleak consumer mood.
The signal from the stock market and polls is clear: Restoring Americans’ economic confidence will require something more than throwing federal dollars at banks, businesses, and consumers.
The issue of lost confidence – and how to revive it – is playing a more pivotal role in this recession than in others. The reason is that today’s problems are centered on the markets for credit, which is really just another word for trust.
On Tuesday, an index of consumer confidence fell to a low not seen in four decades of surveys. Stock indexes are on a parallel track, having dropped this week to levels not seen since the mid-1990s.
All this comes despite – and perhaps partly because of – extraordinary government intervention on the economy’s behalf.
Consider that the biggest bank, the biggest insurance firm, and the biggest automaker are all seeking more government support this week.
Many Americans are worried not just about their jobs or the value of their homes, but about whether the public rescue efforts will work, how much tax money they’ll cost, and when there will be clarity on the scope of government’s role.
The challenge for President Obama and other policymakers is how to revive the spirits of a marketplace economy even as the government takes an unusually large role in that marketplace.
“There’s no confidence that we know what the rules are yet,” says Brian Battle, a bond trader and vice president at Performance Trust Capital Partners in Chicago. It doesn’t help, he adds, that “the administration has spent a lot of time talking about how bad everything is.”
He’s not saying that the government shouldn’t be taking strong action or that a pep talk is all that’s needed.
But the goal, Mr. Battle says, is for markets to start functioning normally again. That still hasn’t happened.
Public dislikes bailouts
He’s not the only one concerned about the scale and nature of government involvement in the economy.
A new USA Today/Gallup poll finds that Americans largely disapprove of spending more money rescuing companies such as automakers and banks. The public generally supports spending to create jobs and helping homeowners avoid foreclosure, but people have serious worries about the overall cost and the danger posed by rising federal deficits.
All this gives Mr. Obama a complicated task.
He’s spending much of this week on the theme of fiscal discipline, to reassure Americans as well as foreign lenders that the government is determined not to borrow its way into a deeper hole.
Priming the pump
But for now, big government spending is needed, many economists say, because the normal pillars of the economy – consumer spending, business investment, construction, and trade – have simultaneously fallen on hard times.
More evidence of difficulties has been piling up lately:
• The Conference Board’s consumer confidence index sank to a level of 25 in February, down from 37 last month and 76 a year ago.
•Stock market indexes closed at 1997 levels Monday. The stock slide reflects ongoing worries about the overall economy and, in particular, the core financial system. The concern is that more bailouts may put some large banks effectively under government control.
What’s needed to turn the dismal mood around?
Economists and financial analysts expect that it will be a mixture of things: improvement in the flow of credit, signs that the job and housing markets are at least not deteriorating at such a rapid pace, and more clarity about government policies toward banks and other industries.
New tone for Obama?
The right tone from Obama himself could play a role. He’s been careful not to raise false hopes, but some analysts say that effort went too far toward pessimism.
As President Jimmy Carter learned, sometimes talking about a crisis of confidence doesn’t help. Another former president, Bill Clinton, in a recent interview said Obama should try to offer a more upbeat tone.
But the key to restoring confidence will be policy substance, not style, say most financial experts.
Already, some signs suggest that steps taken by the Federal Reserve, and the Bush and Obama administrations, have been helping. The market for commercial paper – short-term loans to businesses – has improved markedly in the past few months, for example.
An American Express survey of small businesses found that fewer report being affected by tightening credit – half of businesses, down from nearly two-thirds in October. Fear of going out of business has also receded since October.
“There are positive signs,” says James Kleckley, who heads the Bureau of Business Research at East Carolina University in Greenville, N.C. A lot of the confidence problem, he says, is that people are more connected to information than ever before – hearing the drumbeat of somber news on the airwaves and seeing it online.
Is worst phase now?
News about housing prices can be particularly deceptive, he adds, since real estate markets are so diverse. The national average is way down, but most North Carolina markets have held steady.
Mr. Kleckley notes that many economists say the nation may be passing through the worst of the recession now, and that a recovery should begin later this year.
“It’s the uncertainty” that restrains confidence, he says. “Hopefully we’re at the worst point now ... and we’ll start coming out of that.”
One positive sign will be when the job market loses 300,000 jobs per month rather than 600,000, he says. That will still be bad, but at least the trend line will be moving in the right direction.
To revive trust on Wall Street, the problem may not be too much information but too little. Doubts persist about the size of bad assets held by large banks such as Citigroup. Markets are awaiting details, moreover, on US rescue plans for firms considered “too big to fail.”
One worry is that these firms could become bottomless pits for bailout money. Rescue plans will need clear parameters and an exit strategy to wean the financial industry from Treasury assistance.
“We should not allow any [big bank] to go bankrupt,” says Whitney Tilson, a mutual fund manager at Tilson Funds in New York. But firms such as Citigroup could be restructured through a temporary receivership, he says. New capital for the bank could come from converting bondholders debt into equity, he suggests, to save taxpayer money.