A year ago, as the outlines of the current financial crisis were just becoming clear, I suggested that this crisis, unlike a superficially similar crisis in 1998, wouldn't end quickly. It hasn't.
The good news, I guess, is that we've been experiencing a slow-motion meltdown, lacking in dramatic Black Fridays and such. The gradual way the crisis has unfolded has led to a debate among economists about whether what we're suffering deserves to be called a recession.
Yet even a slow-mo crisis can do a lot of damage.
Home prices went down about 16 percent over the past year, and show no sign of stabilizing. The pain is widely spread: There are millions of American families who didn't buy mortgage-backed securities and haven't lost their houses, but have been impoverished by the destruction of much or all of their home equity.
The job market has deteriorated even more than you'd guess from the jump in the headline unemployment rate. The broadest measure of unemployment, which takes into account the number of workers forced to take cuts in paid hours and wages, has risen from 8.3 percent to 10.3 percent over the past year, roughly matching its high point five years ago.
And there's no end in sight.
The problem is fear
Ben Bernanke and his Federal Reserve colleagues have cut the interest rates they control repeatedly since September. But mortgage rates are about where they were last summer, and the interest rates many corporations 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 because investors, burned by their losses on securities that were supposed to be safe, are reluctant to buy anything that isn't guaranteed by the U.S. government.
Those tax rebates Congress and the White House agreed to mail out 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 things will probably get much worse before they get better.
What more can policy do? Nobody thinks additional interest-rate cuts by the Fed would accomplish much
Nothing much can or should be done to support home prices, which are still much too high in inflation-adjusted terms. Nor can Washington prevent a continuing credit crunch. Overextended, undercapitalized financial institutions have to rein in their lending.
Another stimulus package needed
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, Obama is offering more than John McCain, whose economic policy mainly amounts to “stay the course.”
It's surprising that the lousy economy hasn't had more impact on the campaign. McCain essentially proposes continuing the policies of a president whose approval rating on economics is 20 percent. So why isn't Obama further ahead in the polls?
One answer may be that Obama has been surprisingly diffident about attacking the Bush economic record. An illustration: If you go to the official Obama Web site and click on the economic issues page, what you see first isn't a call for change, but a long quote from the candidate extolling the wonders of the free market that could easily have come from President Bush.
I titled a 2007 column on the early stages of the financial crisis “Very Scary Things.” It's clear now that I was right to be afraid.