World Bankers Suggest Rebound May Be Under Way

In the August 22, 2009 New York Times article "World Bankers Suggest Rebound May Be Under Way" Edmund L. Andrews reports:

JACKSON HOLE, Wyo. — Central bankers from around the world expressed growing confidence on Friday that the worst of the financial crisis was over and that a global economic recovery was beginning to take shape.

“The prospects for a return to growth in the near term appear good,” declared Ben S. Bernanke, chairman of the Federal Reserve, offering optimism both about the United States and the worldwide outlook.

Though the Fed chairman repeated his warning that the economic recovery here was likely to be slow and arduous and that unemployment would remain high for another year, he went beyond the central bank’s most recent statement that economic activity was “leveling out.” Speaking to central bankers and economists at the Fed’s annual retreat here in the Grand Tetons, Mr. Bernanke echoed the growing relief among European and Asian central bankers that their own economies had already started to rebound.

Even as they indulged in a bit of self-congratulation over what had been achieved since the financial crisis of last year, these central bankers were beginning to focus quietly on another big task, how they will unwind the vast emergency measures they put in place to fight the crisis.

At almost the same time that Mr. Bernanke spoke, the National Association of Realtors reported that sales of existing homes jumped 7.2 percent in July — the biggest monthly increase in more than a decade and much bigger than analysts had expected.

Investors reacted ebulliently to both the housing news and to the Fed chairman’s remarks. The Dow Jones industrial average jumped as soon as the markets opened and ended the day up 155.91 points, or 1.67 percent, at 9505.96. Though stock prices are far below their record highs, the Dow has risen 45 percent from March and is at its highest point this year.

Shares of major home builders surged on the improvement in home sales, which was the fourth monthly increase in a row. While forecasters had expected a gain, the size of it jolted investors.

But stocks for a wide range of other companies climbed higher as well, as did the prices of oil, copper and gold. Shares climbed for industrial companies, energy producers and manufacturers of chemicals, plastics and other basic materials.

“This is a bull market,” said Laszlo Birinyi Jr., president of Birinyi Associates, who said he was investing in large banks, well-established technology companies like Apple and big industrial companies like 3M and United States Steel. “There’s just a desire to be in the market and hope that the train will again leave the station.”

Here in Jackson Hole, the mood of relief and cautious confidence among central bankers and economists on Friday was almost palpable — a stark contrast to the anxiety and tension that permeated their retreat here one year ago.

“It is reasonable to declare that the worst of the crisis is behind us, and that the first signs of global growth have appeared earlier than we generally expected nine months ago,” said Stanley Fischer, governor of the Bank of Israel and a top former official at the International Monetary Fund.

In the past week, France and Germany both surprised forecasters by reporting positive growth after a string of quarterly contractions. Japan followed with its own growth report.

The Fed and other central banks will have to unwind a number of emergency measures deployed during the peak of the crisis as growth returns.

A growing number of economists and some Fed officials say the shift to tighter monetary policies and higher interest rates, though unlikely to start until at least the middle of next year, may have to be much more abrupt than normal if they are to prevent inflation two or three years from now.

“When you get into a crisis like this, gradualism is not the right strategy,” said Frederic S. Mishkin, an economist at Columbia University who was a Fed governor from 2006 until 2008. “Of course, when things turn around, you have to be aggressive in the other direction.”

Indeed, the Federal Reserve’s “exit strategy” could lead to a clash with the Obama administration. The White House plans to release its newest budget estimates next week, and administration officials said that the 10-year deficit will rise to $9 trillion — a big jump from its earlier estimate of $7 trillion.

Some Fed officials are already worried about criticism that they are financing the government’s deficits by buying up long-term Treasury securities, and the central bank announced last week that it would end that program next month.

In the future, Fed officials could feel more pressure to further tighten monetary policy as a way of countering the government’s deficit spending. The immense amount of borrowing could push up long-term interest rates, if foreign investors balk at buying up United States debt.

Assessing the extraordinary events of the last year, Mr. Bernanke argued that aggressive action by countries around the world prevented a collapse that would have been even worse than what actually took place.

Asserting that short-term lending markets are functioning more normally, that corporate bond issuance is strong and that other “previously moribund” securitization markets are reviving, Mr. Bernanke said that both the United States and other major countries were poised for growth.

In emphasizing not just an imminent end to the recession but also good chances for actual growth, Mr. Bernanke’s assessment was in some ways surprising.

Despite encouraging signs on many fronts, American retailers have reported unexpectedly weak sales in the last week — a sign that that consumer spending could drag down economic growth in the months ahead. And on Thursday, the Labor Department reported that new unemployment claims jumped again.

And on Friday, a prominent banking analyst warned that hundreds more American banks would fail over the next year, adding to the difficulties that small businesses have experienced in routine borrowing.

“There will be over 300 bank closures,” Meredith Whitney, the Wall Street analyst who accurately predicted last year that Citigroup would have to cut its dividend, said in an interview with Bloomberg Television in Jackson Hole.

Jean-Claude Trichet, president of the European Central Bank, cautioned against assuming that the world was back to normal.

“We still have a lot of work to do,” he said, adding that “it would be a catastrophe” if governments failed to heed the lessons of the crisis and financial regulation.

Mr. Bernanke acknowledged that the banking system’s problems were far from over.

“Strains persist in many financial markets across the globe,” he cautioned. “Financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit.”

Test your understanding of economics in the news: Is this a change in supply or a change in demand?

According to the August 21, 2009 article "Analysts: Without price cuts, Wii could be in trouble," Ben Silverman reports a change in the price of the Playstation 3 gaming system will affect the market for the Nintendo Wii game console. Will this decrease in the price of the Playstation 3 cause (a) an increase in the supply of the Nintendo Wii, (b) a decrease in the supply of the Nintendo Wii, (c) an increase in the demand for the Nintendo Wii, or (d) a decrease in the demand for the Nintendo Wii? Read the article and then illustrate the change in the market for the Nintendo Wii with a graph that shows the initial positions of the supply and demand for the Nintendo Wii and the new positions of the supply and demand curves. (Hint #1: Only one of the curves has shifted. Hint #2: Does a change in the price of a substitute good affect the supply or demand for a product?) There is a link at the bottom of this posting that provides the answer.

Thanks to months of rumors, Sony might not have shocked the gaming world by finally dropping the price of the Playstation 3 last week. But with a fresh, $299 model en route to retailers, they've certainly changed the face of the console war.

And according to multiple analysts, the company with the most to lose is none other than Nintendo and its market-leading Wii.

Game site Gamasutra checked in with a group of industry experts to get a glimpse into the post-PS3 price-cut future. The consensus? At $299, both the Xbox 360 and the PS3 are in perfect position to make some serious gains on Nintendo's Wii, which is the only system yet to see a price cut and is currently available at the suddenly not-so-bargain price of $250.

"I think that they may see sales suffer, and certainly will see sales down year-over-year," says oft-quoted Wedbush Morgan analyst Michael Pachter. "So we have to see if they cut, unbundle and cut, or rebundle (with Wii Sports Resort plus Wii Motion Plus). They’re hard to figure out."

His thoughts were echoed by Kaufman Bros. Todd Mitchell, who notes that Nintendo is "struggling to keep the Wii relevant."

Jesse Divnich from EEADR concurs. "While the target audience for the two platforms varies greatly, some consumers will face a tough decision to purchase the Wii with outdated processing power or the PlayStation 3 with a built-in Blu-Ray player," he says.

Earlier this month, however, Nintendo boss Satoru Iwata insisted that a Wii price cut simply wasn't on the radar, leaving consumers to wonder exactly what Nintendo is planning to do to combat the gains made by its rivals.

Whatever they do, they’d better do it quickly. Based on a chart-topping flood of pre-orders on both the US and UK versions of its site, Amazon is already warning consumers to expect shortages of the forthcoming PS3 Slim and has limited sales to one per household.

CLICK HERE FOR THE ANSWER.

Bernanke optimistic economy will grow again soon

In the August 21, 2009 article "Bernanke optimistic economy will grow again soon" Associated Press economics writer Jeannine Aversa reports Ben Bernanke, the chairman of the Board of Governors of the Federal Reserve System, thinks the U.S. is on the cusp of economic recovery:

JACKSON, Wyo. – Federal Reserve Chairman Ben Bernanke on Friday offered his most optimistic outlook since the financial crisis struck, saying the economy is on the verge of growing again.

Speaking at an annual Fed conference, Bernanke acknowledged no missteps by the central bank in managing the worst crisis since the Great Depression. But he conceded that consumers and businesses are still having trouble getting loans, even though the financial system is gradually stabilizing.

Economic activity in both the U.S. and around the world seems to be leveling out, and the economy is likely to start growing again soon, Bernanke said in a speech at an annual Fed conference in Jackson.

The mood here was decidedly more hopeful than it was last summer, when a sense of foreboding hung over the forum just before the financial crisis erupted.

Bernanke's hopeful remarks on the economy contributed to a rally on Wall Street. The Dow Jones industrial average surged about 155 points, or 1.7 percent, and broader stock averages also gained sharply.

Despite his upbeat tone, Bernanke cautioned that the recovery is likely to be "relatively slow at first."

Unemployment, now at 9.4 percent, is widely expected to hit double digits later this year and to remain high for many months.

The financial markets have stabilized, and some businesses and consumers have found it easier to get loans. Still, the banking system has yet to return to normal, Bernanke said.

Financial institutions face further losses on soured investments. And many businesses and households still can't get the credit they need to fuel the economy, he said.

"Although we have avoided the worst, difficult challenges still lie ahead," Bernanke told the gathering of fellow bankers, academics and economists. "We must work together to build on the gains already made to secure a sustained economic recovery."

Reviewing the past year's crisis, Bernanke outlined the many emergency measures the Fed and other regulators took to help ward off a global financial meltdown. He declined to acknowledge critics' arguments that regulators failed to detect signs of the crisis before it occurred — or that Wall Street bailouts sent a message that big companies that make reckless bets would be rescued with taxpayer money.

A $700 billion taxpayer-funded bailout program to prop up financial institutions incensed many Americans. So did the repeated bailouts of AIG, which paid hefty bonuses to employees who worked in the division that brought down the firm.

Some analysts said Bernanke appeared to be angling to keep his job for another term.

"The lack of any mea culpa suggests the Fed chairman wants to be reappointed," said Richard Yamarone, economist at Argus Research. "When you go on an interview, you never speak of your shortcomings."

President Barack Obama will have to decide in coming months whether to reappoint or replace Bernanke, whose term expires early next year.

Ken Mayland, president of ClearView Economics, said Bernanke was engaging in a "bit of cheerleading to inspire confidence," especially among consumers whose caution could restrain the recovery.

Elsewhere at the conference, European Central Bank President Jean-Claude Trichet responded to a research paper on the origins and the nature of the financial crisis by saying he was a "little bit uneasy" about talk of a return to normalcy.

"We have an enormous amount of work to do, and we should be as active as possible," Trichet said.

The bulk of Bernanke's speech chronicled the extraordinary events of the past year.

Financial markets took a dizzying plunge starting in September and into October, nearly shutting down the flow of credit. The crisis felled storied Wall Street firms. The government took over mortgage giants Fannie Mae and Freddie Mac, as well as insurance titan American International Group Inc.

Lehman Brothers failed. It filed for bankruptcy on Sept. 15, the largest in corporate history, roiling markets worldwide.

The Fed swooped in with unprecedented emergency lending programs to fight the crisis. It eventually slashed a key bank lending rate to a record low near zero. And Congress enacted programs to stimulate the economy, including a $787 billion package of tax cuts and increased government spending.

"Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major firms would have failed and the entire global financial system would have been at serious risk," Bernanke said.

Unlike in the 1930s, Washington policymakers this time acted aggressively and quickly to contain the crisis, said Bernanke, a scholar of the Great Depression.

"As severe as the economic impact has been, however, the outcome could have been decidedly worse," he said.
Global cooperation in battling the crisis was crucial, with central banks slashing interest rates and the U.S. and other governments delivering fiscal stimulus, he noted.

"The crisis, in turn, sparked a deep global recession, from which we are only now beginning to emerge," the Fed chief observed.

The conference, sponsored by the Federal Reserve Bank of Kansas City, draws a virtual who's who of the financial world — Bernanke's counterparts in other countries, academics and economists. This year's forum focused on lessons learned from the crisis and how they can be applied to prevent a repeat of the debacles.

Bernanke again urged a rewrite of U.S. financial regulations, something Congress is involved in. He repeated his call for stricter oversight of companies — such as AIG — whose failure would endanger the entire financial system and the broader economy. Obama wants to empower the Fed for that duty, something many lawmakers oppose.

Bernanke also said the U.S. needs a process to wind down globally interconnected companies, as the Federal Deposit Insurance Corp. does for failing banks.

A strengthening of financial regulation is needed, he said, "to ensure that the enormous costs of the past two years will not be borne again."

Does the Republican Party have a proposal for health insurance reform?

So just exactly what does the Republican Party stand for these days? Health care costs are skyrocketing. Rising premiums for health insurance reduce what employers could otherwise give workers as a pay raise. Corporate profits remain high as health insurers actively deny legitimate claims. Administrative costs for corporate health care are about 20%, compared to 3% for government run Medicare. Even ignoring the millions of people with no health insurance, is there not still a need for reform of the health insurance industry?

Joe Klein argues the Republican Party is focused on acquiring and maintaining power - not doing what is best for the citizens it allegedly represents. So in the health care debate, they are obstructionists. Even when conservatives have helpful contributions, they are silenced by pressure from those who do not want the current administration to accomplish anything of benefit to the American people.

In his August 20, 2009 TIME magazine column "The GOP Has Become a Party of Nihilists," Klein argues:

In one of those awful collisions between public policy and real life, I was in the midst of an awkward conversation about end-of-life issues with my father when Sarah Palin raised the remarkable idea that the Obama Administration's attempt to include such issues in its health-care-reform proposal would lead to "death panels." Let me tell you something about my family situation, a common one these days, in order to illuminate the obscenity of Palin's formulation and the cowardice of those, like Senator Charles Grassley of Iowa, the lead Republican negotiator on the Senate Finance Committee, who have refused to contest her claim.

Both my parents are 89 years old. They have been inseparable, with the exception of my father's service in World War II, since kindergarten. My mother has lost her sight and is quite frail. My father takes care of her and my aunt Rose, lovingly, with some — but not enough — private help at their home in central Pennsylvania. One night in early August, I had a terrible scare. I called home and Aunt Rose was freaking out; she didn't know where my father was. All the worst possibilities crossed my mind — it turned out he was just getting the mail — as well as a very difficult reality: if he'd had a stroke, I would have had no idea about what he'd want me to do. I had lunch with him the next day to discuss this.

It wasn't easy. My dad is very proud and independent. He didn't really want to talk about what came next. He was pretty sure, but not certain, that he'd signed a living will. He was very reluctant to sign an enduring power of attorney to empower me, or my brother, to make decisions about his care and my mom's if he were incapacitated. I tried to convince him that it was important to make some plans, but I didn't have the strategic experience that a professional would have — and, in his eyes, I didn't have the standing. I may be a grandfather myself, but I'm still just a kid in my dad's mind. Clearly, an independent, professional authority figure was needed. And this is what the "death panels" are all about: making end-of-life counseling free and available through Medicare. (I'd make it mandatory, based on recent experience, but hey, I'm not entirely clearheaded on the subject right now.)

Given the heinous dust that's been raised, it seems likely that end-of-life counseling will be dropped from the health-reform legislation. But that's a small point, compared with the larger issue that has clouded this summer: How can you sustain a democracy if one of the two major political parties has been overrun by nihilists? And another question: How can you maintain the illusion of journalistic impartiality when one of the political parties has jumped the shark? [Watch Fonzie jump the shark.]

I'm not going to try. I've written countless "Democrats in Disarray" stories over the years and been critical of the left on numerous issues in the past. This year, the liberal insistence on a marginally relevant public option has been a tactical mistake that has enabled the right's "government takeover" disinformation jihad. There have been times when Democrats have run demagogic scare campaigns on issues like Social Security and Medicare. There are more than a few Democrats who believe, in practice, that government should be run for the benefit of government employees' unions. There are Democrats who are so solicitous of civil liberties that they would undermine legitimate covert intelligence collection. There are others who mistrust the use of military power under almost any circumstances. But these are policy differences, matters of substance. The most liberal members of the Democratic caucus — Senator Russ Feingold in the Senate, Representative Dennis Kucinich in the House, to name two — are honorable public servants who make their arguments based on facts. They don't retail outright lies. Hyperbole and distortion certainly exist on the left, but they are a minor chord in the Democratic Party.

It is a very different story among Republicans. To be sure, there are honorable conservatives, trying to do the right thing. There is a legitimate, if wildly improbable, fear that Obama's plan will start a process that will end with a health-care system entirely controlled by the government. There are conservatives — Senator Lamar Alexander, Representative Mike Pence, among many others — who make their arguments based on facts. But they have been overwhelmed by nihilists and hypocrites more interested in destroying the opposition and gaining power than in the public weal. The philosophically supple party that existed as recently as George H.W. Bush's presidency has been obliterated. The party's putative intellectuals — people like the Weekly Standard's William Kristol — are prosaic tacticians who make precious few substantive arguments but oppose health-care reform mostly because passage would help Barack Obama's political prospects. In 1993, when the Clintons tried health-care reform, the Republican John Chafee offered a creative (in fact, superior) alternative — which Kristol quashed with his famous "Don't Help Clinton" fax to the troops. There is no Republican health-care alternative in 2009. The same people who rail against a government takeover of health care tried to enforce a government takeover of Terri Schiavo's end-of-life decisions. And when Palin floated the "death panel" canard, the number of prominent Republicans who rose up to call her out could be counted on one hand.

A striking example of the prevailing cravenness was Senator Johnny Isakson of Georgia, who has authored end-of-life counseling provisions and told the Washington Post that comparing such counseling to euthanasia was nuts — but then quickly retreated when he realized that he had sided with the reality-based community against his Rush Limbaugh-led party. Mitt Romney, the Republican front-runner for President according to most polls, actually created a universal-health-care plan in Massachusetts that looks very much like the proposed Obamacare, but he spends much of his time trying to fudge the similarities and was AWOL on the "death panels." Why are these men so reluctant to be rational in public?

An argument can be made that this is nothing new. Dwight Eisenhower tiptoed around Joe McCarthy. Obama reminded an audience in Colorado that opponents of Social Security in the 1930s "said that everybody was going to have to wear dog tags and that this was a plot for the government to keep track of everybody ... These struggles have always boiled down to a contest between hope and fear." True enough. There was McCarthyism in the 1950s, the John Birch Society in the 1960s. But there was a difference in those times: the crazies were a faction — often a powerful faction — of the Republican Party, but they didn't run it. The neofascist Father Coughlin had a huge radio audience in the 1930s, but he didn't have the power to control and silence the elected leaders of the party that Limbaugh — who, if not the party's leader, is certainly the most powerful Republican extant — does now. Until recently, the Republican Party contained a strong moderate wing. It was a Republican, the lawyer Joseph Welch, who delivered the coup de grâce to Senator McCarthy when he said, "Have you no sense of decency, sir, at long last?" Where is the Republican who would dare say that to Rush Limbaugh, who has compared the President of the United States to Adolf Hitler?

This is a difficult situation for the President. Cynicism about government is always easy, even if it now seems apparent that it was government action — by both Obama and, yes, George W. Bush — that prevented a reprise of the Great Depression. I watched Obama as he traveled the Rocky Mountain West, holding health-care forums, trying to lance the boil by eliciting questions from the irrational minority that had pulverized the public forums held by lesser pols. He would search the crowds for a first-class nutter who might challenge him on "death panels," but he was constantly disappointed. In Colorado, he locked in on an angry-looking fellow in a teal T shirt — but the guy's fury was directed at the right-wing disinformation campaign. Obama seemed to sag. He had to bring up the "death panels" himself.

This may tell us something about the actual state of play on health care: the nutters are a tiny minority; the Republicans are curling themselves into a tight, white, extremist bubble — but there may be enough of them raising dust to render creative public policy impossible. Some righteous anger seems called for, but that's not Obama's style. He will have to come up with something, though — and he will have to do it without the tiniest scintilla of help from the Republican Party.

Mark Steyn: Stimulus hits a pothole

The August 21, 2009 editorial "Stimulus hits a pothole" by syndicated columnist Mark Steyn is a good example of bad commentary. It fails to make sound reasoned analysis of the issue, but instead relies on ridicule and contempt to incite an emotional response from the reader. It does little to increase the understanding of valid points on either side of the issue.

For example, Steyn suggests the quicker recovery of the French and German economies can be credited to their LACK of government stimulus spending (with the flawed implication that this is proof that stimulus spending is an erroneous policy for reversing economic declines). Steyn fails to understand that European countries have significantly larger government social programs that automatically increase spending in economic downturns. Should he instead be advocating that the U.S. adopt government social programs like those of the Europeans?

And Steyn implies that the current U.S. budget deficits are due entirely to President Obama's economic policies. An examination of the U.S. public debt since 1940 suggests significant blame belongs to the tax cutting and big spending policies under the administrations of Ronald Reagan, George H.W. Bush, George W. Bush, and to a much lesser extent, Bill Clinton.

Steyn argues:

And Obamacare can't be rationalized on economic or medical grounds because it's not about that. It's about moving America left.

The other day, wending my way from Woodsville, N.H., 40 miles south to Plymouth, I came across several "stimulus" projects – every few miles, and heralded by a two-tone sign, a hitherto rare sight on Granite State highways. The orange strip at the top said "PUTTING AMERICA BACK TO WORK" with a silhouette of a man with a shovel, and the green part underneath informed you that what you were about to see was a "PROJECT FUNDED BY THE AMERICAN RECOVERY AND REINVESTMENT ACT." There then followed a few yards of desolate, abandoned scarified pavement, followed by an "END OF ROAD WORKS" sign, until the next "stimulus" project a couple of bends down a quiet rural blacktop.

I don't know why one of the least fiscally debauched states in the Union needs funds from "the American Recovery and Reinvestment Act" to repair random stretches of highway, especially stretches that were perfectly fine until someone came along to dig them up in order to access "stimulus" funding. I would have asked one of those men with a shovel, as depicted on the sign. But there were none to be found. Usually in New Hampshire, they dig up the road, regrade or repave it, while the flagmen stand guard until it's all done. But here a certain federal torpor seemed to hang in the eerie silence.

Still, what do I know? Evidently, it's stimulated the sign-making industry, putting America back to work by putting up "PUTTING AMERICA BACK TO WORK" signs every 200 yards across the land. And at 300 bucks a pop the signage alone should be enough to launch an era of unparalleled prosperity, assuming America's gilded sign magnates don't spend their newfound wealth on Bahamian vacations and European imports. Perhaps if the president were to have his All-Seeing O logo lovingly hand-painted onto each sign, it would stimulate the economy even more, if only when they were taken down and auctioned on eBay.

Meanwhile, in Brazil, India, China, Japan and much of Continental Europe the recession has ended. In the second quarter this year, both the French and German economies grew by 0.3 percent, while the U.S. economy shrank by 1 percent. How can that be? Unlike America, France and Germany had no government stimulus worth speaking of, the Germans declining to go the Obama route on the quaint grounds that they couldn't afford it. They did not invest in the critical signage-in-front-of-holes-in-the-road sector. And yet their recession has gone away. Of the world's biggest economies, only the U.S., Britain and Italy are still contracting. All three are big stimulators, though Gordon Brown and Silvio Berlusconi can't compete with Obama's $800 billion porkapalooza. The president has borrowed more money to spend to less effect than anybody on the planet.

Actually, when I say "to less effect," that's not strictly true: Due to Obama, one of the least-indebted developed nations is now one of the most indebted – and getting ever more so. We've become the third most debt-ridden country, after Japan and Italy. According to last month's IMF report, general government debt as a percentage of GDP will rise from 63 percent in 2007 to 88.8 percent this year and to 99.8 percent of GDP next year.

Of course, the president retains his formidable political skills, artfully distracting attention from his stimulus debacle with his health care debacle. But there are diminishing returns to his serial thousand-page, trillion-dollar boondoggles. They may be too long for your representatives to bother reading before passing into law, but, whatever the intricacies of Section 417(a) xii on page 938, people are beginning to spot what all this stuff has in common: He's spending your future. And by "future" I don't mean 2070, 2060, 2040, but the day after tomorrow. Democrats can talk about only raising taxes on "the rich," but more and more Americans are beginning to figure out what percentage of them will wind up in "the richest 5 percent" before this binge is over. According to Gallup, nearly 70 percent of Americans now expect higher taxes under Obama.

But the silver-tongued salesman sails on. Why be scared of a government health program? After all, says the president, "Medicare is a government program that works really well," and if "we're able to get something right like Medicare," we should have more "confidence" about being able to do it for everyone.

On the other hand, says the president, Medicare is "unsustainable" and "running out of money."

By the way, unlike your run-of-the-mill politician's contradictory statements, these weren't made a year or even a week apart, but during the same presidential speech in Portsmouth, N.H. At any rate, in order to "control costs," Obama says we need to introduce a new trillion-dollar government entitlement. It's a good thing he's the smartest president of all time and the greatest orator since Socrates because otherwise one might easily confuse him with some birdbrained Bush type. But, if we take him at his word, then a trillion-dollar public expenditure that "controls costs" presumably means he's planning on reducing private health expenditure – such as, say, your insurance plan – by at least a trillion. Or he'll be raising a trillion dollars' worth of revenue. Either way, under Obama nothing is certain but death panels and taxes – i.e., a vast enervating statism and the confiscation of the fruits of your labors required to pay for it.

That's why the "stimulus" flopped. It didn't just fail to stimulate, it actively deterred stimulation, because it was the first explicit signal to America and the world that the Democrats' political priorities overrode everything else. If you're a business owner, why take on extra employees when cap-and-trade is promising increased regulatory costs, and health "reform" wants to stick you with an 8 percent tax for not having a company insurance plan? Obama's leviathan sends a consistent message to business and consumers alike: When he's spending this crazy, maybe the smart thing for you to do is hunker down until the dust's settled, and you get a better sense of just how broke he's going to make you. For this level of "community organization," there aren't enough of "the rich" to pay for it. That leaves you.

For Obama, government health care is the fastest way to a permanent left-of-center political culture in which all elections and most public discourse will be conducted on Democrat terms. It's no surprise that the president can't make a coherent economic or medical argument for Obamacare because that's not what it's about – and for all his cool he can't quite disguise that. Apropos a new poll, the Associated Press reports that Americans "are losing faith in Barack Obama."

"Losing faith"? Oh, no! Fall on your knees and beseech the One: "Give me a sign, O Lord!"

But he has. They're all along empty highways across rural New Hampshire: "This Massive Expansion Of Wasteful Statism Brought To You By Obama Marketing Inc."

Fed Chairman Bernanke has supporters and critics

In the August 20, 2009 New York Times articleBernanke, a Hero to His Own, Can’t Shake Critics Edmund L. Andrews explains that Federal Reserve Chairman Ben Bernanke has supporters and critics for his response to the global financial crisis:

WASHINGTON — Ben S. Bernanke, chairman of the Federal Reserve, no longer looks sleep-deprived.

He still works seven days a week, but earlier this month he took two days off — for the first time in two years — to attend his son’s wedding. And he often gets home for dinner and even out to baseball games every few weeks.

As central bankers and economists from around the world gather on Thursday for the Fed’s annual retreat in Jackson Hole, Wyo., most are likely to welcome Mr. Bernanke as a conquering hero. In Washington and on Wall Street, it would be a surprise if President Obama did not nominate Mr. Bernanke for a second term, even though he is a Republican and was appointed by President George W. Bush.

But the White House has remained silent. And despite Mr. Bernanke’s credibility in financial circles, both he and the Fed as an institution have come under political fire from lawmakers in both parties over the handling of particular bailouts and the scope of the Fed’s power.

He has been frustrated that many in Congress do not give the Fed what he believes is enough credit for what it has accomplished. Indeed, Mr. Bernanke has met privately with hundreds of lawmakers in recent months to explain the Fed’s strategy.

Fellow economists, however, are heaping praise on Mr. Bernanke for his bold actions and steady hand in pulling the economy out of its worst crisis since the 1930s. Tossing out the Fed’s standard playbook, Mr. Bernanke orchestrated a long list of colossal rescue programs: Wall Street bailouts, shotgun weddings, emergency loan programs, vast amounts of newly printed money and the lowest interest rates in American history.

Even one of his harshest critics now praises him.

“He realized that the great recession could turn into the Great Depression 2.0, and he was very aggressive about taking the actions that needed to be taken,” said Nouriel Roubini, chairman of Roubini Global Economics, who had long criticized Fed officials for ignoring the dangers of the housing bubble.

But Mr. Bernanke is hardly breathing easy. Unemployment is still at 9.4 percent, and the central bank’s own forecasts assume that it will remain that high through the end of next year. Even if all goes according to plan, Fed officials said, Mr. Bernanke’s current popularity could sink if the recovery proves slower than many people expect.

While the White House keeps mum about Mr. Bernanke’s future, the leading Democratic candidates to replace him include Lawrence H. Summers, director of the National Economic Council; Janet L. Yellen, president of the Federal Reserve Bank of San Francisco; Alan S. Blinder, a Princeton economist and former Fed vice chairman; and Roger Ferguson, another former Fed vice chairman.

Mr. Bernanke faces two major challenges. On the economic front, the Fed has to decide when and how it will reverse all its emergency measures and raise interest rates back to normal without either stalling the economy or igniting inflation.

On the political front, Mr. Bernanke is trying to defend the Fed’s power and independence as the White House and Congress debate plans to overhaul the system of financial regulation.

Democrats like Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, contend that the Fed was too cozy with banks and Wall Street firms as the mortgage crisis was building. House Republicans, and some Democrats, complain that the Fed already has too much power.

“Why does the Fed deserve more authority when institutionally it seemed to have failed to prevent the current crisis?” asked Senator Dodd last month.

The political battle over President Obama’s plan to overhaul financial regulation has put Mr. Bernanke in an awkward position.

Fed officials support the administration’s proposals to put them in charge of systemic risk like the growth of reckless mortgage lending or the misuse of financial derivatives. But they chafe at the plan to shift the Fed’s consumer-protection functions, which protect people from deceptive and unfair lending practices, to a new agency.

Mr. Bernanke has avoided publicly criticizing the White House’s call for an independent consumer regulatory agency. While acknowledging that the Federal Reserve did nothing to stop mortgage practices during the housing bubble, Mr. Bernanke has argued that the Fed has since written tough new protections for both mortgage borrowers and credit card customers.

“We think the Fed can play a constructive role in protecting consumers,” he told the House Financial Services Committee last month.

Mr. Bernanke and other Fed officials now concede they failed to anticipate the full danger posed by the explosion of subprime mortgage lending. As recently as the spring of 2007, Mr. Bernanke still contended that the problems of the housing market were largely “contained” to subprime mortgages. When panic over mortgage-backed securities began spreading through the broader credit markets in late July 2007, Fed officials initially refused to cut interest rates.

By December 2007, Mr. Bernanke became increasingly convinced that the economy itself was in trouble but policy makers were unable to reach agreement and decided not to reduce interest rates.

At a meeting on Jan. 21, 2008, the Fed slashed the benchmark federal funds rate by 0.75 percent, to 3.5 percent, the biggest one-time reduction in decades. Nine days later, officials cut the rate again, down to 3 percent.

As the credit crisis deepened, Mr. Bernanke urged Fed officials to devise proposals that had never been tried before. They responded with a kaleidoscope of emergency loan programs to a wide array of industries.

“He has had tremendous courage throughout this episode,” said Frederic S. Mishkin, a professor at Columbia University’s business school and a former Fed governor.

Amid the chaos, Fed and Treasury officials made numerous mistakes. Their original idea for the $700 billion to buy up bad mortgage assets held by banks has yet to get off the ground.

But economists say Mr. Bernanke’s most important accomplishment was to create staggering amounts of money out of thin air.

All told, the Federal Reserve has expanded its balance sheet to $1.9 trillion today, from about $900 billion a year ago. Analysts now caution that Mr. Bernanke’s job is only half complete. He will eventually have to reel all that money back. He has already laid out elements of the Fed’s “exit strategy,” but Fed officials have been careful to say it is still too early to pull back any time soon.

Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the August 20, 2009 story "Fall airfare sales cutting deeper than usual," Associated Press writer Joshua Freed talks about airlines cutting airfares. Is this change in the price of air travel caused by (a) an increase in the supply of air travel, (b) a decrease in the supply of air travel, (c) an increase in the demand for air travel, or (d) a decrease in the demand for air travel? Read the article and then illustrate this price change with a graph that shows the initial positions of the supply and demand for air travel and the new positions of the supply and demand curves. (Hint: Only one of the curves has shifted.) There is a link at the bottom of this posting that provides the answer.

MINNEAPOLIS – Airlines are cutting fares deeper than usual this fall in an effort to fill seats.

American and Southwest both launched fare sales this week, and United is running several sales, too.

While it's common for airlines to use discounts to fill planes during the slower fall travel months, the discounts this year are deeper and more widely available than last fall, said FareCompare.com CEO Rick Seaney.

"The prices we're seeing now are just absolutely superb" compared with this time last year, he said. They're still a little above the fares airlines were offering over the winter and spring when demand was in a free-fall, he said.

Business travelers, the most profitable for airlines, have been staying home for months as companies cut travel back to only the most essential flying. Steep discounts kept leisure travelers in the air through the summer, though at prices that often don't cover the cost of the flight. Still, airlines are better off flying at a loss than parking the plane and incurring what would often be an even bigger loss.

Cheap seats are easier to get under some of the sales than others.

The sale by Southwest Airlines Co. applies to flights from Sept. 9 through Jan. 7, but sale fares aren't available on Fridays or Sundays. And it blacked-out flights around Thanksgiving — Nov. 24 through Dec. 1 — and near Christmas and New Year's Day — Dec. 18 through Jan. 4. Tickets must be purchased by Sept. 3. Some seats are as cheap as $59 each way plus taxes.

UAL Corp.'s United, meanwhile, is running several sales, with fares for travel between Chicago and Houston for $102 each way, and travel between Atlanta and Denver for $109 each way. Tickets have to be purchased by Tuesday for travel by Dec. 16.
Another sale covered Washington Dulles to several East Coast cities for travel through Nov. 18. Tickets must be purchased by Friday. Both sales are valid only for travel on Tuesday, Wednesday, or Saturday.

The sale by AMR Corp.'s American covered flights between New York and five other cities: Miami, Chicago, Dallas-Fort Worth, San Francisco, and Los Angeles.

The New York to California flights were $109 each way, a number that caught Seaney's eye. It's close to the $99 each-way fare for coast-to-coast travel that fliers watch for but seldom get, he said.

Also, some carriers are undercutting each others' direct flights with one-stop flights to the same cities.

"There's a lot of really low-ball deals out there if you're willing to put up with connecting," he said.

CLICK HERE FOR THE ANSWER.

Flawed Logic Used in Partisan Attack on Obama

In the March 3, 2009 article "The Obama Economy," The Wall Street Journal argued that the decline of the Dow Jones Industrial Average (the Dow) in the first six weeks of Barack Obama's presidency was evidence of the failure of his economic policies. The Dow had fallen from 7949 on Inauguration Day (January 20) to 6763 on March 2. Today (August 20), the Dow closed at 9350. That is more than a 17% increase in the first seven months of Obama's administration. (Try getting that rate of return from a bank account.) So why hasn't The Wall Street Journal published a follow up story explaining how this significant increase in the stock market proves that Obama's policies were right all along?

The answer is that the original story was a cheap, partisan, unsigned attack based on flawed logic. See my original critique of the article for an explanation.

Purchasing power: An alternative Big Mac index

According to the August 20, 2009 Economist.com article "Purchasing power: An alternative Big Mac index," an average worker in Chicago, Toronto, or Tokyo earns enough income in 12 minutes to be able to buy a McDonald's Big Mac hamburger. In the rest of the world, workers must labor for longer periods of time to be able to afford one:

How many minutes to earn the price of a Big Mac?

THE size of your pay packet may be important, but so is its purchasing power. Helpfully, a UBS report published this week offers a handy guide to how long it takes a worker on the average net wage to earn the price of a Big Mac in 73 cities. Fast-food junkies are best off in Chicago, Toronto and Tokyo, where it takes a mere 12 minutes at work to afford a Big Mac. By contrast, employees must toil for over two hours to earn enough for a burger fix in Mexico City, Jakarta and Nairobi.

FACT CHECK: Health overhaul myths taking root

In the August 19, 2001 article "FACT CHECK: Health overhaul myths taking root" Associated Press writer Calvin Woodward reports that lies and distortions are influencing the debate over health insurance reform:

WASHINGTON – The judgment is harsh in a new poll that finds Americans worried about the government taking over health insurance, cutting off treatment to the elderly and giving coverage to illegal immigrants. Harsh, but not based on facts.

President Barack Obama's lack of a detailed plan for overhauling health care is letting critics fill in the blanks in the public's mind. In reality, Washington is not working on "death panels" or nationalization of health care.

To be sure, presenting Congress and the country with the nuts and bolts of a revamped system of health insurance is no guarantee of success for a president — just ask Bill and Hillary Rodham Clinton. Their famous flop was demonized, too. After all, the devil does lurk in details.

It can also lurk in generalities, it seems.

Obama is promoting his changes in something of a vacuum, laying out principles, goals and broad avenues, some of which he's open to amending. As lawmakers sweat the nitty gritty, he's doing a lot of listening, and he's getting an earful.

A new NBC News poll suggests some of the myths and partial truths about the plans under consideration are taking hold.

Most respondents said the effort is likely to lead to a "government takeover of the health care system" and to public insurance for illegal immigrants. Half said it will probably result in taxpayers paying for abortions and nearly that many expected the government will end up with the power to decide when treatment should stop for old people.

A look at each of those points:

THE POLL: 45 percent said it's likely the government will decide when to stop care for the elderly; 50 percent said it's not likely.

THE FACTS: Nothing being debated in Washington would give the government such authority. Critics have twisted a provision in a House bill that would direct Medicare to pay for counseling sessions about end-of-life care, living wills, hospices and the like if a patient wants such consultations with a doctor. They have said, incorrectly, that the elderly would be required to have these sessions.

House Republican Leader John Boehner of Ohio said such counseling "may start us down a treacherous path toward government-encouraged euthanasia."

The bill would prohibit coverage of counseling that presents suicide or assisted suicide as an option.

Republican Sen. Johnny Isakson of Georgia, who has been a proponent of coverage for end-of-life counseling under Medicare, said such sessions are a voluntary benefit, strictly between doctor and patient, and it was "nuts" to think death panels are looming or euthanasia is part of the equation.

But as fellow conservatives stepped up criticism of the provision, he backed away from his defense of it.
___
THE POLL: 55 percent expect the overhaul will give coverage to illegal immigrants; 34 percent don't.

THE FACTS: The proposals being negotiated do not provide coverage for illegal immigrants.
___
THE POLL: 54 percent said the overhaul will lead to a government takeover of health care; 39 percent disagree.

THE FACTS: Obama is not proposing a single-payer system in which the government covers everyone, like in Canada or some European countries. He says that direction is not right for the U.S. The proposals being negotiated do not go there.

At issue is a proposed "exchange" or "marketplace" in which a new government plan would be one option for people who aren't covered at work or whose job coverage is too expensive. The exchange would offer some private plans as well as the public one, all of them required to offer certain basic benefits.

That's a long way from a government takeover. But when Obama tells people they can just continue with the plans they have now if they are happy with them, that can't be taken at face value, either. Tax provisions could end up making it cheaper for some employers to pay a fee to end their health coverage, nudging some patients into a public plan with different doctors and benefits. Over time, critics fear, the public plan could squeeze private insurers out of business because they would not be able to compete with the federal government.

It's unclear now whether Obama is committed to the public option. He described it recently as "just one sliver" of health reform, suggesting it was expendable if lawmakers could agree on another way to expand affordable coverage. Now the White House is emphasizing his strong support for it.
___
THE POLL: 50 percent expect taxpayer dollars will be used to pay for abortions; 37 percent don't.

THE FACTS: The House version of legislation would allow coverage for abortion in the public plan. But the procedure would be paid for with dollars from beneficiary premiums, not from federal funds. Likewise, private plans in the new insurance exchange could opt to cover abortion, but no federal subsidies would be used to pay for the procedure.

Opponents say the prohibition on federal money for the procedure is merely a bookkeeping trick and what matters is that Washington would allow abortion to be covered under government-subsidized insurance.

Obama has stated that the U.S. should continue its tradition of "not financing abortions as part of government-funded health care." Current laws prohibiting public financing of abortion would stay on the books.

Yet abortion guidelines are not yet clear for the government-supervised insurance exchange. There is strong sentiment in Congress on both sides of the issue.
___
The poll of 805 people was taken Aug. 15-17 and has a margin of sampling error of plus or minus 3.5 percentage points.

Are Selfishness & Greed Always Good? ... Are They Ever Good?

Are selfishness and greed a good thing? Many advocates of business, capitalism, and free trade seem to make that argument. For example, they will cite the following quotation from Adam Smith's An Inquiry Into the Nature and Causes of the Wealth of Nations:

"Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." (Book, IV Chapter II)

Yet, a more careful reading of Adam Smith yields a different conclusion. As Douglas Rushkoss explains in his 2009 book, Life, Inc.: How the World Became a Corporation and How to Take It Back :

Best & Worst Markets for Job Seekers

In his August 18, 2009 Orlando Sentinel blog entry "Site ranks Orlando as one of the worst markets for job seekers" Etan Horowitz reports:

A new study from Indeed.com, a site that aggregates job listings from around the Web, lists Orlando as one of the worst markets to be unemployed and looking for a job these days.

The study compared the number of unemployed people to the number of job postings in each of the 50 top metropolitan areas during June. The more job postings there are per unemployed person, the better the market is for job seekers.

In Orlando, for every one job posting, there are six unemployed people, landing Orlando as No. 42 on the list. With the exception of Jacksonville, which came in at No. 2 with a ratio of three jobs for every unemployed person, most of the Florida cities ranked near the bottom.

Florida markets

Jacksonville - Ranked #2 - 3 jobs to every 1 unemployed persons
Tampa: Ranked #36 - 1 job to every 5 unemployed persons
Orlando: Ranked #42: 1 job to every 6 unemployed persons
Miami: Ranked #49: 1 job to every 10 unemployed persons

The top ten best cities for finding jobs (and the ratios of job postings to unemployed):

1. Washington, DC (6:1)
2. Jacksonville, FL (3:1)
3. Baltimore, MD (1:1)
4. Salt Lake City, UT (1:2)
5. New York, NY (1:2)
6. San Jose, CA (1:2)
7. Hartford, CT (1:2)
8. Oklahoma City, OK (1:3)
9. Austin, TX (1:3)
10. Boston, MA (1:3)

The worst ten cities for job searches:

41. Buffalo, NY (1:6)
42. Orlando, FL (1:6)
43. Sacramento, CA (1:6)
44. Rochester, NY (1:6)
45. Chicago, IL (1:7)
46. Portland, OR (1:7)
47. Los Angeles, CA (1:8)
48. Riverside, CA (1:9)
49. Miami, FL (1:10)
50. Detroit, MI (1:18)

The Economic Lesson of Goldilocks and the Three Bears: Overall Spending Should Not Be Too Large or Too Small

One of the most significant determinants of a country's economic well-being is overall spending on newly produced goods and services, which economists call aggregate demand (AD). Overall spending needs to be large enough to keep unemployment low, yet small enough to keep inflation low. Aggregate demand should not be too large or too small. Like the porridge, chair, and bed in the story of Goldilocks and the Three Bears, an economy's overall spending needs to be "just right."

Insufficient overall spending causes economic recessions and depressions. As aggregate demand declines, businesses sell fewer goods and services. Inventories of unsold products increase, leading to fewer factory orders for newly produced goods. Businesses lay off workers as production and sales decline. The unemployment rate increases as more workers become unemployed. The rate of economic growth, which is measured as the percentage change in output, decreases.

Excessive overall spending causes inflation, which is a general increase in the price level. During periods of inflation, the prices of most goods and services are rising. Inflation is similar to the rising prices of scalped tickets to a popular concert or sporting event. If a society tries to buy more goods and services than the economy is able to produce, the prices of most things will increase.

If society wishes to manage the natural fluctuations in economic activity, called business cycles, it needs to alter overall spending on newly produced goods and services. Thus, there can be a role for government in managing the economy when the consumption and investment actions of households and businesses fail to provide socially desirable outcomes.

When low unemployment and increasing inflation suggest the productive capacity of the economy is unable to meet the demand for goods and services, the appropriate policy is to discourage spending through contractionary monetary policy (higher interest rates, fewer bank loans, and a smaller money supply), and contractionary fiscal policy (higher taxes and reduced government purchases).

However, when unemployment is relatively high and economic growth is small (such as in the current recession), the appropriate policies to pursue are expansionary monetary policy (lower interest rates, more bank loans, and a larger money supply) and expansionary fiscal policy (lower taxes and increased government purchases).

In the current U.S. economy, monetary policy has been largely ineffective. Interest rates are about as low as they can go. (The federal funds rate is 0.25%. It is almost zero.) Because of the financial crisis, banks are reluctant to lend money. Tax cuts have been largely ineffective as well. Studies show most recipients have used the additional funds to pay down debt rather than increase purchases. So that leaves increased government spending as the most viable way to increase the aggregate demand for newly produced goods and services.

Thus, the economic justification for government spending programs to stimulate the economy is that they can increase aggregate demand when consumers and businesses and unwilling to do so.

If one's primary concern is economic recovery, then the spending should be done as quickly as possible on projects that employ workers in the production of new goods and services. However, there is a tradeoff between projects that can be done quickly, and those that provide the greatest long-term benefit. This has led to criticism of U.S. government stimulus spending. Projects that can be done quickly are criticized for lacking long-term benefit. Spending for more worthy projects is criticized because it is not helping the economy quickly enough. This is why defenders of stimulus programs argue we need to give them more time. Much of the spending was designed to help over the period of several years, not a few months.

CLICK HERE to read the story of Goldilocks and the Three Bears.

The Story of Goldilocks and the Three Bears

Once upon a time, there was a little girl named Goldilocks. She went for a walk in the forest. Pretty soon, she came upon a house. She knocked and, when no one answered, she walked right in.

At the table in the kitchen, there were three bowls of porridge. Goldilocks was hungry. She tasted the porridge from the first bowl.

"This porridge is too hot!" she exclaimed.

So, she tasted the porridge from the second bowl.

"This porridge is too cold," she said

So, she tasted the last bowl of porridge.

"Ahhh, this porridge is just right," she said happily and she ate it all up.

After she'd eaten the three bears' breakfasts she decided she was feeling a little tired. So, she walked into the living room where she saw three chairs. Goldilocks sat in the first chair to rest her feet.

"This chair is too big!" she exclaimed.

So she sat in the second chair.

"This chair is too big, too!" she whined.

So she tried the last and smallest chair.

"Ahhh, this chair is just right," she sighed. But just as she settled down into the chair to rest, it broke into pieces!

Goldilocks was very tired by this time, so she went upstairs to the bedroom. She lay down in the first bed, but it was too hard. Then she lay in the second bed, but it was too soft. Then she lay down in the third bed and it was just right. Goldilocks fell asleep.

As she was sleeping, the three bears came home.

"Someone's been eating my porridge," growled the Papa bear.

"Someone's been eating my porridge," said the Mama bear.

"Someone's been eating my porridge and they ate it all up!" cried the Baby bear.

"Someone's been sitting in my chair," growled the Papa bear.

"Someone's been sitting in my chair," said the Mama bear.

"Someone's been sitting in my chair and they've broken it all to pieces," cried the Baby bear.

They decided to look around some more and when they got upstairs to the bedroom, Papa bear growled, "Someone's been sleeping in my bed,"

"Someone's been sleeping in my bed, too" said the Mama bear

"Someone's been sleeping in my bed and she's still there!" exclaimed Baby bear.

Just then, Goldilocks woke up and saw the three bears. She screamed, "Help!" And she jumped up and ran out of the room. Goldilocks ran down the stairs, opened the door, and ran away into the forest. And she never returned to the home of the three bears.

THE END

Source: http://www.dltk-teach.com/rhymes/goldilocks_story.htm

CLICK HERE to read how this story relates to macroeconomic policy.

The Significance of Consumption

In the August 17, 2009 story "Stocks plunge as investors worry about consumers" Associated Press writer Tim Paradis provides further evidence of the significance of consumption in the global economy:

NEW YORK – Investors' rising fears about consumer spending are turning stocks into a risky investment again.

Stocks plunged and Treasury prices soared Monday as investors around the world feared that consumers are too anxious to lift the economy into recovery. The losses on stock exchanges extended the heavy selling that began Friday with a disappointing reading on consumer confidence. And bond investors, once again searching for a safe investment, bought heavily into Treasurys.

The Dow Jones industrials fell 165 points, while overseas, the Shanghai stock market tumbled almost 6 percent and the major indexes in Europe fell more than 1.5 percent.

Stocks fell across all industries as investors worried that consumers' reluctance to spend will hurt corporate earnings. Many companies second-quarter results were boosted by cost-cutting, not higher sales, and the fear is that without a pickup in sales, earnings will fall.

While other parts of the economy, including housing and manufacturing, are showing signs of progress, the country cannot have a strong recovery unless consumers are spending more freely. Their spending accounts for more than two-thirds of U.S. economic activity.

Traders got more bad news about the consumer Monday when home improvement retailer Lowe's Cos. said poor weather and cautious consumer spending caused sales to fall 19 percent in the second quarter. The company's results missed analysts' forecasts.

The market's reaction to news of a reluctant consumer had many questioning whether a five-month rally was way too optimistic. At its recent high the S&P 500 index had climbed almost 50 percent from a 12-year low in early March.

Joe Saluzzi, co-head of equity trading at Themis Trading LLC, said the market had risen too far and that the selling was warranted.

"The economics obviously don't support where we've been," he said.

Other analysts were more upbeat, saying some retreat was to be expected.

"We have come an awful long way. To not expect a sell-off after the degree of increase — I think you're dreaming," said John Merrill, chief investment officer of Tanglewood Wealth Management in Houston.

In midday trading, the Dow fell 163.16, or 1.8 percent, to 9,253.10. The broader Standard & Poor's 500 index fell 21.22, or 2.1 percent, to 982.87, while Nasdaq composite index fell 48.13, or 2.4 percent, to 1,937.39.

About 2,700 stocks fell while only 280 rose on the New York Stock Exchange, where volume came to 471.9 million shares compared with 435.2 million shares traded Friday.

The Chicago Board Options Exchange's Volatility Index, also known as the market's fear index, surged 13.2 percent Monday. The VIX rose 3.22 to 27.49. It is down 31 percent in 2009 and its historical average is 18 to 20. It hit a record 89.5 in October at the height of the financial crisis.

Meanwhile, the yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.49 percent from 3.57 percent late Friday.

Overseas, Japan's Nikkei stock average fell 3.1 percent as investors weren't satisfied by news that the country had emerged from recession in the second quarter. China's main market fell 5.8 percent as investors worried that stocks had risen too quickly and the government would tighten bank lending policies.

In afternoon trading, Britain's FTSE 100 fell 1.8 percent, Germany's DAX index fell 1.9 percent, and France's CAC-40 fell 2.2 percent.

Stocks fell Friday following a sharp drop in the Reuters/University of Michigan consumer sentiment index, which followed a surprisingly weak July retail sales report from the Commerce Department.

The mixed economic readings of the past several months aren't surprising. A turnaround produces mixed messages because not all parts of the economy recover at the same speed and some indicators start to show life before others.

Analysts say investors who had expected the economy would rocket higher got ahead of themselves by sending stocks up so quickly. Many economists have predicted a gradual recovery in the economy, in part because unemployment rates could remain high.

Investors are worried about consumers and unemployment because that could make it harder for the economy to return to growth. In downturns over the past 60 years, the S&P 500 index has hit bottom on average four months before a recession ended and about nine months before unemployment reached its peak.

Oil prices also extended their losses, reflecting the growing concerns about a weak economy that will curtail demand for energy. A barrel of crude oil fell $1.74 to $65.77 a barrel on the New York Mercantile Exchange.

Among companies reporting results Monday, Lowe's shares fell $1.99, or 8.7 percent, to $20.84.

The dollar rose against other major currencies, while gold prices fell.

The Russell 2000 index of smaller companies fell 14.20, or 2.5 percent, to 549.70.