"Hopes that the worst of the credit crunch has now passed drove overseas markets higher," declared a story teaser on the Wall Street Journal's home page on Tuesday. Meanwhile, consumer confidence in the United States fell to its lowest point in 35 years, which means Americans feel as optimistic about the future now as they did in the days of Watergate and the OPEC oil embargo.

It's easy to understand why average Americans are feeling down. Gas prices are high, food prices are rising, and, according to the latest numbers from the influential Case/Shiller home price index, housing prices fell ten percent year-over-year in January. (Another index showed a smaller drop, but the general trend line described by both indexes illustrates the same picture -- the curve points down.)

It's harder to grasp why investors might feel hopeful. How many times do their dreams have to be crushed before they give up? After every previous episode in the credit crunch, dating back to last August, investors have seized upon each interest rate cut, liquidity injection, or better-than-expected earnings report from a major Wall Street financial institution as the fabled coming of blessed light at the end of the tunnel. And each time they've been wrong.

Eventually, they'll be right. But against the backdrop of the consumer confidence findings and the latest data on home prices, now is not the time for optimism. A year-on-year ten percent drop in home prices is a huge hit to the net worth of home-owning Americans. Forget about the economic stimulus checks due in May -- nothing is more likely to convince the American consumer to cut back on spending, pay off their credit car bills, and put off buying that new car or HD flat screen than the sense that the value of their home is declining. Credit crunch or no credit crunch, a contraction in economic activity is not going to be good for financial institutions whose bottom lines are already seriously stressed.