The Bush economy: Strong and stronger

Basking in brisk GDP growth, the president advises Americans to take "a good look" at their economy. Yes sir, Mr. President. But what about the stock market?

Published July 27, 2007 6:22PM (EDT)

"I want the American people to take a good look at this economy of ours," said President Bush in a "media availability" appearance Friday morning.

Bush says the economy is strong. In a 351-word statement, he said "strong" seven times, sometimes twice in the same sentence, in case we missed it the first time around. His main basis for this assertion was Friday's news that the economy grew 3.4 percent in the second quarter of 2007, a sharp rebound upward from the first quarter's barely perceptible growth.

According to the Wall Street Journal, he declined to respond to a question from a reporter about Thursday's 300-point market plummet. (Presumably, he would also be inclined to ignore Friday's 200-point drop.) And no reference whatsoever was made to by far the biggest economic story of the week: the implosion of Wall Street's credit markets. The price of insuring against default, as measured by a variety of different indexes, hit record highs on Thursday. "Risk aversion" is the new battle cry. Easy money? Not so much.

But a fear of risk isn't strong, is it? Some might even say it is a sign of weakness.

But that raises a good question. How the World Works spends a lot of time reading the Financial Times and the Wall Street Journal and following a score of finance geek bloggers who love nothing better than to spend all day trying to explain the difference between a credit swap and a collateralized debt obligation. In this realm, what happened on Thursday was a very big deal, with potentially vast implications for the world of high finance.

If, for example, you are the kind of person who cares about whether one of the biggest private equity operators in the world, Kohlberg-Kravis-Roberts, will be forced to postpone its planned public offering, the collapse of credit markets rocks your world. KKR's leveraged-buyout business strategy just doesn't work when the cost of racking up billions of dollars of debt goes through the roof. And if you have long harbored the suspicion that the vast edifice of "structured finance" erected via the innovative financial experiments of Wall Street's derivatives geniuses is really a big pyramid scheme, then you can't take your eyes off the current traffic wreck. Everyone wants to know: What will break next? How many more hedge funds will self-destruct? What happens to the bottom line of the big investment banks that are the linchpin of the whole system?

But should we care? So a bunch of rich investors have to take a timeout. They can afford it. If the nuts-and-bolts economy is motoring along reasonably well at 3.4 percent -- lagging the global economy's brisk 5 percent growth rate, to be sure, but still, not too shabby -- why should the rest of us care that mergers and acquisition activity appears to be screeching to a halt?

(I can already hear my readers sharpening up their quills as they prepare their screeds on how GDP growth means nothing if the benefits of that growth are not equitably distributed. Fine. It's still better to have some growth than none.)

There's a simple answer to why we should care. Credit crunches spark recessions. If money gets expensive, companies don't just stop buying each other, they also find it harder to raise capital to do anything. Growth slows. People get laid off.

President Bush -- you might want to rethink that advice about taking "a good look at the economy." By definition, that means digging a little deeper than just the most recent GDP numbers. Because it's just possible that such an exercise would explain why investors are suddenly scrambling for high ground.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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