Wall Street gets the jitters, again

A bond manager warns of a "tsunami"; a Fed official labels future economic health "subpar." What do Republicans have to say? Nothing, again

Published September 4, 2008 10:54PM (EDT)

By mid-afternoon Thursday, War Room reports, Republicans were claiming that Sarah Palin's speech to the Republican National Convention had encouraged $1 million in new online donations. Democrats, meanwhile, were promising that Barack Obama supporters would have contributed $10 million by the time John McCain made his speech Thursday night.

What explains the disparity? One reason could be that the unremitting stream of attacks aimed at Obama by a parade of Republican speakers galvanized Obama's fanbase. Remember those days when progressives were shaken by Obama's stance on FISA or his straddle of various issues relating to guns, faith, and the death penalty? Irrelevant now. After Wednesday night, that old familiar culture war is raging once again. Wallets are emptying.

But there could be another reason for the outpour. For the second night in a row, Republicans at the convention made zero references to the state of the American economy. It's amazing, really. Poll after poll has shown that the economy is the most important issue for Americans -- heck, it's the number one issue in the world right now. And yet, clearly on purpose, McCain's campaign managers have decided to ignore it.

I won't claim that the beating suffered by the stock market on Thursday (the Dow Jones Industrial Average closed down 340 points, nearing new lows for the year) is any kind of direct reaction to the obtuseness on display in Minnesota Wednesday night. Rising jobless claims and weak retail sales are far more likely culprits. But it's also conceivable that some people are watching the Republicans and then comparing their words to what other people are saying, and beginning to get a little nervous.

Take, for example, Bill Gross, the manager of the world's biggest bond fund, PIMCO. In one of his regular Web-posted missives, he observed on Thursday that "government sponsored enterprises, banks, investment banks, global hedge funds and even individual households" are rapidly divesting themselves of a vast array of assets as they attempt to liquidate their various debts.

Unchecked, [such debt liquidation] can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.

Then there's Janet Yellen, President of the Federal Reserve Bank of San Francisco, who gave her assessment of the economy in a speech in Salt Lake City Thursday:

Turning to the national economy, it was recently reported that growth in the second quarter came in at a fairly robust rate of 3 and quarter percent...

While one might be tempted to interpret the recent strong numbers as a sign that things are turning around, there are three important reasons to think that the strength will not hold up, and that economic performance will be decidedly subpar in the second half of the year.

The reasons: consumer spending in the second quarter was only moderately juiced by the tax rebates, and is slacking off now; export growth has been keeping the economy afloat, but a stronger dollar and weakening global economy will undermine that supporting pillar; and housing, credit, and labor markets are all continuing to slump.

"Decidedly subpar," as Calculated Risk notes, is about as somber a prediction as you are ever going to get from a Federal Reserve Bank President. Put that together with the "tsunami" warning from Gross, and you can begin to understand why investors are jittery.

So now let's see what John McCain has to say about all this, tonight.

By Andrew Leonard

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

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2008 Elections Globalization Great Recession How The World Works U.s. Economy