Job losses point to bigger trouble ahead

What happened

More bad news deepened the gloom over the slumping economy, as the Labor Department reported last week that 63,000 Americans lost their jobs in February—a steep and unexpected decline. It was the second straight month of job losses, with workers in manufacturing, construction, and retail the hardest hit. Combined with the collapsing housing market and a slowdown in consumer spending, the job loss had many analysts predicting a painful year ahead. “All the lights are flashing red,” said economist Nariman Behravesh of Global Insight Inc. “We’re in a recession.” President Bush described the current situation as a “slowdown,’’ and said the stimulus package he signed recently would provide the economy “with a booster shot.”

The Federal Reserve this week announced plans to lend about $200 billion to large investment firms; as collateral, the Fed will accept residential-mortgage-backed securities that other institutions have been rejecting as unacceptably risky. That news led to a dramatic rally on Wall Street, which had been in a nose dive. Fed Chairman Ben Bernanke suggested that the central bank would also lower interest rates yet again by as much as a half-point to stimulate economic growth. “The economic situation has become distinctly less favorable,” Bernanke told Congress.

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What the editorials said

The Fed has already cut interest rates 2.25 percentage points since September, said the Baltimore Sun, and it hasn’t helped. Bernanke needs to focus on how we got into this mess in the first place. Too many banks bought mortgage-backed securities without knowing how risky they actually were. More transparency would be the first step toward rebuilding confidence. “A comeback would be assisted significantly if the Fed and other regulators order reforms in the way mortgage-backed securities are packaged and sold.”

The Fed can’t help us now, said Marketwatch.com. “Time, not money, is what the markets need to work out their problems. And there’s no way for the Fed to fast-forward through this mess.” In fact, by continuing to cut interest rates, said the Los Angeles Times, Bernanke is now risking feeding the fires of inflation. “It’s pick-your-poison time.’’

What the columnists said

If it cuts interest rates again, said Paul R. La Monica in CNNmoney.com, the Fed will have picked the wrong poison. Another rate cut will further weaken the dollar against the yen and the euro, and drive up prices at home. “The Fed has to do everything it can to make sure recessions are brief and not too painful, but it is irresponsible to forget about the inflation risk.” It will take some time to see the full effects of the rate cuts that the Fed has already made. Until then, let’s hold off on doing anything “reckless.”

The news of so many lost jobs “is disturbing enough,’’ said Paul Krugman in The New York Times, but it’s less ominous than what the mortgage meltdown has done to the financial markets. All the banks and institutional investors that took on bad risk are trying to get out at the same time. “The whole financial system is facing demands to come up with cash it doesn’t have,’’ and compared to what is collectively owed, the $200 billion the Fed is willing to take on “is a drop in the bucket.’’

As bad as this week’s news was, said Robert Costanza in the Los Angeles Times, “the situation is actually much worse.” Economists define a recession as at least two consecutive quarters of a decline in the gross domestic product. But the GDP is a poor measure of how average citizens are doing. After all, crime, pollution, and disaster are all good for the GDP because we spend money on them. By more meaningful measures, such as the amount of leisure time people have and how satisfied they are with their lives, the country’s economic health “peaked about 1975 and has been relatively flat or declining ever since.”

What next?

Analysts are watching Wall Street to see if this week’s rally lasts. If it does, it would mean that the Fed accomplished its goal in relieving banks of some of their mortgage risks. “Whenever you’re in the midst of a crisis situation, it’s hard to know what the final piece is that will turn around investor psychology,” said Bill Stone in Marketwatch.com. “I’m not sure if this is the official turn.”