Back in the Bag? Back on Track?

THE BE YOUR OWN ECONOMIST ® BLOG

Is the cat back in the bag? Is the bailout back on track?

Today’s stock-market gains say “yes:” Dow +485, Nasdaq +99, S&P +58.

Perhaps the President can sway enough House Republicans to change their votes. Maybe Nancy Pelosi will convince some Democrats to play along. We’ll see on Thursday.

In any event, let’s hope for the best. And let’s also hope that the Senate agrees as well.

Then what? Then we take the experts at their word that the financial system will not fail.

But does that mean everything is now OK? Not at all. Everything will not be OK even if the bailout works as intended. The economy is going into recession and will remain depressed for some time.

Recent events have probably exacerbated the housing crisis, not alleviated it. The onset of recession, with its rising unemployment and general economic malaise, will also deepen the housing slump. Lower home prices and less construction will accentuate the gloom. It will be years before real estate climbs out of the ditch.

Meanwhile, there’s no savior on the horizon. There’s no incipient hi-tech boom. There’s no upsurge in business investment in plant and equipment. There is nothing out there, not even Federal Reserve policy, that can offset the glut of homes on the market. The real-estate slump must run its course before the economy turns up again.

© 2008 Michael B. Lehmann