But the public would be much better advised to make its assessments of the economy on economic data than the stock markets fluctuations.

If the public focused on economic data rather than the stock market they probably would be far more pessimistic :0! The biggest problem with this over-focus on the level of stocks IMO, is the linkage with 401k retirement plans. The DJIA, i.e., becomes a rough barometer of 401k balances. This has resulted, IMO, in the government encouraging a far too easy credit environment in the recent past which has contributed greatly to the problems that we now have. This has also, IMO, enabled politicians to hold retirements "hostage", in order to justify bailouts for AIG and the banks. "Let us do what we have to so your retirement doesn't evaporate" is the subtle message.

I'd ordinarily agree - but pension funds are getting crushed right now. That's going to have a impact on consumer spending, as well as the retirement age of boomers. This will, in turn, affect the younger generation whose career advancement in many sectors will be blocked, as boomers linger on their jobs. And, the younger generation is already crushed with debt in a way never seen in U.S. history.

Falling stock prices unfortunately have all sorts of direct and indirect effects (just as falling real-estate prices do), even on those who don't themselves own stocks. It would be irrational to pretend that the economy is rational (although many economists do this as a matter of principle) and ignore the real effects of a stock-market crash.

The real fault is in ignoring the unreality of bubble prices. It's almost impossible to make money by opposing or speaking out against upward price trends, as Dean and a few other did. It's past time to recognize that "free" markets are inherently unstable - these things happen over and over and it's part of human nature that people do not learn from such events.

Dr. Baker wrote: The Washington Post told readers that "Stock Sell-Off Spurs Fears That Slump Will Worsen." Among whom did it raise such fears?

It would be a sensible headline if it read "stock sell-off reflects fears that slump will worsen."

I am not near as learned as this author or the other 'posters' here. But I have tried to stress to many Texans that Wall Street and the stock market are the worst place to get information about the economy, since it reflects ONLY what has happened in the past.

i.e. By the time it is apparent in stock market circles the economy is already suffering or growing. They are the last to know.

A believer in diversification of an investment portfolio
(equities, real estate, bonds, cash, in proper balance) may become a non-believer.

"I'd ordinarily agree - but pension funds are getting crushed right now. That's going to have a impact on consumer spending, as well as the retirement age of boomers."

Do that many people really base that much of their spending based on stock returns? If so, isn't it likely to be the same group of people whose (poor) spending habits aren't going to change no matter what happens?

"This will, in turn, affect the younger generation whose career advancement in many sectors will be blocked, as boomers linger on their jobs."

This makes more sense, but again, it helps to have a clear link. Of course, it assumes there are a lot of people close to retirement who are directly competing with people who are fresh in the workforce.

"And, the younger generation is already crushed with debt in a way never seen in U.S. history."

This is a true but, it seems, ultimately irrelevant point. What does the debt of recent college graduates have to do with the stock market?

I've stated this in an unclear way in the past, but Dean has it exactly right. It's not that the stock market has nothing to do with the economy as a whole. It's that it's far from the only, or even the best, indicator of overall health.

irrational pessimism

So, Dean are you buying? I began buying back in September and I am still buying. In the years between 1998 and 2008 there were very few good stock buys. Between 2004 and 2008 there were no good home buys.

Dean, thanks to your insights based on just obvious arithmetic regarding the stock market and its price level that you explained back in summer of 2007, and the likely affect of the then just bursting housing bubble on future earnings as demand slacken, I shifted into Treasuries (at least mostly), and as a result matched Barry Rithholz of The Big Picture's return for client. It stil hurts a little bit, but -10% feels a lot better than -50%. I note the William Pooles, Jim Kramers, and Larry Kudlows of the world, who are so certain that Obama's budget will be disaster, were equally certain in 2007 that the Bull Market would continue onward and upward through the end of 2007 and first half of 2008. And in Kudlow's case right to end of August 2008.

I think "Doc" is right. Over the years, especially as companies reduced or dropped employee pension plans, massive numbers of Americans were "encouraged" to fund their retirements through 401(k), 403(b) and other stock-based investment plans (this probably applies to many/most reporters, and many academic economists as well). It is understandable that they find stock market developments so very newsworthy.

Well, quite a long time ago, Paul Samuelson wisecracked that "the stock market has forecast nine out of the last six recessions." OTOH, the sub-text of the WaPo story is genuinely scary, that the global nature of the collapse is spreading and worsening, and markets all over the world were going down. This fits with the new forecast out of BNP-Paribas that Brad Setser linked to on 2/27 that instead of the relatively rosy IMF forecast of the lowest global growth rate since WW II of positive one half percent, we are probably looking at negative one half percent global GDP growth.

Shag,

The only thing that goes up when the markets go down is correlation.

Rick K.,

Last time I checked, Kudlow has been spouting optimism about the stock market, kind of like Dean here, although he will be fully prepared to blame Obama if his optimistic forecasts are not fulfilled, I am sure.

I'm just a stupid layman, but can anybody tell me in who's pockets are these 120 Bailout Billions going to end? To whom is AIG Insurance to pay out all these Billions? Are these the beneficiaries of all the tax payers cash? Somebody is going to be fcuking rich here...

Barkley Rosser: Does Brenda ever post here? She's my Heroine, YOU Know. I haven't seen her on the net since Max closed down.

Hoi Polloi: NOT YOURS or mine. That money goes to bankers and investors, mostly overseas. To remain solvent they MUST pay off those debts (with YOUR money) to keep the merry-go-round turning. I'm guessing when their losses hit a trillion they'll fold and walk off with OUR 200 billion plus ALL the RIPPED OFF investor money from the last 8+ years.

Hoi Polloi: NOT YOURS or mine. That money goes to bankers and investors, mostly overseas. To remain solvent they MUST pay off those debts (with YOUR money) to keep the merry-go-round turning. I'm guessing when their losses hit a trillion they'll fold and walk off with OUR 200 billion plus ALL the RIPPED OFF investor money from the last 8+ years.

Judging the economy by the stock market is like judging how much gas a Nevada station sells based on how much they take in at the slot machine.

Other than boomers, who would likely be less exposed than 30-somethings like yours truly, or mentally insane if they weren't in short-term reserves,
who was going to touch their 401k any time soon?

The housing bubble deflation, and resetting mortgages, are a much bigger factor than shy gamblers.

Right on. Actually, the bond markets are an excellent meaure of where the economy is. Trends in yields are a pretty good measure of where govt and corporate America think the economy will go. Bonds lead; stocks follow.

Some commenters have apparently got the bizarre idea that Dean is recommending buying stocks, or saying that the economic forecast is other than gloomy. I think the point is that to base economic expectations on the stock market is go into a feedback loop, disconnected from reality. This is not a minor matter - there would probably not be a boom-bust cycle if it were not that economic players act in this irrational way.

The Stock Market is just an enormous emotional Casino and people pay what they think the stocks are worth, between nothing and unlimited based on rumors or the madness of the day.

IMO this speculation is a very disturbing factor for the Real Economy. Look at the price of commodities the last 12 months. The price of steel I pay raised from 800 to 1350 and back to 900 within 10 months.

Crazy stuff which I've never experienced in my 40 years of business

Mike Meyer: very disturbing it is indeed and the more reason to nationalize the bad boys for at least 2 years until everything has been sorted out. Bad for the stock holders, but that's the way it is.

The bank lobby always say that the government cannot run their business but that's just BS.

Hoi Polloi: I'm all for just plain running them through BANKruptcy Court, myself. Either way YOU look at it though, they're still insolvent. BANKruptcy Court would eliminate the need for U&I to pay hard earned cash for THEIR criminal actions.
OT: I'm looking for some 4130 chrome moly 2"x12'x10gauge but will go as thin as 18 gauge. ANY supplier's name would be greatly appreciated.

Mike Meyer,

Good old Brenda Rosser is a co-blogger on the successor to Maxspeak, Econospeak, as am I. I do not believe I have ever seen her show up here.

Barkley Rosser: THANK YOU!

Mike Meyer, re Chrome Moly, since I'm from the EU I would get it from www.legierterstahl.com. Are you in motorsports?

Hoi Polloi: Homebuilt Aircraft actually, I'm building a Bensen Gyrocopter. I carve my own wooden propellers and these rotors will be my largest project. The molly is the actual strength of the pieces.

Hoi Polloi: THANK YOU! 6' lengths IS about all one can find around here. Everyone uses extruded aluminum store boughts. (expensive rotors) I'm using the original Bensen style.

The stock exchanges were, in the beginning, vehicles for crooks to fleece us and they still are. Dump the exchanges, confiscate the ill-gotten wealth of traders and ex-Wall Street chairman Richard Grasso. Where did we get the idea that investors can put money into the stock market and have literally billions simply channeled into their hands and in Grasso's case, $188,000,000 paid to him, for what? Wall Street is a Ponzi scheme anyway. A famous quote from a Newspaper printed many years ago, "What fools these mortals be!" Actually, rather than fools, idiots, is more to the point. We are idiots.