The Quitter Economy

Of course, staged events and stunts frequently fail. John D. Rockefeller, who kept his financial affairs to himself, conspicuously invested in stocks after the 1929 crash. "Believing that the fundamental conditions of the country are sound, my son and I have been purchasing sound common stocks for days," he said. (Entertainer Eddie Cantor's response: "Sure, who else had any money left?") Obama's declaration that he would freeze salaries of top White House aides, saving $443,000 in the first year, is less than a droplet in the bucket. What's more, the markets and consumers have become increasingly immune to Beltway reassurance, especially since so much of it has been false.

But some words can carry weight, especially if Obama manages to do what Bush and his colleagues have failed to since the problems started in the summer of 2007: declare a comprehensive set of principles and plans, and follow through on them. "If you want to restore confidence, we have to stop improvising," says Desmond Lachman, resident fellow at the American Enterprise Institute in Washington, D.C.

A strategy is emerging. The stimulus package, likely to be Obama's first significant piece of legislation, will include a mix of traditional measures intended to buffer economic distress and make consumers feel a little more secure (extending unemployment benefits, expanding Medicaid's coverage of children, creating jobs through infrastructure spending and providing aid to stricken states).

But to halt the process of foreclosures and forced sales, to stop lenders from forcing liquidation, more unorthodox measures may be required. In the past year, government backstops have prevented death spirals in several markets that function as the plumbing for the corporate sector, such as the commercial paper market. If the Federal Reserve were to, for example, guarantee DIP financing, it might put a halt to quick liquidations.

There are also signs that government action may be spurring the private sector to put the brakes on foreclosures. Last July, when the FDIC took over failed California bank IndyMac and its huge portfolio of 65,000 delinquent loans, FDIC staffers developed a streamlined loan-modification plan and aggressively reached out to borrowers. The first 8,500 modifications that the FDIC made produced an average of $49,000 more value than if they had been foreclosed—a savings of $23 million for lenders. The FDIC's modification plan is being applied to other cases, most notably as part of the agreement the U.S. government made with Citigroup in late November to backstop $306 billion of loans. "I think we're finally seeing a lot of mortgage servicers coming around to the fact that they can't use old processes to deal with this problem," says Michael Krimminger, special adviser for policy to the FDIC chair.

The private sector seems finally to be heeding one of FDR's maxims: "It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something." Congress is considering a controversial law that would let bankruptcy judges, rather than banks themselves, cut interest rates for homeowners at risk of defaulting—a process known as a "cramdown." In an effort to assure Congress that such measures aren't necessary, some banks have become more proactive in modifying loans. After the success of an early effort last fall by JPMorgan Chase to modify loans, the giant bank announced in mid-January it would step up efforts to include the larger portfolio of loans that it services. The program, targeted to cover a little more than a trillion dollars in investor-owned loans, has slowed the foreclosure process on more than 80,000 homeowners since October, staving off $22 billion in foreclosed properties.

Obama's speech was judged by many to have been a somber assessment of a bleak period, and to have lacked some of the jaunty happy-warrior spirit of FDR. But FDR's first inaugural wasn't full of happy talk. "Only a foolish optimist can deny the dark realities of the moment," he said. And if you read between the lines of Obama's address, you can detect some Depression-era blithe spirit poking through the gloom. "Starting today," Obama said near the end, "we must pick ourselves up, dust ourselves off and begin again the work of remaking America." Fans of the Great American Songbook will recognize this as a paraphrase of Dorothy Fields's lyrics to the Jerome Kern tune "Pick Yourself Up." The song, a paean to self-belief, bouncing back and not giving up—an affirmation of "Yes, We Can"—was featured in "Swing Time," a 1936 confection that starred Fred Astaire and Ginger Rogers twirling their way gracefully through the gloom.

With Matthew Philips and Jessica Ramirez in New York, and Daniel Stone in WashingtonWith and in New York, and in Washington

© 2009