Gross: Can Obama's Calming Influence Last on Economy

The first 100 days, tumultuous and full of drama, have been dominated by economic issues. In its first few months, the Obama team has attempted to tackle the massive macroeconomic problems we face (with a huge stimulus package and the broad outlines of a budget) and the many microeconomic issues bedeviling the world's economic engine (what to do about the car industry and the financial-services industry). All the indicators today suggest a sharp turnaround in the right direction. But there are exceptions, and they will present Obama with his biggest challenges over the coming months.

Since coming into office, the president has functioned as a sort of human Valium, a calming influence. Here's a chart of the VIX (volatility index), a measure of how much traders are freaking out. It peaked at 56.65 on Jan. 20, the day of his inauguration. While the VIX is still at an elevated level, the trend line indicates that traders have gradually calmed down. The broader stock market, too, has stabilized, and stands about where it was when Obama came into office. (I guess the idea of an Obama bear market, given so much play on the Wall Street Journal op-ed page and CNBC, is over.)

The signs are overwhelmingly good. According to the Associated Press, 48 percent of Americans now think the country is headed in the right direction, compared with a pathetic 17 percent last October. Consumer confidence, as measured by the Conference Board, seems to have bottomed out and is rebounding. Of course, the positive data points are mostly mood indicators. And government money—in the form of cheap credit, federal guarantees and stimulus funding—is functioning as a mood elevator. But what about the underlying situation in the private sector, where a turnaround is so vitally needed? So far, the data doesn't seem to support the improvement in sentiment. In the first quarter of 2009, we learned Wednesday, the economy shrank at a 6.1 percent annual rate, only slightly less dreary than the economy's fourth-quarter 2008 performance. The nation is still hemorrhaging jobs at an alarming rate. Other metrics, from the volume of global trade to interest-rate spreads (the way the market prices risk), from auto sales to housing prices, are still not providing evidence of green shoots in the shrinking portion of the economy not dependent on the government. And those companies that are reporting rising earnings are doing so largely because they've been successful at cutting costs, rather than boosting revenues.

The one unambiguously positive sign from the first 100 days is that the combination of market discipline, bailouts and the return of intelligent management seems to have warded off further systemic crises. We're still having plenty of failures. Banks have been going under at a rate of one or two per week, but they're mostly smaller institutions, and the FDIC handles those failures with relative ease. The financial sector has stabilized somewhat, and TARP funds are being paid back. Many bankers are desperate to get out from under government supervision by the end of the year so they can get back to what they do best: pay bonuses. (To that end, Goldman Sachs has even forced bankers to abandon Ritz-Carltons for Embassy Suites.) Plenty of companies are failing, but the Chapter 11 process handles most of them with relative ease.

Still, there are several exceptions to these rules. And those will present Obama with his sternest tests over the next 100 days. Thanks to the stabilization efforts, we don't have a banking crisis today so much as we have a crisis of Citigroup and AIG—two institutions whose scale (and scale of managerial screw-up) was so massive that the usual methods for dealing with failure don't work. For the same reasons, we don't have a car-company crisis now so much as we have a General Motors crisis. These maladies require treatments far more invasive and aggressive than economic Valium.

Perhaps Obama's biggest success thus far has been to redefine what economic progress means. Due to the catastrophic events of the second half of 2008—the mammoth failures and sharp downturn—the nation seems to have a new sense of what progress means: not growth but a mere slowdown in the pace of decline; not market gains but market stabilization; not widespread success but an absence of systemic failure.

Of course, the effects of pharmaceuticals intended to soothe jangled nerves wear off. And as they do, the expectations and needs of the patient will change. "I'm pleased with the progress we've made, but I'm not satisfied," President Obama said Wednesday in his Missouri speech marking 100 days. In the next 100 days—and the next 1,000 days—the economy will have to show us all improved results.