The most important sentence I heard last week came from Mark Zandi, the noted economist who has been advising both political parties on the economic crisis. “The difference between a recession, a very severe recession and a depression is a lack of confidence,” he said. It is a troubling thought, even though it’s not at all controversial.
Most of the press coverage about the U.S. Government’s response to the crisis thus far has focused, appropriately, on what is being done. Is the stimulus big enough? (Paul Krugman, along with a bunch of other economists, including Zandi, says no.) Is the U.S. Treasury acting fast enough to deal with the credit crunch? (A rising Libor index, which measures interbank lending, and the continuing rush to government issued bonds, suggests no.) But these policy issues are small compared to the impact they have on the nation’s psyche. Confidence is the ultimate thing that will either save us, or doom us.
In other words, even if the toxic banking problem was solved tomorrow, and the stimulus was big enough to rebuild every bridge in America, none of it would matter much if you stayed scared, if you remained worried that you could be laid off tomorrow, or if you started padding your mattress with $100 bills. The reverse is also true: If the credit, contraction and employment problems continue for the foreseeable future, but the American public maintains its confidence in a coming recovery, then the damage done will be considerably less severe. I say all this by way of introduction to the most important interview that will be conducted today, a CNBC sit down with Warren Buffett, who remains flabbergasted by the change in consumer behavior. His, er, money quote: “Fear is very contagious and I’ve never seen the consumer, or the Americans just generally, more fearful than this.” Watch the whole thing here. The discussion gets going at about four minutes. [Update: A transcript of the interview is here.]
If Obama has a single task before him, as the most celebrated communicator of his generation tasked with leading the economic recovery, it is to temper this rising contagion. Good speechs will not be enough. He will, over time, have to find a way to calm the markets, address the concerns of his responsible critics, and then use these successes to assure consumers everywhere that better days do, in fact, lie ahead, a claim that virtually every economist would endorse, though many disagree on the timing. Obama may be just the man for the job. (I can’t really think of anyone else up to the task.) That is the hope, at least.