The stock market plunge that began in earnest last week reflects the market’s belief that we’re not going to recover fully from the recession that began in 2007. As a Wall Street Journal commentator said mid-Monday’s plunge: “The market is pricing in a double dip recession”. In reality, the 2007 recession (caused initially by $150 a barrel oil) never really ended.
Past remedies for recession basically involved nearly free money and Keynesian pump priming to stimulate demand with either borrowed or freshly printed money. The most recent (bipartisan) stimulus effort, nearly a trillion worth of extended Bush tax cuts, unemployment extensions, payroll tax cuts, etc. which Congress and the Obama Administration negotiated in December, seems to have disappeared into thin air, producing a whopping 0.8% economic growth in the first half of 2011 and a July unemployment rate of 9.2%. This Economist analysis argues that the political system has exhausted its remedies for our economic problems.