The Global Rout

Editorial do WSJ

They say there's always a silver lining. Yesterday there wasn't. Markets around the globe sold off in a chaotic day. The Dow Jones Industrial Average's hair-raising ride ended the day down 512 points. The discernible theme among the wreckage was a generalized loss of confidence in the policy-making role of governments, here and in Europe.

If we had to single out one story in yesterday's events as suggestive of the depth of the desperation it was Bank of New York Mellon's announcement that it would start charging very large corporate and institutional depositors for the privilege of simply holding their cash. When even corporate treasurers are taking their money out of short-term securities and parking it in no-interest cash, you know the big boys are discovering the same anxieties Mom and Pop have known for a year as they ran out of safe havens for their assets.

Nominally, yesterday's rout began in Europe, as it became clear that the latest bailout of its debt-strapped nations isn't working and that the turmoil may spread to Spain and Italy. There is now fear that Europe will slide into recession, which would increase the odds of a United States double-dip.

As market participants sort through the charred tea leaves, they will note that oil prices fell below $89, three-month U.S. Treasury bills are yielding next to nothing, or that even the "safe haven" Swiss government felt obliged to drop interest rates near zero to protect its economy from an overvalued franc.

These volatile details matter, but the underlying problem remains unchanged: The economies of Europe and the United States have arrived at the moment when they no longer have any conceivable hope of being able to pay for the huge public commitments they've amassed the past 40 years. This year's "debt crisis" has been building for decades. European Central Bank President Jean-Claude Trichet finished his public statement yesterday by calling on Europe, for the umpteenth time, to do "comprehensive structural reform."

Here in the U.S. we have just gone through three weeks of arduous negotiations between the President and Congressional leadership over spending, taxes and a U.S. debt ceiling above $14 trillion. The deal they struck hardly qualifies as comprehensive reform. President Obama's primary contribution, after he joined the talks, was to insist that the deal include tax increases, of all things, amid high unemployment and weak growth. A relatively more sensible deal with spending cuts alone was achieved only after House Speaker John Boehner announced he could no longer do business with the White House. Congressional Democrats and Republicans then cut a compromise.

In the wake of the debt deal, liberal economists are now complaining that the downward pressure on spending violates the Keynesian commandment to flood a faltering economy with government outlays.

We've done that. From the first months of the Obama Presidency, billions of stimulus have been injected into the economy, budgeted federal spending has grown toward 25% of GDP and the Federal Reserve has poured oceans of cash into the markets.

The Keynesians have fired all their ammo, and here we are, going south. Maybe now President Obama should consider everything he's done to revive the American economy—and do the opposite.