Tough times at auto dealers

And now a look at last week’s economic news:

Unemployment claims were up and rising. Consumer spending was down and falling. You could shoot a cannon through a lot of new-car showrooms and not hit anyone. General Motors, once the symbol of the American industrial economy, announced it might run out of cash by year’s end.

The Treasury secretary announced that he’d changed his mind about how the government should be spending that $700 billion in financial bailout money. The Dow Jones industrial average plunged on the news, then rose after traders realized the original plan wasn’t working anyway. The government announced that one month into its new fiscal year, it already was $237.2 billion in the red; forecasters suggested the budget deficit would easily blow past $1 trillion for the year.

Meanwhile, leaders and finance ministers from 20 of the world’s industrial and emerging nations, including the European Union, gathered in Washington this weekend with an eye to doing nothing less than remaking the world’s economic system.

That was one week. And those are just the headlines.

Ten days ago, Kevin M. Warsh, a member of the board of governors of the Federal Reserve, gave a speech at New York University in which he said, “We are witnessing a fundamental reassessment of the value of virtually every asset everywhere in the world.”

What started with the subprime mortgage crisis has devolved into a far more basic problem: What is everything worth? What is anything worth? A fundamental law of market economics is that something is worth what someone else is willing to pay for it. If people aren’t buying, value is called into question. The more people don’t buy, the more fundamental the problem becomes.

So when Treasury Secretary Henry Paulson announced Wednesday that the Troubled Assets Recovery Program set up to spend the $700 billion bailout fund would not buy “troubled assets,” it landed like a bombshell. It shouldn’t have.

Congress passed the bailout package in a mighty rush with little debate and knowing few details. The idea was that “what” and “how” were far less important than “when.” Financial markets would be so assured that the government was bailing them out that confidence would return, and with confidence would come stability.

Some $350 billion into the program, with the government buying up stakes in banks by taking over troubled assets, it turns out that “what” is important after all. With no value assigned to these assets, no one knows how to extrapolate value. Uncertainty continues.

So Mr. Paulson announced that the bailout program would concentrate on shoring up financial institutions that offer consumer credit: credit cards, college loans and loans for goods and services, the value of which is easier to calculate. That money gets into the economy faster and puts a floor under many commodities.
At least that’s the hope.

The G-20 nations meeting in Washington this weekend will take the next steps, and no doubt they will be faltering. The developed world already is in recession; when the problems hit the undeveloped world, recession becomes calamity. The industrialized nations must bolster the International Monetary Fund and World Bank.

But they also must resist the temptation to turn inward, no matter how great their internal economic turmoil. The world’s finances have become wholly interdependent. National banks must continue doing business with other national banks under new rules governing bank stability and risk. Banks need to know and share common assumptions about the value of assets and the assessment of risk.

The crisis comes at a parlous time for the United States, midway between two administrations that have very different views of the world. Somehow the Bush administration and the Obama administration-to-be must speak with one voice. Never has presidential transition been more important. Next week’s news could be worse.