See Your $800 Billion and Raise You $7 Trillion

This is $800 billion no one had the day before, and certainly better than a poke in the eye or a 16.6% drop in the price of one's prized asset. That's how much the S&P/Case-Shiller Index released at about the same time said U.S. home prices were down in a year. This represents a $3.3 trillion paper loss on U.S. households' real-estate assets. Also in the last year, the Dow Jones Wilshire 5000 has dropped 41% -- and if we assume that household stock and mutual fund portfolios fared a bit better than that, then they're only down $4 trillion or so. So that's, conservatively speaking, $7 trillion of paper wealth gone up the chimney between investments and real estate. Even if most of that was never more than notional, that's not exactly the sort of thing that will stimulate borrowing, lending or spending.

Speaking of which, real personal consumption expenditures decreased 3.7% in the third quarter according to the revised GDP report, which doesn't even account for the goings on in October. That translates into a $360 billion spending drop on an annualized basis from 2007 levels. And that's a decrease not in credit but in spending, and therefore in revenue, and therefore in corporate profits, creditworthiness and employment levels.

This is what the Fed and the Treasury are up against and on a relative basis an $800 billion credit emission and a trillion-dollar economic stimulus suddenly don't seem so bold. The government has become the universal lender of final resort, and its creditors could hardly be more pleased about this turn of events. The price of Treasury bonds is up, so that a 30-year loan to Uncle Sam now yields just 3.67%, and never mind inflation.

The people now complaining of socialism and warning of an inflation threat seem to have lost sight of the sheer scale of the deleveraging to date and of the credit shock that's finally reached Main Street. The government is moving buckets around the ballroom floor trying to catch the most pressing leaks. And then it's hauling them back up the stairs to refill a cracked bathtub.

The stock market, at least based on its druthers today, seems to know the score. It reserved the bulk of its early enthusiasm (don't look now) for the banks, retailers and home builders who should benefit most from the federal credit spigot, while lightening up on most everyone else. The infrastructure builders in line for some government orders are up. But Hewlett-Packard, Sony, Research in Motion and Electronic Arts are all signaling more pain for the consumer.