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Weighing the Damage

The opinions expressed by columnists are their own and do not necessarily represent the views of

WASHINGTON -- A deepening pessimism is taking root in the American economy as joblessness rises inexorably toward 9 percent, businesses are failing, U.S. exports have tanked, and Wall Street is in a depression.

Billionaire investor Warren Buffet declares the economy has "fallen off a cliff," and sees recovery further off than ever. Economists talk gloomily of a long recession followed by years of anemic growth as the once-mighty global economy shrinks for the first time since World War II.

The administration's plans to bail out failing banks, buy worthless toxic assets, and "jump start" a listless economy now seem tame in the face of a dawning realization that the fierce financial infection is far more systemic than first imagined.

Global economic analysts here now talk of bank failures in the trillions of dollars, dwarfing the rapidly depleting $350 billion in TARP rescue funds that the Treasury has at its disposal. The Federal Deposit Insurance Corp. is raising its premiums on the nation's banks to replenish its shrinking fund at a time when many banks are too weak to pony up more money.

President Obama's honeymoon, if he ever really had one, is being cut short by new criticism from Wall Street, Republicans and Democrats in Congress, and, increasingly, the business community.

Investment strategists complain that Obama dismisses Wall Street's pivotal role in the economy's recovery as he plans to raise taxes on the very investors the country needs to boost stock prices and unlock risk capital to refinance a cash-starved economy.

"The result has been a capital strike and the return of the fear from last year that we could face a far deeper downturn," the Wall Street Journal said in an editorial aptly titled "The Obama Economy."

Leading Wall Street analysts, fearful of criticizing the administration this early, have now begun to speak out more brazenly.

I asked David Wyss, chief economist at Standard & Poor's, the influential Wall Street research and forecasting firm, whether the market's plunge was a sign of no confidence in the White House's recovery plans. He quickly replied, "Yeah, I would say.

"Part of it is they (Wall Street) feel there's no there there," Wyss told me. "They don't have (fully worked-out) plans. They are still in the formation stage. These guys have been there 45 days, but he promised to hit the ground running, and it's more like they landed up to their knees in cement. A lot of the cement was left there by the previous administration, but I don't think Obama has done the greatest job."

There is also a growing belief that Obama is pushing too many domestic-spending initiatives at once, attempting to emulate Franklin Roosevelt's whirlwind 100 days. While the stock market was tanking, the jobless rate was going through the roof, the economy was critically ill, strategic posts at Treasury were unfilled and the White House was holding a seminar on healthcare reform.

"You've got to concentrate on the economy first," Wyss said.

Republicans and some Democrats have also begun to question the "too big to fail" strategy that the administration refuses to abandon.

"We should have a much more aggressive strategy" toward bad banks, "recognizing that they are broken and selling them off," said Brookings economic analyst William Gale. "Alan Greenspan said nothing is too big to fail. In some cases, there is no reason to keep them in play."

There is a more fundamental weakness in Obama's recovery plans -- and that is his decision to use the economic crisis as a means to expand social spending at the expense of needed tax incentives to foster growth and investment.

Economist Harm Bandholz at UniCredit Research faults Obama for doing "nothing to stop the fall in the stock market, nothing directly," adding that "without the stabilization or recovery of the stock market, the U.S. economy won't be able to get out of this recession."

What should the president do? "Cut capital-gains taxes," Bandholz replied.

But Obama and his economic advisers are proposing to raise capital-gains taxes on investors to as high as 20 percent, a move that will cripple the level of capital investing needed to refire the nation's sputtering engines of growth.

Throw in the administration's protectionist intentions to reshape existing trade pacts and restrict future trade agreements, and you have a recipe for slower economic growth in the years to come.

Still, as dark as the economy may now seem, there are still reasons to be bullish in the long term. The American economy remains as resilient as ever, with one of the most productive work forces on the planet. Housing prices are falling along with mortgage rates, and the dream to own a home is still very much alive.

We've overcome wars, depressions, recessions and wrongheaded economic policies before, and we will do so again. We may be down now, but we always come back.

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