Brad DeLong�s suggestion that there is no new news in the news but merely the playing out of trends we knew were underway months ago may be true in the way that the news that a man drowned in a river whose average depth was 1 inch is true. It isn�t that what he said was untrue, but that what is omitted and left unsaid may be more important. DeLong�s observations that we have had advanced notice that things were bad and on their way to getting worse are true but incomplete. [He could just as easily have pointed to other periods. For example, from the summer of 2007 when the financial crisis became widely recognized to the Bear Stearns collapse in March, 2008, or the period between March and early Sep, 2008 when the stock market traded within a trading range even though there was increasing evidence of a growing financial crisis.] The major thing left out is context. Context includes not only what is known but also the way it is interpreted and what we think it means. For example, historical context involves not only the unfolding of historical events but also the way people living in a particularly historical situation understood what was happening and the way they responded to that understanding. A particularly important aspect of context is the expectation people have about where things are going. For example, in 2007 and 2008 both the Treasury and the Federal Reserve were way behind the curve in recognizing and responding to the financial tsunami bearing down on the U.S. and world economies. They were slow to acknowledge and slow to act around the intertwined deterioration in the residential housing market and the growing problems in the financial system. Consequently, the messages they delivered and the interpretations they offered the public were misleading rather than clarifying. Whether this reflects a critical misunderstanding of what was happening or a deliberate miscommunication in an attempt to keep public sentiment and consumer confidence more upbeat, the effect was to create expectations at odds with what was actually happening. The mismatching of expectations and realizations produces reactions, not unlike the seismic shifts of earthquakes. They provide sharp corrections and reorientations. By late 2008, we had already gone through enormous disillusionment. The TARP program, which supposedly was going to save our financial system, was presented as a costly but absolutely necessary remedy. Significantly, it was a rush job with no testimony before Congressional committees besides Fed Chairman Bernanke and Treasury Secretary Paulson. The situation was not unlike The Story of Chicken Little where an acorn falls on Chicken Little�s head, but the story was interpreted as �the sky is falling� and further elaborated into a policy response: �we should go and tell the king�. The understanding of the TARP program, which was initially accepted as bitter medicine that had to be taken to cure the financial crisis, but later came to be seen as a wasteful squandering of money and time in a misdirected and largely ineffective program, changed significantly and resentment toward it grew significantly. Like an unfolding crime scene, the facts of TARP didn�t change, but the discovery and disillusionment that occurred as they were discovered and reinterpreted had a major impact. One of the casualties of growing disillusionment around TARP may have been the Bush administration�s failure to propose and support an economic stimulus program, which Brad Delong mentioned. Another may have been the TARP program itself, since it pretty much went into hibernation half way through its $700 billion budget. Both of these are examples of the huge political failures: the failure to acknowledge the severity of the economic crisis and the inadequacy of the steps taken to address it, particularly going into elections. As more bad news accumulated, the context around that news began to shift from �the government and the Fed have things under control� to �these guys can�t be trusted to address the crisis�. Taken together, they contributed to a climate of disillusionment. Though some may have held out hope that a new Obama administration would have a fresh start and could better address the growing financial and economic problems, the shift in context toward greater disillusionment contributed to a situation in which news would be interpreted more skeptically and pessimistically. After the elections, the news flow became more negative or more realistic. The context of understanding shifted toward realization that we were in a severe financial crisis that was compounding a snowballing recession. Significantly, the comparisons used by the financial media to describe the economic contraction changed. From the worst recession since the early 1980�s, to the worst recession of the postwar period, to the worst since the Great Depression, these shifts in reference marked shifts in context that changed how people were interpreting the news and how they were changing their expectations about where things may be headed. The post-election disillusionment can be measured by the dramatic decline in the stock market. From Nov 4 to the November 20 low, there was a 25.2% decline in the S&P 500. Since that represents about 46% of the total market decline from Oct 97, it is fair to ask what did the market learn in that two week period that made it worth 25% less? What it learned was not that there was a continuing deterioration of serious financial and housing crises both of which were spilling over into a worsening recession � that we already knew. What it learned was a major disillusionment around the handling of those crises. While the unfolding economic news was generally worse than expected � a reflection of the slowness of analysts gradually revising their expectations from optimistic and hopeful to pessimistic and fearful, the bigger news has been major political disillusionment. Another marker of that sea change was Timothy Geithner�s Feb 9 release of the Treasury Department�s Financial Rescue plan. Though in one sense it did not present major new news, the impact of Geithner�s �no news� speech on the financial markets was enormous. Why? Because it disappointed hopes that Geithner would present a long-awaited solution to the financial crisis and multiplied political disillusionment. The reaction to a significant change in context can be huge because it changes not only the way news is interpreted going forward but also the way history is viewed retrospectively. The Geithner speech undermined historical expectations that the new Treasury Department would mark a significant improvement from the acknowledged failures of the Paulson Treasury. So the reaction to the news is magnified by having to undo and replace earlier more optimistic expectations with a more grim view of where we are and where we are headed.

Delong makes the obvious point that a big ship takes a long time to turn. We didn't start trying to turn the ship until late February, so we shouldn't be surprised that it isn't turning in early March. If it's not turning by July, then we should be concerned.