Congress and the White House will both focus this week on keeping the crisis in confidence on Wall Street from spreading to consumers on Main Street, where it could derail an already fragile economic recovery.
President Bush heads to Wall Street Tuesday to unveil his plan to impose criminal penalties on executives who fudge corporate figures. Meanwhile, the Senate will take up the Democrats' sweeping plan to overhaul the accounting profession. The bill's prospects improved sharply after WorldCom announced the biggest-ever misstatement of profits off by $3.85 billion.
The crisis presents tough challenges for policymakers. Decisive confidence-building steps were easier to find in the late 1980s, when the public was shaken by a spate of failed savings-and-loan institutions. Then the government could bring to bear its tradition of bank-industry oversight. Dealing with today's turmoil in financial markets is a more perplexing problem, experts say.
Still, by aggressively challenging shoddy accounting, Mr. Bush and lawmakers can help reassure the public, even if more scandals emerge, some experts say.
"The risk is that sliding investor confidence takes business and consumer confidence with it," says Mark Zandi, chief economist at Economy.Com, an economic research company. "The longer this drags on, the greater the chance that consumer confidence will start to slide and the risk to the recovery will intensify."
Washington's focus on restoring confidence comes as battered investors, concerned about the war on terror and corporate bookkeeping, drag stocks down. Normally, the stock market recovers from a recession along with the economy.
Even after a rally Friday during abbreviated holiday trading, the stock market opens this week with the Dow Jones Industrial Average down 20 percent from its peak in early 2000, the Standard and Poor's 500 index down 35.2 percent, and the technology-heavy Nasdaq index down a numbing 71.3 percent.
Those numbers help explain why President Bush will be on Wall Street, with calls for tough penalties on fudged finances.
"They have to be very aggressive in prosecuting the offenders. And I think they have to err on the side of overdoing it," Mr. Zandi says. They "have to send a very strong signal, not only to potential investors but to the public."
While Bush takes to the bully pulpit, Congress and large investors are putting their own pressure on Wall Street.
The Sarbanes bill is probably "a good idea," says Andrew Hodge, chief US economist at DRI-WEFA, an economic consulting company. But "more than anything else, it is incumbent on investors to get the information they need.... That process is finally and belatedly under way."
For all the Wall Street gloom, consumers have so far kept their pocketbooks open, although household spending has become a bit less robust. Consumer spending plays a crucial role in the economy, and its relative strength over the past 18 months prevented a mild recession from growing more severe.
The impact of corporate America's crisis on consumers "depends on the extent to which it affects the labor market," says Lynn Franco, director of the Conference Board's Consumer Research Center. At "some of these corporations, it is resulting in massive layoffs. And in that respect, it will affect consumer confidence."
The latest news on the jobs front is not encouraging. On Friday, the government said unemployment edged up one-tenth of a percentage point in June, to 5.9 percent. More important, companies reacting in part to the economic impact of the scandals added only 36,000 jobs, half as many as expected.
"Our biggest concern is that business hiring has not yet picked up," says Mr. Hodge of DRI-WEFA. "If we end up with another jobless recovery, that is probably even a bigger risk than the stock market, in terms of causing the economy to falter."
The White House clearly wants to avoid having the economy dip back into recession as the 2002 congressional elections approach. "I don't believe there will be a double dip," Lawrence Lindsey, President Bush's chief economic adviser, recently told Business Week.
Most forecasters expect economic growth of 2 percent or less in the April-to-June period, well under the 6.1 pace in the January-to-March quarter. For the year as a whole, DRI-WEFA is predicting growth of 2.4 percent.
Meanwhile, consumers are sending mixed messages about their feelings. The University of Michigan Consumer Sentiment Survey in June fell 4.5 points from May, but is still 10 points higher than last fall. And consumers' future outlook is stronger than it was last June, as the economy was slowing.
The Conference Board's index of consumer confidence also fell in June, to its lowest level since February, reversing three months of gains. Still, "current levels are not anything to sound an alarm about" notes Franco, the board's research director.
Washington's job of rebuilding confidence depends, in part, on how much more bad news emerges. "It probably takes a bomb the size of Enron going off every month or two to keep the market down," says Hodge.
The next wave of confidence-busting corporate news could come later this summer, analysts say. The Securities and Exchange Commission is requiring CEOs at billion-dollar corporations to swear under oath in writing that their companies' recent financial statements are correct. The deadline for most CEOs is Aug. 14.