Last week’s deal to raise the U.S. debt ceiling in exchange for long-term deficit reduction wasn’t what the doctor ordered to reassure investors. Stock markets around the world dropped sharply today, reflecting fears about lousy economic prospects in the U.S. and abroad.  

How bad was the market slide today?

The Dow Jones industrials fell 634.76 points, the first trading day since Standard & Poor’s downgraded American debt. It was the sixth-worst point decline for the Dow in the last 112 years and the worst drop since December 2008. Every stock in the Standard & Poor’s 500 index declined Monday. […]

The Vix, a measure of market volatility and fear among investors, shot up 50 percent. That was its steepest rise since February 2007.

Investors desperately looked for safe places to put their money and settled on U.S. government debt – even though it was the target of the downgrade Friday, when S&P removed the United States from its list of the lowest-risk countries. […]

“This is largely a flight to safety,” said Thomas Simons, money market economist with Jefferies & Co. “The bond market is really trading off of what’s going on in the stock market.” Money flowed out of stocks and into Treasurys.

Gold set a record. It rose $61.40 an ounce to settle at $1,713.20.

Crude oil, natural gas and other commodities fell sharply on worries that a weaker global economy will mean less demand. Oil fell 6.4 percent to $81.31 per barrel, its lowest price of the year. […]

The Dow was down 5.5 percent at 10,809.85. The sharp drop extended Wall Street’s almost uninterrupted decline since late July, when the Dow was flirting with 13,000. It fell below 11,000 for the first time since November.

The S&P 500 fell 79.92, or 6.7 percent, to 1,119.49. The Nasdaq composite index fell 174.72, or 6.9 percent, to 2,357.69.

Trading volume was the highest since September 2008 and the fourth-highest on record. A total of 9.9 billion shares traded, and about 70 stocks fell for every one that rose on the New York Stock Exchange.

Standard & Poor’s downgraded U.S. sovereign debt last Friday, but clearly investors aren’t worried about the federal government’s ability to repay bond holders.

President Barack Obama spoke this afternoon about the credit rating downgrade and what the U.S. needs to do to solve its long-term debt and short-term economic problems. Click here to read his full remarks. Excerpt:

Our problems are imminently [eminently] solvable.*  And we know what we have to do to solve them.  With respect to debt, our problem is not confidence in our credit — the markets continue to reaffirm our credit as among the world’s safest.  Our challenge is the need to tackle our deficits over the long term.

Last week, we reached an agreement that will make historic cuts to defense and domestic spending.  But there’s not much further we can cut in either of those categories.  What we need to do now is combine those spending cuts with two additional steps:  tax reform that will ask those who can afford it to pay their fair share and modest adjustments to health care programs like Medicare.

Making these reforms doesn’t require any radical steps.  What it does require is common sense and compromise.  There are plenty of good ideas about how to achieve long-term deficit reduction that doesn’t hamper economic growth right now.  Republicans and Democrats on the bipartisan fiscal commission that I set up put forth good proposals.  Republicans and Democrats in the Senate’s Gang of Six came up with some good proposals.  John Boehner and I came up with some good proposals when we came close to agreeing on a grand bargain.

So it’s not a lack of plans or policies that’s the problem here.  It’s a lack of political will in Washington.  It’s the insistence on drawing lines in the sand, a refusal to put what’s best for the country ahead of self-interest or party or ideology.  And that’s what we need to change.

I realize that after what we just went through, there’s some skepticism that Republicans and Democrats on the so-called super committee, this joint committee that’s been set up, will be able to reach a compromise, but my hope is that Friday’s news will give us a renewed sense of urgency.  I intend to present my own recommendations over the coming weeks on how we should proceed.  And that committee will have this administration’s full cooperation.  And I assure you, we will stay on it until we get the job done.

Of course, as worrisome as the issues of debt and deficits may be, the most immediate concern of most Americans, and of concern to the marketplace as well, is the issue of jobs and the slow pace of recovery coming out of the worst recession in our lifetimes.

And the good news here is that by coming together to deal with the long-term debt challenge, we would have more room to implement key proposals that can get the economy to grow faster.  Specifically, we should extend the payroll tax cut as soon as possible, so that workers have more money in their paychecks next year and businesses have more customers next year.

We should continue to make sure that if you’re one of the millions of Americans who’s out there looking for a job, you can get the unemployment insurance that your tax dollars contributed to.  That will also put money in people’s pockets and more customers in stores.

In fact, if Congress fails to extend the payroll tax cut and the unemployment insurance benefits that I’ve called for, it could mean 1 million fewer jobs and half a percent less growth.  This is something we can do immediately, something we can do as soon as Congress gets back.

We should also help companies that want to repair our roads and bridges and airports, so that thousands of construction workers who’ve been without a job for the last few years can get a paycheck again.  That will also help to spur economic growth.

Even if Congress acted on Obama’s requests (it won’t), those proposals are far from the level of stimulus the country needs. By the way, the president still offers nothing to the “99ers” who have exhausted previously extended unemployment benefits.

The president seems unable to recognize how badly his economic strategy has failed. Nationwide polls are showing all-time high disapproval numbers for how Obama is handling the economy. Yet he still emphasizes deficit reduction over job creation. Last week the president and his chief of staff, William Daley, were trying to talk Treasury Secretary Timothy Geithner into staying on, and Geithner (unfortunately) agreed. The president seems overly concerned about the optics oflosing the last member of his original economic team. Or perhaps Obama was worried about demands Senate Republicans might make in exchange for confirming a new Treasury secretary.

Whatever the reason, those concerns shouldn’t outweigh the need to change course. Geithner’s job performance has been inexcusably poor. He was wrong about the need for more economic stimulus, his department hasn’t spent most of the money allocated for housing relief and horribly mismanaged its Home Affordable Modification Program.

Economist Brad DeLong published a good post today:

Stock market down 17% in two and half weeks while the bond market has reduced the yield on the Ten-Year Treasury from 3% to 2.35%, and break-even five-year inflation has fallen from 2.1% to 1.7%. I think that is a very loud wake-up call for Mr. Obama–that it is long past time for him to stop talking about how surrendering to Republicans on long-run spending priorities will bring the confidence fairy who will then gift us with a strong recovery and start actually doing his job. […]

[T]he only strong policy views in the administration’s internal debate mix right now are those of people who were wrong in the summer of 2009.

And when I talk to their staffs, the message I hear is not “we were wrong about how the world works, and are rethinking the issues from the ground up to figure out what to do” but instead “we were unlucky: our policies were good”. […]

In order to properly respond to the situation today they need to forget everything they thought they knew about the world in the summer of 2009 and look at the situation with fresh eyes. I don’t think they have done that. i don’t think they can do that. And yet theirs seem to be the only strong policy voices from people with deep substance-matter expertise that Obama hears[.]

If you were to ask me what thing–aside from the complete and immediate collapse of the Republican Party and the resignation of all of its legislators from both houses of the Congress: if the previous fifteen years had not taught me that Republican politicians have nothing useful to contribute to national governance the last three years would certainly have done so–would most give me confidence that America would surmount this current economic crisis, it would be personnel changes to put qualified people who saw the world as it was in the summer of 2009 into the key economic jobs:

Laura Tyson or someone like her to Treasury Secretary (recess-appointed, acting, whatever).

Larry Summers or someone like him to Fed Chair (recess-appointed, acting, whatever).

Alan Blinder or someone like him to CEA Chair (recess-appointed, acting, whatever)

Christy Romer or someone like her to Assistant to the President for Economic Policy.

Any thoughts about the economy or economic policy are welcome in this thread.

P.S.- Worth highlighting from Obama’s remarks today: “What we need to do now is combine those spending cuts with two additional steps:  tax reform that will ask those who can afford it to pay their fair share and modest adjustments to health care programs like Medicare.”

There’s an agenda to get “fired up and ready to go” for!

The Democratic National Committee, Democratic Congressional Campaign Committee, and Democratic Senatorial Campaign Committee have been on a rampage for months about Republicans trying to take away your Medicare. How do they expect that message to resonate when the president is leading the charge for “modest adjustments” to Medicare?