Bernanke presses the panic button
A global stock market sell-off on Monday, followed by a near instantaneous 400-point drop in the Dow Jones industrial average and a whopping three-quarters of a percentage point "emergency" cut in the Fed Funds rate (the biggest single downward slice since 1994) on Tuesday morning, are spurring some discouraging words on the economic frontier, and sparking comparisons with a century's worth of financial disasters.
Monday's stock plunges around the world are already being called "Black Monday," an allusion to the crash of Oct 18, 1987. Economist Nouriel Roubini, who has been preaching doom for years, declares that the oncoming " recession will be ugly, deep and severe, much more severe than the mild 8-month recessions in 1990-91 and 2001." Dean Baker, co-director of the Center for Economic and Policy Research, observes that the housing bust "is creating the largest financial crisis since the Great Depression and might well lead to the most serious recession since World War II."
The Federal Reserve, as usual, is more constrained, attributing its action to "a weakening of the economic outlook and increasing downside risks to growth." And Treasury Secretary Paulson did his best to give the bad news a positive spin, arguing that the Fed's rate-cut "shows to this country and the rest of the world is that our central bank is nimble and is able to move quickly to respond to market conditions. That should be a confidence builder.''
How the World Works has two immediate reactions:
First: Ben Bernanke has proven, once and for all, that juicing the stock market is now considered Job #1 for the Federal Reserve Bank. The material effects of rate cuts do not show up in economic growth statistics for months or even years after their enactment. By making an emergency "inter-meeting" cut a mere eight days before its regularly scheduled meeting, Bernanke is conducting economic policy in order to appease market psychology. The fragile psyches of Wall Street traders who played such a pivotal role in creating this mess by romping through the derivatives wonderland, are now in control of government strategy. That can't be good.
Second: When the "mild" recession of 2001 hit, it was tempting for some to blame George Bush, although fairer minds, no matter how partisan their inclinations, had to acknowledge that, economically speaking, one couldn't pin responsibility for the inevitable fluctuations of the business cycle on a newly arrived President. All one could do is critique how the new president handled the situation. But if the current economic downturn gets anywhere near as bad as some of the more gloomy observers are suggesting, there will be no escaping the verdict of history on this administration. The worst recession since World War II? Just another line on Bush's resumé, highlighted, underlined, in bold and italics.
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