The Reaction: What was left on the cutting room floor

By Carl

I'm struggling with how to characterize the jitters of the market and the surprising (if feeble) news out of the Federal Reserve this morning.

On the one hand, I can't recall a moment in history when the US had this much warning of a total meltdown in what many of the uninformed take to be the economy: the New York (and other) Stock Exchange. Stock exchanges tend to be lagging indicators of the economy, tho, so the steep drops we've been experiencing are echoes of what's really going on in the commercial sector of the country.

On the other, I can't recall such a feeble response: a stimulus package that actually might harm the economy longer term, as well as a ~~pissant~~ rate cut of a three-quarters* of a percent in the prime rate.

The tax cut and rebate package on the face of things sounds like a pretty good deal: put money immediately back in the hands of taxpayers, while giving businesses a break on their earnings.

The administration doesn't seem to get it. This is not a temporary economic correction, this is a full-blown recession that's teetering (if not already fallen) on the brink of depression.

If we take Paulson's words at face value, and assume he's just talking things up to avoid panic, well, a) he's not succeeding too well, based on the futures market as of 9:15 this morning, and b) we'd like to think that behind the scenes, there's some furious activity to fix things quickly.

There's some evidence of that, but it's easy to infer there are some major obstacles to creating an effective response.

Rumours on the European markets are that the Federal Reserve cut is the first of a series of central bank rate cuts, primarily in Europe, to be announced. Could be. As I said, I can't recall any emergency rate cuts in my lifetime. It would be indicative of a collaborative effort to announce the US rate cut before the others are announced.

The problem for Europe, however, is they've actually been raising their central bank rates in order to stem inflationary pressures. A cut now would send a very mixed message to their markets.

The Fed's three-quarter-point rate cut serves only to aggravate the markets here. They will open down about 300 points, and investors were expecting (funny how yesterday, there wasn't even the merest hint of a rumour of a rate cut, and now suddenly, they were "expecting"?) a half a point cut.

Not that any of this will really make a difference, of course. While credit markets are tight, it's not because interest rates are high, it's because the markets are terrified of the outcome of the mortgage default crisis. You could lower the discount rate to zero (a prime rate of 3%), and banks still wouldn't lend.

Asia is in total meltdown already, which means that China is experiencing its first market crash. There's no way of telling what response Beijing will make. This side note is a way of saying, "Gee, I sure hope they don't start calling in their chits on the American economy!"

The Bush legacy seems to be even further in the hole. His Hail Mary pass of a Middle East settlement is in disarray, and his one hope for any positive news was four years of relative economic strength. Not Clintonian, but Bush would have been able to point to positive growth, especially if you look at the last five years of his administration only.

Alas, even that slim margin of growth has been squandered, along with several hundreds of billions of dollars in Iraq and trillions domestically. Had we not had tax cuts of the severity that Bush insisted and the Republican Congress lapped at like Tommy Lee on Pamela Anderson, we might have some programs in place already to deal with the problems ahead.

Instead, we squandered like a drunk sailor on shore leave with a stolen credit card. Hey, the rich sure as hell won't ever have to pay these bills back, why should they care?