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January 22, 2008

Fed Hits The Panic Button Economy

In Asia, Monday's stock market slide continues. The Fed has hit the panic button, cutting interest rates 3/4 of a point, eight days ahead of its next scheduled meeting. WaPo:

Today's declines in Asia were even more severe than those on Monday, and several markets hit multiyear lows. Indian shares plunged so quickly — nearly 11 percent — that its stock markets halted trading soon after opening. In South Korea, volatile futures prices prompted the main Kospi market to briefly suspend program selling orders at midday. The Australian market suffered its worst one-day fall ever, while Japan's Nikkei fell 5.65 percent to its lowest point since 2005. It is down nearly 18 percent this year.

In Hong Kong, the Hang Seng index was down 8.65 percent today, after dropping 5.49 percent yesterday. It's off 19 percent this year and is 30 percent lower than a peak in late October.

"This is an expression of panic — really nothing less than panic about prospects for the U.S. economy," said Stephen Green, senior economist with Standard Chartered Bank.

Salon's Andrew Leonard has a couple of 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.

There's an old saying on Wall Street that fear is a much more powerful emotion than hope, and more contagious, too. Which is why markets go down much faster than they go up. At times like this, you can think of the stock market as a giant theatre that's suddenly on fire. Except in this theatre, you can't leave your seat until you find someone else willing to buy it from you. When the building's on fire, you've got to slash prices in a hurry to find a buyer. Meanwhile, all around you, other people are desperate to get out of the building, too. Hence the P-word.

Posted by Jonathan at January 22, 2008 11:29 AM  del.icio.us digg NewsVine Reddit YahooMyWeb