Lessons of a Stock Dive
March 1, 2007
There are several lessons from the stock market dive this week.
One is the obvious interdependency of the global financial markets.
The tumble began in China and then rolled right over the Pacific Ocean to Manhattan.
Used to be that China didn’t have that much influence. But its huge economy has been booming. With its odd mix of Stalinism and cowboy capitalism, it is now susceptible to speculative trading just like we are, even more so. And when it falls, everyone else loses balance.
Another lesson is the Fed’s obsessive concern with fighting inflation rather than with keeping our economy sturdy. It raised interest rates seventeen times from June 2004 to June 2006. Since then, the Fed has kept interest rates steady, though Fed Chairman Ben Bernanke did warn about the risks of inflation in Congressional testimony on February 15, suggesting that he might need to raise rates again. (But when he testified on Wednesday, he seemed less inclined to do so.)
The problem is, the damage has already been done to the economy. The increase in rates has pricked the housing bubble and dampened demand for durable goods, the engines that have driven the economy.
If the U.S. economy descends into recession, as even Alan Greenspan warns about, then Greenspan and Bernanke will have to shoulder some of the blame.
Finally, the risk of recession puts into sharp relief the fiscal idiocy on Capitol Hill.
Politicians of both parties are in the habit of prattling on about the need for a balanced budget.
Republicans do so, after Bush ran up the deficit on war and giveaways to the wealthy, in order to starve social programs.
Democrats do so to score cheap points with the electorate about how they are such good stewards of the public’s money.
But that traps the Democrats when it comes to spending on such vital things as health care, college loans, and anti-poverty programs that are desperately needed now.
And it also shackles them from rescuing an economy that may be sliding into a recession.
At such a time, you need to run a deficit, perhaps even a bigger one, to break the fall.
But few Democrats want to admit that now. It’s too easy, too tempting, just to blame Bush.