The Daily Sandwich

"We have to learn the lesson that intellectual honesty is fundamental for everything we cherish." -Sir Karl Popper

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Location: Boston, Massachusetts, United States

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Tuesday, January 22, 2008

This whole "economy" thing is starting to make me a little nervous

I'm just trying to figure out how scared I should get, is all.

[T]he hyperlinked global markets of the 21st century measure a Fed chairman by his rate cuts, not his ├╝ber-rational reasoning. And when you shock the world with an emergency three-quarters of a percentage point cut in the Fed Funds rate that is larger than anything the U.S. has seen in 23 years, your image as Mr. Calm is bound to take a beating. Wasn't he telling us just a few months ago that the housing bust was "contained"?

Well, that's pretty scary. But no reason to panic, right?

Given the clear connection between Tuesday's rate cut and global market turmoil, it is hard to avoid at least one conclusion. Bernanke has proven, once and for all, that juicing the stock market is now considered Job No. 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.

Does this mean that my horrible fear of a "stimulus package" that bails out the greedy bastards responsible for this meltdown are as well-founded as I'm thinkin' they are? Hardly a surprise, but pretty frightening.

How bad can it get? 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."

Such rhetoric seems to belong to a different universe than that which the Federal Reserve inhabits: Its statement, explaining its actions Tuesday morning, was far 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 what 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.''

Well, that's not terribly encouraging, but at least some people are still keeping their cool.

At a White House briefing for reporters, press secretary Dana Perino confined her comments to noting that the White House did not comment on Fed rate cuts or market fluctuations, but that the "the president's advisers are advising him that they are not forecasting a recession."

Never mind. We're screwed.