the visible hand

it is the theory which decides what can be observed – einstein

75 bip cut and the market still falling…

Posted by ecoshift on January 23, 2008

A surprise 75 basis point cut in the Fed Fund rate, the steepest one-day cut in central bank history, and the market still falls over 100 points yesterday.  Paul Krugman wonders if the Fed has enough ammunition left to weather the downturn. Some commenters figure this means there’s nothing left to scare the bears out of their shorts if 75 bips don’t halt falling prices. And, the NYT wonders if the good times were just a mirage.

Hint: yes.


Worries That the Good Times Were Mostly a Mirage – New York Times
By DAVID LEONHARDT
Published: January 23, 2008

So, how bad could this get?

Until a few months ago, it was accepted wisdom that the American economy functioned far more smoothly than in the past. Economic expansions lasted longer, and recessions were both shorter and milder. Inflation had been tamed. The spreading of financial risk, across institutions and around the world, had reduced the odds of a crisis.

Back in 2004, Ben Bernanke, then a Federal Reserve governor, borrowed a phrase from an academic research paper to give these happy developments a name: “the great moderation.”

These days, though, the great moderation isn’t looking quite so great — or so moderate.

The recent financial turmoil has many causes, but they are tied to a basic fear that some of the economic successes of the last generation may yet turn out to be a mirage. That helps explain why problems in the American subprime mortgage market could have spread so quickly through the world’s financial system. On Tuesday, Mr. Bernanke, who is now the Fed chairman, presided over the steepest one-day interest rate cut in the central bank’s history.

The great moderation now seems to have depended — in part — on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.

Now, some worry, comes the payback.

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