Quick Fixes

The market didn't fall as far as it might've, and Asian markets seem to be bouncing back as a result. Was it caused by the Fed's unexpected three-quarter point rate cut first thing this morning, before the markets even opened? Could be. It's the largest cut since 1984, and you don't make that kind of move hoping it won't be noticed. Of course, it was unexpected because the Fed doesn't actually meet until next week, so count on more rate cuts at that time. That can make us feel better about the short term (or it might not), but we've still got some basic problems in the economy that won't go away so easily. A couple of posts from TPM Cafe help illuminate the problem. First, here's Jared Bernstein:

Global financial markets have been tumbling recently based on a number of factors:

--they too are holding bad debt related to our mortgage crisis. The Bank of China just disclosed that the might have to write off $8 billion more in bad loans;

--they’re worried about an American recession. Contrary to the theory of the "great decoupling," globalization has made markets more, not less, interdependent. Foreign markets are betting that the US consumer is unlikely to continue to financing their expansions.

--the weakening dollar means diminished US demand for exports, because they are now more expensive to us.

All of this adds up to greater uncertainty about what's ahead, and that's spooking markets here and abroad. Each week, market players and policy makers keep expecting to hit bottom, only to find some new, deeper problem surface.

Dean Baker provides a little bit of history:

The cause of the chaos is no mystery; the housing bubble is bursting.

It was easy for any competent macroeconomist to recognize that the housing market was in the midst of an unsustainable bubble. By its peak in 2006, the run-up had generated more than $8 trillion in housing bubble wealth. It was inevitable that this bubble would burst and wreak the sort of havoc that we are now seeing.

The housing bubble was allowed to expand to such dangerous proportions because the Fed was not run by a competent macroeconomist. It was run by Alan Greenspan, who used to be the greatest central banker of all time. Greenspan did nothing to stem the growth of the bubble. In fact, he encouraged its growth by recommending that people take out adjustable rate mortgages. He also dismissed the views of the competent macroeconomists who tried to warn of the bubble, assuring the markets that everything was under control.

Fed cuts don't really address any of those issues. Will the upcoming stimulus package do any good, or do we just have to ride the recession until it works itself out?