Well, we survived Black Tuesday.
Depending on how you look at things, this was either a non-event and just another down day in the markets, or perhaps it was more than that.
- The main bloodletting was put off due to the Fed’s emergency 75bp rate cut before the markets opened yesterday. This emergency rate cut (the first since just after 9/11) has been billed as a ‘once in a generation event.’
- Normally, when the Fed cuts rates even by just 25bp (i.e .25%), the markets usually surge ahead. In this case, we have an emergency rate cut of .75% and the markets reward us by ‘only’ losing around 120 points.
- We got into this mess in part through extreme cuts to the Federal Funds Rate fueling inflation and risky loans and general greed. The rate hikes that were designed to slow the economy down and rein in inflation have helped cause even more problems, and we are now trying to fix them by slashing rates again. This may very well trigger another round of debt expansion, but it will also cause inflation and higher prices for most everything sooner or later.
- We’ll have more problems over time as the housing market continues to worsen. If we use most of our ‘bullets’ now, what will we do when things really start getting ugly?
Asian markets have responded positively today, but European ones don’t look to be following suit, and the Dow is opening down as well. Yesterday wasn’t a catastrophe, but the US government took drastic measures and only managed to slow down the losses. People can argue about whether the US has entered a recession yet or not. What seems obvious to me is that we have yet to experience any real discomfort, but that’s coming.
Those in power who control finance aren’t all-knowing, but they’re not idiots either. They’ve got to know that the proposed ‘stimulus’ packages are short-term, temporary fixes at best and will do nothing to solve the major problems our economy faces. This makes me wonder if they have long-term plans identified, or if they are simply kicking the can down the line until 2009 when a new president gets to deal with things. Any major fixes to the economy will be accompanied by pain, which most Americans won’t voluntarily accept. In the amoral calculus of high-level politics, maybe some policymakers have already figured things out to one degree or another, figured out that there’s no realistic way to implement things without major upheaval, and are willing to let things collapse in order to make the public amenable to the new ‘solutions’ they will provide?