Panic met panic yesterday as the Federal Reserve hastily agreed to an emergency interest-rate cut in time to bring the swooning stock market back to its senses. Now what? Neither the Fed nor the market seems to have the answer to what ails the American economy.
Stemming a vertiginous drop in stock prices was perhaps not a bad idea, if it helps to keep the creeping credit crunch from turning into a runaway, across-the-board recession. It may give inflation a boost upward, and the dollar a kick downward, but if it saps some of the irrational - what's the opposite of exuberance? inuberance? - from Wall Street, that's a good thing.
Yet plenty of critics are wondering where the Fed was, say, a month ago. They think it took too long to wake up to this crisis, and then, when it did, it was responding to a stock market that is not supposed to be its main concern. The Fed's primary responsibilities are to keep inflation in check and to manage the orderly growth of the economy with an eye to employment. Its primary headache at the moment is that much of the credit market has ground to a halt, and the financial institutions that package and guarantee loans are in peril.
Lending of all sorts is way down, not so much because of intolerably high interest rates but because lenders don't want to take the risk. Lowering interest rates, as the Fed has done, may help - some - but likely won't get at the real problem.
Two of America's biggest banks reported jaw-dropping declines in profits yesterday compared with a year ago. It is a tangible symbol of just how bad the subprime mortgage mess has turned out. We fear that, rather than a stimulus, some sort of rescue legislation will eventually prove to be the only option, as unpalatable as that may be - considering that it's the lenders who got the economy into this bind in the first place who will be getting most of the rescue. Of course it won't be called a rescue, but a reform. Either way, a solution is likely to be colossally expensive - more expensive by far than the stimulus proposed last week by President Bush or the rate cut approved yesterday by the Fed. But the alternative might be more red ink than this country has seen in a long time.