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Freakouts Without Borders
Today’s market mania – the Dow closed down 391 points – has the rare distinction of being absolutely global: the U.S., Asia, Europe….they’re all freaking out. Thus the headline: Freakouts without borders.
But has anyone stopped to think what, really, is worth freaking out about?
Apparently not. The reason most news outlets (and yours truly) would give is that the “markets” are disappointed with yesterday’s Federal Reserve announcement about Operation Twist. The Fed said it would buy $400 billion of long-term Treasury bonds – the 30-year kind – and it would sell the shorter 3-year bonds.
Why bother? For one thing, the Fed was under a lot of pressure to do something about the dual crises of unemployment or housing, and its only real power is to lower interest rates. So it decided to lower long-term interest rates, which are the ones that influence home mortgages.
The Fed also said that the global economy was stagnating, which is not exactly breaking news
So far, so good. Operation Twist isn’t absolute genius, but neither is it a disaster. As for the Fed’s downbeat comments about the economy: with all due respect: duh. We already knew this.
So today’s stop-the-world-I-want-to-get-off panic about the Fed is particularly perplexing. If the primary complaint about Operation Twist from markets folks was that it was not enough – it was too small a stimulus to save them – what is the point of participating in a giant, out-of-scale overreaction to it? This tempest-in-a-teapot doesn’t seem so much like a market panic as it does a terrible-twos tantrum. (And the “terrible twos” here would refer to the two years since the recovery allegedly began.)
What makes today’s market panic so strange and inconsequential is that nothing fundamental has changed in the economy or the markets in the United States or, indeed, in Europe – except that the Pope met with German Chancellor Angela Merkel.
We know nothing new; the Fed’s action will change very little. In Europe, Greece is still on the verge of default, but that’s no reason for a complete panic. Default is just a technical term that means a missed payment or a broken covenant. But all that means is a painful renegotiation, that can be done in a civilized and orderly way if the European Union wishes it to be. Greece is fully funded for a few more quarters — it hasn’t even used up its last bailout – and a default can be managed.
Yet the scale of the drop in the major market indices is consistent with a significant market disaster. Maybe the “new normal” is just what we used to call the old “irrational.”