Markets from every corner of the globe threw in the towel on Monday, with one of the broadest and heaviest global sell-offs the world has ever seen. And boy oh boy, was it ugly! Remember the battle scene from the movie Braveheart? Substitute stockbrokers in Brooks Brothers for warriors in kilts, and you'll get the idea.
But never fear, investors. Our good pal Ben Bernanke came rushing to the rescue on Tuesday with an unplanned, unexpected rate cut to save the day.
The Fed's move to slash interest rates by the largest one-day amount in years certainly did its job, soothing investors' nerves and preventing what could have been the worst day in the stock market since the crash of 1987. Phew!
That's fantastic, but while the cut certainly pared back the prospects of an all-out market crash, you shouldn't get too ecstatic about the Fed's sudden moves.
Think about it. The Fed is set to meet next Tuesday to discuss what to do with interest rates. Slashing rates seven days early clearly has no immediate effect on the economy's health. Unemployment, inflation, and growth all take considerable amounts of time to produce any noticeable effects. That said, it makes sense to conclude there's only one reason the Fed moved so swiftly to cut rates: They're shakin' in their boots over market turmoil, just like the rest of us.
Perhaps it was bond insurers Ambac
Is this a good thing?
Sure, Bernanke and company undoubtedly had more on their minds than just a stock crash when deciding to cut rates. The state of markets can have a serious psychological affect on consumers' spending habits, and hence the economy as a whole. Watching your portfolio melt away before your eyes rarely makes people want to run to the mall and start spending at Macy's
Tomorrow isn't just a day away
However, when a week becomes too long to wait before taking action, you have to question the Fed's reaction toward short-term events over the long-term health of the economy.
When grouchy foreign markets stomp their feet, and the Fed responds with a Herculean rate cut, I get worried. Such a move puts far too much power in the hands of investors whose current time horizon for success doesn't go much past Valentine's Day.
Cutting rates may be a welcome sign for markets in the coming weeks, but what about the coming years? With the U.S. dollar floundering, and a trade deficit that shows no signs of shrinking, lowering rates without regard for the nation's long-term prosperity could lead to problems that would make a short-term market collapse seem like a mosquito bite. And a market-pleasing rate cut could further increase inflation -- hardly a cozy notion, given the recent rising costs of food and energy.
Don't get me wrong: Bernanke is in one heck of a bind right now, and I don't think anyone else could eclipse his knowledge of the Federal banking system. We've got the right man for the job. All the same, he's still capable of succumbing to short-term market fanfare, rather than keeping an eye on the economy's long-term health.
Suck it up
Recessions happen. They've happened in the past, they'll happen in the future. Constructing interest rate policies around the needs of a greedy and emotional market just to forestall the inevitable won't get us very far.
Don't worry, Ben. We know you have a job to do. We won't get mad about some ups and downs in the next few months, as long as you promise not to set the economy up for failure in the name of pleasing short-term market jitters.
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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. He appreciates your questions, comments, and complaints. The Fool's disclosure policy plans on riding out the storm.