If the Bush administration could choose one day from 2008 so far to live over, which day would that be? We pick last Friday, a day that will go down in history as The Market Day Before the Fed Came to the Rescue.
Let's replay. In real life, our government had been assuring us the economy was doing just fine. Then, after consulting with experts U.S. Treasury Secretary Henry Paulson announced a slight problem and told the American consumer, we'll help you continue to spend. It didn't work. Global markets melted in a vote of no-confidence with that plan. So on Tuesday, the Fed stepped in, cutting interest rates and injecting liquidity into the market as an emergency measure.
But what if, like Phil Connors (Bill Murray), the Pennsylvania weatherman who finds himself repeating the same day over and over again in Groundhog Day, we enter an alternate reality. Pretend that, in an act of proactive monetary responsibility, "Helicopter Ben" proactively cut rates on Friday to avoid the market panic some smelled around the bend. What would this week's headlines say then?
Instead of Tuesday's WSJ top line, "Fed Rate Cut Halts Market Free Fall, But Recession Fears Are Mounting," (Weds. Jan. 23) maybe we'd see "Proactive Fed Restores Market Confidence." Instead of reading "Fears Spark Global Plunge" on the front page of Financial Times, we'd wake to "Global Markets Respond Well." Instead of headlines proclaiming "Americans Have Poor Financial Math Skills", we'd see "President Bush Announces President's Advisory Council on Financial Literacy," which in the real world did in fact happen this week.
Deeper than the headlines is the effect on the psyche of both the investing community and the public at large. Even though the markets seem to be stabilizing, there was likely profound carnage along the way. Did Jane and Joe Jones bail out of their stock portfolio at the low-tick of the market because they were panicked by what they heard on TV? Did some of the already stressed-out financial institutions experience further losses because of the almost unprecedented volatility? On wild trading days individuals generally lose out to professional traders, and the most vulnerable and inexperienced suffer the most pain.
In our alt-reality, the Fed, by moving before a major market meltdown rather then after, would have instilled confidence that the powers-that-be knew what was going on. Judging by how the market responded to the 75 basis point reduction the following week, the markets would have likely rallied on Friday as the ball was passed overseas. Though the impact of SocGen's rogue trader would still have been felt, it would likely have been muted by the exuberance and relief felt as a result of the Fed's monetary leadership. It is in times of uncertainty that leadership matters the most.
In Groundhog Day, Bill Murray reexamines his life and priorities in quest of a desired outcome -- in his case, love. Our nation's leaders, including Ben Bernanke, don't get to do Friday over. But we all can learn from the consequences of our actions. May the 2008 presidential candidates show more thoughtful leadership in their quest to preserve market stability going forward. And may our nation's current leaders stop waiting to act until they know whether or not the groundhog saw its shadow yesterday.