Darker Days Ahead?

Think the last few days have been bad for Wall Street and the rest of the world's markets? Hang on, things are probably going to get worse, says Robert Reich, President Clinton's former secretary of Labor and author of the recent book "Supercapitalism: The Transformation of Business, Democracy and Everyday Life." According to Reich, who currently teaches public policy at the University of California, Berkeley, the United States might even be headed toward a depression.

NEWSWEEK's Arlyn Tobias Gajilan talked to Reich about the Fed's surprise rate cut Wednesday, the "D word," the growing criticism of Federal Reserve chairman Ben Bernanke and whether a stimulus package will include $500 check for each American. Excerpts:

NEWSWEEK: Many investors had hoped for an interest-rate cut, but this cut's size and timing took people by surprise. Were you taken aback by the Fed's three-quarter basis-point cut, the largest single-day reduction in the Fed's history? And do you think it's necessary?
Robert Reich: Yes and yes. The Fed is clearly becoming aware of the serious potential of an economic meltdown. The size of the cut is larger than anyone expected because the Fed usually moves in [increments of] .25 or .50 percentage points. But the danger of a cut this size is that it may panic the investors. They may conclude that the Fed has determined that the economy is even worse than assumed and that there is still a way to go before we hit bottom. Yet the Fed has to [cut]. Credit markets are still uncomfortably frozen, and the housing slump continues to worsen.

Unlike Ben Bernanke ,  Alan Greenspan had a habit of hinting at what his next move would be. While he kept investors on their toes, Greenspan rarely acted as unexpectedly as Bernanke did this week. Is it dangerous for a Fed chairman to surprise the market?
Yes, but I don't believe Bernanke wants to surprise the market as a general rule. This strikes me as a major exception to the relative transparency he's trying to achieve with regard to letting the market know where the Fed is going. It's a move that underscores the seriousness of the current economic problems.

Tuesday's rate cut initially caused a huge market swing, with the Dow, NASDAQ and the S&P 500 all hitting 14-, 15- and 16-month lows respectively. But by the end of the day, all three had bounced back considerably. Does that mean the cut is working?
The fact is that no one knows anything. Investors are flying blind. Even experienced Wall Street hands have no idea whether we're near the bottom. We can expect even more violent swings in the stock market. The reason for all the uncertainty is that the big banks and lenders simply have no idea how many bad loans they're holding. [During the housing bubble] credit markets evolved such complex ways of reselling and repackaging debt that even many top Wall Street professionals simply have no idea of the risks and costs they're involved with. The bottom line is there is a great deal of uncertainty out there, and the markets hate uncertainty.

Can we expect another rate cut at the Fed meeting next week?
Yes. I wouldn't be surprised if the Fed cut another quarter point. If it doesn't announce something at its meeting, it may cut .25 or even .50 within the next month or so. They are clearly worried. [And while lowering rates may cause] inflation, it is far less threatening now than a recession or perhaps--and I cringe at using the word--a depression.