The Market’s Echo Chamber

What Cramer and many talking heads offer are selective and sensationalized views that favor short-term conditions and immediate gratification: higher stock prices tomorrow; better trading profits. By these appraisals, the U.S. economy is in dire shape. Who knows? Maybe a calamity lies just ahead. But as yet, the evidence is unconvincing. For all of 2007, profits of nonfinancial corporations were up 6 percent, says Silverblatt. At the year-end, these companies had a hefty $609 billion in cash or cash equivalents, he notes. They are in a strong position to weather trouble.

Of course, the economy has serious problems. We don't live in an economic utopia and never will. By its nature, a market system involves failures. But every problem—even a recession—is not the apocalypse. In the late 1990s, the electronic echo chamber promoted unrealistic euphoria, which fed the "tech bubble." Now the message has swung to the opposite extreme. It's not just that these portrayals, in both directions, exaggerate. They may harm us by encouraging self-defeating economic policies.

The Fed's first responsibility is to maintain a basic price stability—to keep inflation at low levels—because, without that, its other goals of maximum economic growth and low unemployment become impossible. We learned this lesson painfully in the 1960s and the 1970s. Political pressures then to avoid all recessions led the Fed to relax money and credit too much and too often. As inflation rose, the economy grew increasingly unstable. The perverse results were higher inflation, ultimately reaching double digits, and more frequent and harsher recessions. Annual inflation peaked at 13.3 percent in 1979 and annual unemployment at 9.7 percent in 1982.

Unlike financial populists, the Fed should focus on the economy's performance in the next six years, not the next six months. Some economists think that the Fed is already repeating its previous error, now prodded by "market pressures" and the specter of financial panic. If the market constantly demands to be stimulated by lower interest rates and easier credit, and threatens to go into an uncontrolled tailspin if it isn't, then the Fed is in a treacherous position. What the Fed now does to make matters better may make them worse—possibly much worse—in a few years if it leads to higher inflation. This is a real, if easily overlooked, danger.

© 2008