Uh, Ben, are you watching?

Wow, Ben Bernanke and the Federal Reserve are playing a very dangerous game with equity markets by dragging their feet with interest rate cuts.

Who does he think he is, Paul Volcker?

Does he realize that one important, inflatable asset class (housing) is now in an irreversible multi-year decline and that another important, and still perfectly mostly good, inflatable asset class (stocks) is following it down?

Along with not only the U.S. economy but now, apparently, the global economy?

Uh, Ben, are you watching?

While cutting off your nose to spite your face may seem like a good plan for restoring the independence and authority of the Fed (which certainly could use some restoration work after the mess your predecessor left), at the risk of severely overloading this sentence with metaphors, this may be a case of where the operation was a success, but the patient died.

This story in The Economist explains:

IT APPEARS to be an old-fashioned case of risk aversion. Stockmarkets are plunging (the FTSE 100 was down more than 300 points, or 5% just after noon in London, on Monday January 21st), commodity prices are dropping and investors are flocking to the safety of government bonds and currencies like the Swiss franc and yen. Speculative bonds now yield seven percentage points more than US Treasuries, the highest spread since April 2003.For some, this merely represents a case of stockmarkets catching up with reality. It is now a year since the subprime crisis first emerged. In that time central banks have cut interest rates, investment banks have announced big write-offs and various rescue packages have been suggested. But the end of the crisis is not yet in sight. Indeed, another leg of the debt crisis may be under way, if problems of monoline debt-insurers (an obscure but important bunch who guarantee the timely repayment of bond principal and interest when the issuer defaults) are not contained. If the American economy is not now in recession, it is close enough not to make a practical difference to sentiment.

For much of past year equity investors knew those salient facts but chose instead to take comfort from three more bullish factors. First was that the Federal Reserve would rescue both the markets and the economy, as it has done so often before. Second, even if the American economy faltered, the rest of the world (particularly Asia) could take up the burden of producing global growth. Third, given the global picture, corporate profits could stay high.

All three assumptions are now coming under question.

To paraphrase David Lereah, the former chief economist at the National Association of Realtors when he spoke of the possibility of a crash in the real estate market a year or so ago, "These are peoples' stocks. Their retirement is depending on them."

ooo

This week's cartoon (sorry, forgot about this yesterday):