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The Developing Economic Consensus

Throughout the week, Clay Risen, the managing editor of Democracy, will be covering economic developments for us on The Plank.

Two points of consensus seem to be emerging among the international finance community. The first is that the Fed's Bear Stearns bailout, impending rate cut, and bank lending program are nice thoughts, but that they can only go so far. With inflation looming, the Fed has only a narrow window for inflation cuts. The loan to Lehman Brothers was big news, but it's unlikely to happen again--even though most people expect there will be more Bear Stearns-like implosions before this is all over. And Ben Bernanke's extension of credit lines to banks and investment firms is a good idea that might only work in theory. Will the Fed really keep lending money if the loans start to go bad? No one seems to think so. And the Fed doesn't actually have to fail for it to lose the market's confidence; it is enough that people think it might fail for them to price those assumptions into the market--and thus hobble, if not destroy, any chance Bernanke has of achieving his goal of financial stability and liquidity, before he even begins.

The second consensus point is that the Fed is only acting because Bush won't. Bernanke himself has already indicated that he'd like to see more efforts by the White House and Congress, perhaps a combination of new regulations and aid to homeowners. But Bush has so far been preternaturally unable to grasp the seriousness of the problem. The current crisis has the potential to dwarf the downturn of the early 2000s, and yet the president's response is the same: tax cuts. Recently, he's been reminding audiences that Americans are about to get $600 tax-rebate checks in the mail. But that's akin to using a shotgun where a laser is needed. I don't own a home, and right now I don't need the money. On the other hand, my friend, who bought a place at the top of the bubble, is hurting. As much as I'd like $600, from a fiscal policy perspective, he needs it more. But that would require more creative, and potentially more activist, governmental steps.

And, as observers are starting to gather, Bush seems to think the rebates are sufficiently strong actions, and that anything more, such as regulation on mortgage lenders, or substantial aid to homebuyers, is pointless. "One thing is for certain--we're in challenging times," he said Monday. "But another thing is for certain--that we've taken strong and decisive action." This being Bush, he's unlikely to care whether most people agree. Unfortunately, the market doesn't work like politics, and it's ironic that the Republican-in-Chief doesn't seem to understand that.

--Clay Risen