A Crisis of Confidence
The Federal Reserve Board may not wish to create the moral hazard of solving problems for investors who made bad decisions. Investors have to pay for their mistakes--yet the Fed cannot allow the crunch to get so severe that it imperils the nation's entire credit system.
Not all panics necessarily lead to economic downturns. But in this mood of uncertainty, confidence in the markets can deteriorate to the point where it mirrors the old Wile E. Coyote cartoon in which he thinks he has been running on solid ground but then comes to see he has passed over the edge of a cliff.
The Fed's lowering at the discount window will help the financial markets, but what remains to be avoided is an economic downturn. John Maynard Keynes, the greatest macroeconomist of the past hundred years, once famously said, in effect, "In the long run we are all dead." Wrong. In the long run, we will all survive and flourish; in the short run, we can be dead. That is what the central banks of America and Europe must prevent.
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