Harder times are coming

Some say the Federal Reserve did just the right thing by cutting the federal funds interest rate Tuesday by an unexpectedly bold three-quarters of 1 percent, and it just might have kept the plunge in the stock market from being deeper than it was.

While the Fed’s move and the president’s “stimulus” plan (if it passes) might ease some pain for some people, they cannot reverse more fundamental forces that will make economic times quite tough for the U.S. economy. If anything, they could make the situation worse by delaying needed corrections.

As Esmael Adibi, who heads the Anderson Center for economic forecasting at Chapman University, reminded us, the Chapman model was predicting in December a mild recession this year. The reason was pretty simple. The problem was housing. Easy credit had allowed many people who had no business taking out mortgages or buying houses more expensive than they could really afford to get into the housing market, pushing prices beyond what was affordable to many Americans of ordinary means. The bubble had to burst, and it did.

That hurt the construction industry and left many financial institutions facing serious exposure — Merrill Lynch and Citigroup reported $20 billion in losses between them. During the mild recession of 2001 most consumers kept on spending because they were able to use their homes as ATMs, but that can’t happen now. Since the U.S. economy is driven 70 percent by consumer spending, it will take time for it to recover.

The best bet is not to go for short-term fixes but to allow the economy to correct itself, even though that will be painful for many people who made bad decisions, some of them quite innocently. Pumping in a little extra money — not enough to fix things — will delay those needed corrections, which are necessary for the economy to begin growing again on a sounder footing. The crisis was brought on by loose-money government policies, and any new government fixes are likely to make matters worse rather than better.