Okay, I’m really in no position to voice an opinion about economic things [UPDATE: Maybe I should read this primer], but I’m going to anyway.
From what I understand (and let me repeat the caveat — I don’t claim to have a mastery of this), the reason for the economic jitters and stock market decline is because of the subprime mortgage market. Basically, for years, it was really easy to get lending for a home — lenders didn’t even really bother to check the credit of those who borrowed money to finance (or re-finance) a home.
How the credit squeeze is on, and people are unable to meet their mortgage payments. And the holders of these mortgages now find themselves trying to collect money from people with bad credit — people who should not have been given such gracious loans in the first place. We even see the possibility that home lenders are on the verge of going belly up.
So what does the fed do? It lowers the interest rate. And the market is up 300 points this morning.
But why would the fed do that? Shouldn’t the market correct itself? Isn’t this what the whole Adam Smith "free hand" is about? Companies that lent to credit-risky people should not be "bailed out" in this way — they should be made to learn their lesson and take the economic hit.
Or am I missing something?