Fear and our economy; Thompson drops out

Behind The News
January 22, 2008 1:26:30 PM PST
Fear is a powerful tide. And there's no question that at least some of what's driving the market downward this year is fear. But it's not fear without justification. There's fear about a drop in value of people's retirements funds, of their wages, of their homes (California today reported a 20-year high in the number of foreclosures during the fourth quarter of last year.)

Does this fear and lack of confidence in the economy justify the huge drop we've seen in the stock market since last summer? There is much argument on both sides of that question tonight.

What we know is that the Federal Reserve Board is worried enough that it dropped the key interest rate - the rate banks charge each other -- by three quarters of a point overnight. That's a significant drop --- three times as great as the typical cut or increase in the key interest rate.

Clearly the Fed is worried - but does their worry spark more fear?

The market came out of the chute about 450 points in the red - but then after the Fed action the market rebounded, and the close wasn't nearly as bad as the open. It closed down "only" 128 points, to pass through the 12,000 mark.

This is no small issue; more than 60% of us have some direct ties to the stock market, one way or the other. And nearly all of us feel the impact of the market when it swings wildly, up or down.

The Bush Administration's singular focus on tax cuts as the needed stimulation for a lackluster economy has now drawn the ire of some of the President's fellow Republicans.

Sen. Judd Gregg of New Hampshire, who is the ranking Republican on the Senate Budget Committee, took issue today with the tax cut strategy. "Maybe it stimulates the Chinese economy," he said on the Senate floor, "but I'm not sure it stimulates our economy. That money has to be borrowed. That money is borrowed from our children. Politically it's a great press release: We're going to extend unemployment for two weeks. But it won't allow people to go out and find jobs for these two weeks."

But the lure of having a few hundred extra dollars makes most Americans salivate. Politicians know that. Enlightened self interest, many experts believe, would call for taxpayers saying no thanks to these rebates, and putting the money away for a rainy day, or to cut the deficit, or to ease future budget deficits.

We could have done that with these proposed federal tax rebates; Mayor Bloomberg could have done that with the real estate property rebates of $400. Instead, many experts believe, we are getting short-term pleasure in exchange for long-term financial pain.

Few people would be willing to turn down this offer, alas.

And maybe someone inside the government understands all this. Today, somehow, someone snuck this item into the President's agenda for the day: the establishment of an Advisory Council on Financial Literacy.

Thank you very much.

We'll have the latest on the market, and the Fed's interest rate cut, tonight at 11.

Also at 11, the Presidential race has one less candidate tonight. Fred Thompson, the actor-turned-Senator-turned-actor-turned Republican candidate, dropped out of the race. His candidacy never really got any traction, even though his name being bandied about before he entered the race gave him the kind of exposure and weight he never had once he became an official candidate.

That's the way it often goes.

There are many who believe that Thompson's 14% showing in South Carolina last Saturday helped John McCain win the primary there. McCain beat Mike Huckabee by only 3 percentage points; and experts say Thompson took away evangelical votes from Huckabee.

We'll also have any breaking news of the night. I hope you can join Liz Cho and me, tonight at 11.