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Reason Foundation

Is the House of Cards Falling Down?

Anthony Randazzo
August 18, 2011, 1:19pm

Stocks are tumbling down a steep turn in the roller coaster again this morning. Just another day of 400 to 500 point swings in the Dow Jones and 4% losses across the board. The trend suggests this will all swing back up the same degree tomorrow, but who knows

The question at hand, though, is not necessarily what is causing the markets today to tumble (they might be up by the time the closing bell rings), but what is causing the overall turbulence. A few things, but primarily it is the cracks forming and exploding in the facade of the fauxcovery experienced last year. 

The past few years have been characterized by stimulus programs, housing recovery assistance projects, monetary easing, and just straight bribes (i.e. cash for clunkers). America was told this was immediately needed to get the economy moving again and once growth was back on track the private sector would take over. We suggested that the government can not perpetuate economic growth through spending and cheap money, particularly when the problem is an anvil of debt sitting on our chest. 

The recovery touted last year as the success of the administration caused most to believe the worst was behind us. Yes there was talk of a double dip, but the Fed projected good growth at the start of the year, and most economists dismissed the idea of a recession coming back to bite. Now the Fed is so worried about the economy that it is extending monetary policy through 2013—a move so unorthodox that three FOMC members dissented, the first time that has happened in decades. 

What jobs the stimulus did create were temporary—unemployment is still with us. 

What brief economic growth was gained quickly went away—so we're back to those double dip fears.

What we thought was an indicator of economic growth, growth in the financial markets, was just monetary policy goosing stocks and not having any real main street impact—so the house of cards starts to fall.

Going from the big picture back to our present day turbulence, we see the rough ride on Wall Street the past two weeks being set off by a mountain of weak economic news from around the world. Europe tried to bail its way out of a banking crisis the past few years but it just delayed the inevitable. On fears of a weak European economy the global markets have shuddered, and that was felt in New York the days after S&P's downgrade. Meanwhile, bad economic news on the home front—from weak GDP a few weeks ago to bad housing and jobs numbers this week—are depressing State-side investors. Combined it creates a collective gloom as investors rush out of their stock positions that were just play things anyway.

Consider the following just from today:

So are we heading back to 6000? Probably not. But this is not necessarily a time for optimism either. 

Anthony Randazzo is Director of Economic Research

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