Most of the attention inside the Beltway on Thursday was on immigration reform. But the real Perils of Pauline drama was playing out on the markets.
The stock market plummeted on Thursday, posting its biggest one-day drop since 2011, rocked by investor concern that the Federal Reserve is getting closer to pulling back on its stimulus program and by poor economic news from China.
The Standard & Poor’s 500 Index tumbled 1,588 points, closing down 2.5 percent, its worst drop since November 2011. The benchmark index’s two-day loss was the biggest since November 2012, at 3.9 percent. The Dow Jones Industrial Average erased nearly 354 points, closing down 2.3 percent.
This quake revealed the fault line in Ben Bernanke’s Fed policy that has troubled conservatives for years. The problem with pumping liquidity into the markets as the Fed has done with its unprecedented bond-buying is that at some point it has to stop. The phenomenon, commonly referred to as taking the “punch bowl” away, has been particularly worrisome to conservatives since growth and job creation remain so anemic. In other words, what meager growth and recovery we’ve had could evaporate once the Fed stops pumping cash into the economy.
Well, all it took was an observation from Bernanke to send the markets reeling. As the Wall Street Journal editorial board put it: “Chairman Ben Bernanke declared on Wednesday that eventually the Federal Reserve will stop its extraordinary bond purchases, and investors acted Thursday as if it that were a shocker. . . . Central banks can’t keep floating the world economy forever, and our view is the sooner the withdrawal begins the better. But as with all addictions, the withdrawal is going to be volatile.”
It is also about the last thing now that the Obama administration, already in a tailspin from scandals and facing a tough 2014 election season, wants. The president has struggled to convince Americans that we’re in recovery mode, but when the punch bowl is taken away for real, investors and employers may yank back on the reins, sending the economy reeling. Then there will be no disguising the abysmal economic record of this administration.
The obvious counterweight to potential punch bowl withdrawal would be a set of tax, regulatory and trade reforms that would help boost investment and hiring. Prime among these would be substantial domestic energy development. But, alas, the president refuses to do all that, intent as he is in holding tax increases over the heads of any significant deal with Congress.
We are heading toward an economic and political cul-de-sac. The Fed can’t go on forever; when it stops the economy will feel a punch to the gut but the policies that might soften that blow are anathema to the president. This should hardly be surprising. Loose money and anti-growth policies catch up with you sooner or later; the administration is praying it is much later.