Bad News Isn't Good

Only on Wall Street do people break out the bubbly when they hear that a recession is coming.

That's what happened last week when the chairman and vice chairman of the Federal Reserve allowed how deteriorating credit conditions and declining consumer confidence would slow the economy more than they thought only a month ago.

Normally, you'd think warnings of an impending recession would be bad news for shareholders. But in the perverse mind of a Wall Street trader, a Fed worried about a recession is a Fed that is going to lower interest rates. And, to follow the perverse logic, lower interest rates will revive the housing sector, restart the leveraged buyout machine and reflate the balance sheets of the big Wall Street banks. In short, the correction is over, the bull market can resume and happy days are here again!

The notion that a market bottom has been reached is fantasy -- and a dangerous one at that. There is nothing the Fed can, or should, do to make bad loans good. And whatever good a rate cut might do in slowing the slowdown of economic growth will be more than offset by the higher inflation the cut will spawn, as the bond market is already signaling. The Fed's only role here is to keep things orderly as assets are repriced and the country makes the painful and necessary adjustment to living within its means.

The next time you see Wall Street celebrating the prospect of a recession, just remember: These are the same overpaid geniuses who got us into the mess in the first place.