Editor’s Letter: Clamorix for a fix

The story everyone thought would be old news by last November rumbled on through January as more giant US banks fessed up to having shockingly large losses as a result of the subprime mortgage crisis. Merrill Lynch, announcing its first annual loss in almost two decades, went one step further than other banks, writing off the value of some of its insurance against the crisis as it became increasingly clear that the big bond insurers might also be facing a financial meltdown.

The first signs of a different kind of credit crisis have also begun to emerge, with major US credit card companies admitting that more of their customers are falling behind on their payments. This news should hardly come as a surprise, given that the liquidity that was wrung out of the housing market has now all but dried up and the next source of funds that overstretched consumers turn to in order to satisfy the urge to splurge is their credit cards. Unexpected or not, though, it still raises the prospect that the big financial institutions could be discovering yet more holes in their already threadbare balance sheets.

The continuing woes in the financial sector have only increased pressure from investors and businesses on both the US government and the central bank to do somethinganythingto prevent the American economy from skidding into a recession. The US Federal Reserve chairman, Ben Bernanke, who has already shown himself to be surprisingly responsive to investors concerns, leapt into the fray with a virtual promise to slash interest rates and a strongly worded call to the US Congress to approve a stimulus package that would give the listless US economy a shot in the arm. Standing shoulder-to-shoulder with Bernanke is president George W. Bush, who is ready to pass the baton of economic salvation to the trusty American consumer in the form of a $140 billion package of tax rebates.

The theory is simple: Give people more money and theyll spend more, thus staving off a recession. But monetary and fiscal stimulus packages are like a drugan addictive and corrosive drug at that. Bushs previous package of tax cuts and rebates and former Fed chairman Alan Greenspans rate-cutting binge helped fuel the burst of economic growth that inflated the housing bubble and led, inexorably, to the subprime disaster, the effects of which are still being felt today. Instead of accepting the fact that the stimulus has run out and going cold turkey, the markets are clamoring for another short-term fix. With their determination to prevent an economic contraction by persuading Americans to go shopping, Bernanke and Bush are likely to provide just that.