WASHINGTON -- The fear and hysteria that gripped financial markets last week was, in Yogi Berra's legendary words, deja vu all over again.
The decline in the housing market and the troubled subprime-mortgage industry has been hanging over the U.S. economy for more than a year now, but with little impact on its fundamentals. Yet it keeps flaring like a bad virus - periodically striking Wall Street with body aches, chills and fever until the illness runs its course.
A recent flare-up occurred in August, at the end of a strong run-up in the stock market, sending the Dow Jones Industrial Average below 13,000. However, it wasn't long before Wall Street recognized that the sun was going to come up the next day, businesses would still be open and people would be going to work -- and the market resumed its upward climb, heading toward 14,000 once more. While Wall Street was calling in sick, no one had told the U.S. economy that it should be feeling just as ill. Instead, it grew by an astounding 3.9 percent annually and was hurtling toward its 50th consecutive month of uninterrupted job growth and continued full employment.
But the financial bellyachers who always see a recession just around the corner were back again last week, warning that the economy was in bad shape and that we were about to plunge into a recession -- really.
This time, though, it wasn't just the housing and credit crunch disturbing the worrywarts. Oil was spiraling toward $100 a barrel; the dollar was falling in overseas currency markets; and several financial giants that had invested heavily in subprime paper were in the hole by billions of dollars.
All of that, fed by a hyperventilating financial news media, sent the stock market into a sell-off swoon last week and the Dow plunged below 13,000 as of Monday.
But as the markets settled down this week, things did not look quite as gloomy as the week before. By Tuesday, the dollar was showing tentative strength again. The price of a barrel of oil fell from its lofty level on the news that Saudi Arabia was about to increase its production in order to bring prices down a bit. And bargain hunters (many of the same people who drove down stock prices) were buying back the stock they had sold the week before.
Consumer confidence has plunged during this period, largely driven by the relentlessly negative way economic news is reported to them. Much of this insecurity is based on beliefs that are not true.