Fed Sounds the Alarm

Greenspan surprises the Street with a rate cut. The signal: Things are much worse than you think.

  • WASHINGTON: Run for the hills. Alan Greenspan astounded Wall Street on Thursday by cutting interest rates by a quarter-point for the second time in less than three weeks -- and without bothering to wait for the November 15 FOMC policy meeting. Delighted traders instantly shot the Dow up more than 200 points in 30 minutes. The index finished the day up 330.56 to close at 8,299.36, its highest level since August. But TIME senior economics reporter Bernard Baumohl says wipe that smile off your face -- this is as close to panicking as Alan Greenspan gets.

    "This was a red alert," says Baumohl. "With hedge funds dropping like flies, the Fed took a good look around at the shape U.S. banks are in, how much exposure they had. And it obviously didn't like what it saw." When banks take too many losses, they stop lending to ordinary people. It's known as a "credit crunch," and it can cut off an economy's air supply. Greenspan means to head that off by giving banks cheaper money to lend for higher profits. Wall Street certainly loves the move -- for now. "I wouldn't be surprised if these gains disappeared Friday," says Baumohl. "Once investors have a chance to think about it, they'll realize that Greenspan may know something they don't."