Who Will Save Us This Time?

The

stock market has been dishing out more stiff lessons than a cranky schoolteacher back from summer break. Five months after what just about everyone figured was a bottom, stock indexes are plunging anew. Last week the Standard & Poor's 500 dipped below its April 4 low, and it has now erased more than three years' worth of gains. The NASDAQ and Dow are flirting with their April lows too.

Facing a second consecutive year of losses, thunderstruck hordes of investors have begun to move serious money out of stocks and into bonds, money-market funds and savings accounts. That's not quite the mattress, but as the bedrock of Americans' retirement goals--401(k) assets--keeps withering, you can practically hear the people wail, "Where, oh where, have you gone, Bob Rubin? What, oh what, will you do, Alan Greenspan?"

Never mind that we got into this pickle pretty much on our own with mindless market speculation in pipe-dream Internet stocks. Now that the mess is eating our futures, we need leadership, and it's easy to pine for the days when Greenspan and Rubin, with trusty sidekick Larry Summers, ran the economic rapids so expertly that TIME dubbed them the Committee to Save the World during 1998's Asian financial crisis.

The Rubin question, of course, is not meant literally. Rubin, Secretary of the Treasury under President Clinton, is easily found in his chairman's office at Citigroup, the banking colossus. Fat lot of good that does us. The Bush Administration faces an all-out market crisis and can offer only wavering reassurances from the untested Paul O'Neill, the former Alcoa boss and current Treasury Secretary. And then there's Bush himself, whom no one sees as supremely tuned to Wall Street worries.

Where's the authoritative and accurate all's well that Rubin delivered when Asian economies started rolling over in 1997? A deep understanding of the Street led Rubin to steer Clinton down the path of reducing the deficit and avoiding criticism of the Federal Reserve's interest-rate policies, consistently soothing markets at critical times.

The Bushies have tried to step up. The President, in a halting Friday press conference, admitted that he was "concerned." Oh, great, now we're petrified, went the market response as stocks fell on that word. O'Neill has said he expects normal economic growth of 3% or more next year. But it's not clear he said it loud enough for anyone to hear, much less be convinced.

The issue with Fed Chairman Greenspan has nothing to do with credibility. He's as battle tested as they come and inspires confidence, even if his pronouncements sound mystifying at times. Presumably he'll cut interest rates again, maybe with a surprise move this week. Rumors of a sudden half-point cut briefly infested the markets on Friday.

But even if Greenspan moves aggressively, it may not work. His seven cuts in eight months so far have not packed the needed firepower to reverse this torturous slowdown. Indeed, the folks who listen to Greenspan most carefully--those in the Treasury-bond pits--are starting to give up on a Greenspan solution. In a sign that they expect economic weakness to persist, last week traders shoved long-term bond yields close to a 2 1/2-year low.

Perversely, the bond market's lack of faith in a recovery might just save the day because long-term rates, which bond traders collectively set, carry the most juice. As long rates fall, so do mortgage rates, giving homeowners the chance to refinance and save a bundle every month. Such savings typically get spent, and far outweigh the effects of tax cuts or any other direct step the President might take.

In Bush's defense, the current climate is different from anything Clinton and Rubin faced. The '98 panic was an overseas event that never did reach these shores. And let's not forget that the stock bubble inflated on Clinton and Rubin's watch. Bush and O'Neill are left to deal with the aftermath, and slowdowns that stem from burst bubbles are tough to fix. Ask the Japanese, who are still wrestling with the results of a market meltdown that began 12 years ago.

The U.S. appears to be in no such jeopardy. Already, there are faint signs that the beleaguered manufacturing sector is ready to recover. If bond yields move much lower and tapped-out consumers can get better terms on their debt, a recovery may not be so far off. If we need a hero, patience may be its name. The good news is that a lot of risk has already been wrung out of the stock market. So this is no time to run scared, even though the cranky teacher is back in the classroom and it seems a long time till next summer.