Dont panic!

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I am trying not to read any significance into the fact that just as I leave The Economist for this shiny new blog at The Atlantic Monthly, the financial markets melt down. Sure, the timing may be correct . . . the market began tanking about a week before my last day, which is par for insider trading deals. But it would be paranoid to take this as any sort of an omen. Wouldn't it?

Not that this is stopping anyone else in the market from looking for inauspicious auguries. Over the last few weeks, I've heard the situation compared to any number of financial crises that preceded really nasty recessions: the 1929 stock market crash, of course, but also more recent debacles, such as Japan and Sweden in the 1990s. Sweden's economy contracted for years, while Japan is only now, just-maybe-barely-we-hope?, pulling out of a slump that lasted for more than a decade. This was very amusing for anyone who owned a copy of Rising Sun, but somewhat less so for the Japanese people.

But for all the ponderous proclamations, the parallels between those economic disasters and our current situation are less than compelling. Don't get me wrong: what is happening in the markets is bad. Very bad. Now is not a fun time to be either a homeowner, or a hedge-fund manager, and from what I can tell I am the only person left in the United States who isn't at least one of those things. The stock market may fall for a longish time, some people will be thrown out of work, and the economy, which has been flirting with recession for quite some time now, may finally decide to go all the way.

But that does not mean that you should start pricing apple-carts or prime spots beneath bridges to pitch your cardboard box. Having a nasty market contraction does not mean that your economy automatically goes down the tubes. It particularly does not mean this in a large, diversified, fully developed economy such as ours.

The dire economic problems in Sweden and Japan, and America in 1929, were only touched off by financial crises. It was central banking errors that turned them into full-fledged disasters. As private markets were collapsing, the central banks kept money too tight. So what had been a temporary situation in a single market spread out in concentric ripples, until the resulting waves had pretty thoroughly scuttled the entire economy.

There were various reasons that this happened. Sweden was trying to defend its exchange rate; America was trying to stay on the gold standard; and Japan . . . well, Japan had a lot of weird reasons for what it did. But none of them apply in America now. Ben Bernanke is known, among those who follow the Fed, as "Helicopter Ben" for famously saying that he'd drop money out of a helicopter onto Americans if more traditional methods for goosing the money supply failed. He's acted pretty quickly to move liquidity into the markets, and pretty clearly stands ready to deliver more if he thinks it's necessary.

Even less appropriate are comparisons to developing countries. We have robust, deep financial markets; an independent central bank; a (no, seriously) fairly modestly sized debt and budget deficit; and most importantly, we all borrow in our own currency. We are not going to turn into [insert developing country that had a financial panic] even if Helicopter Ben falls asleep at the joystick.

So while I wouldn't say you should be exactly sanguine about the mess in the markets, it's not time to panic yet. Save that for the Yankees' pitching lineup.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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