We have seen the sharpest falls in stock markets around the world for almost a decade. Billions have been wiped off share prices worldwide. As we have predicted, fear mounted among the financial authorities that the panic could lead to a full-blown recession.

So on Tuesday January 22^nd Ben Bernanke, Chair of the Fed (the US Central Bank) called an emergency meeting only eight days before the Fed’s regular meeting. There he pushed through an unprecedented 0.75% interest rate cut, the biggest for 25 years. Usually the Fed fine-tunes the economy with 0.25% adjustments. Panic indeed!

Bernanke is behaving like a wastrel who, having lost his fortune at the tables, in desperation bets his fur coat in a last throw to get all his money back. This is ironic, for Bernanke made his reputation as an academic critical of his predecessor Greenspan. Greenspan was well aware that much of the boom in the USA since the 2001 was froth, based on the housing bubble. He spoke of ‘irrational exuberance’. But he kept the party supplied with booze for years, in the form of interest rates below the rate of inflation. Now Bernanke has decided to join that party.

Not surprisingly shares climbed on the news. But it’s not all over, not by a long shot. Like Satan in Paradise Lost, capitalism is going “down to bottomless perdition.” Unlike Satan, it won’t be a straight drop. The system will plateau and stage partial recoveries, even though the general direction is down. In fact the bounce after the Fed’s announcement shows the markets’ hysteria and the underlying weakness of the real economy.

• The banks have already written off $120bn in bad debts. That figure could rise to $500bn. Bad debts remain bad debts. They remain written off.
• Profits are down across the board. They stay down.
• House prices are falling. They have further to fall.

None of the fundamental weaknesses have been changed by the Fed’s announcement. It is ironic that the panic began when Bush announced a rescue package to deal with the threat of recession, ‘the markets’ (the rich) realised they had a problem. Bush proposed tax cuts of nearly $150bn to stimulate the economy. That’s 1% of American GDP. The markets reacted – they didn’t think it was enough. So they panicked.

Then Bernanke rode to the rescue. He has cut interest rates to 3½%. Now inflation in the USA is about 4%, about the same as in the UK. In effect they are paying you to borrow money! That should stimulate the economy and keep the party going – if it works.

The problem with easy money is it’s likely to stoke up inflationary pressures in the US. Bernanke’s idea is that Americans will borrow like there’s no tomorrow. So prices are likely to climb. Also the dollar is only held up at its present level by foreigners (particularly the Chinese) buying US government securities. If interest rates fall, they don’t get as much bang for their bucks. They’re likely to pull their money out. If the dollar crashes, import prices will go up and US living standards will be hit that way.

The European Central Bank and the Bank of England are making cautious noises. Sometimes whatever the authorities do is wrong. There are limits as to how far they can fine-tune and manipulate an essentially unplanned system.

Whatever happens on stock markets over the next few days, capitalism has a great ability to make working people’s lives a misery. Let’s make sure they pay for their crisis, not us.