Have Financial Markets Broken From `Reality'? Many Economists Say Yes
With yesterday's mini-meltdown on Wall Street, the question looms larger than ever: Have the financial markets detached themselves from the "real" economy of jobs, incomes and gross domestic product?</br></br>For many economists, the answer is a fairly resounding yes. And they find it misguided to see the gyrations of the 1998 U.S. stock market as a reliable indicator of either a continued boom or an imminent bust.</br></br>The stock decline is "not telling us a thing about the U.S. economy," said James F. Smith Jr., professor of finance at the University of North Carolina. "There's hardly anything wrong with the U.S. economy today that you can't solve with lower interest rates."</br></br>It's tempting to believe otherwise, of course. It was less than eight weeks ago that the Dow Jones Industrial Average reached a record 9337.97. Optimists saw it as proof of a new economic paradigm. Bolder types concluded, as they had in past years, that the business cycle had been repealed by tremendous strides in technology and productivity, justifying enormous leaps in stock prices.</br></br>Today, just a few weeks later, doomsayers point to the plunging financial markets and the global damage inflicted by the Asian crisis.