As the Chinese adage goes, "may you live in interesting times." With the "real" beginning of the new millennium in 2001, things have gotten a whole lot more interesting in the U.S. economy. For the majority of us who have seen our financial wealth take a serious hit, I suspect that we'd gladly go back to our boring, old, twentieth century ways. Especially since we ended on such a high note, riding an economic winning streak of unprecedented length. 

Indeed, for those grown comfortable with the booming growth of the late 1990's, the unwinding of the economy, and especially the stock market, in the last few months has come as quite a shock. In financial circles one often hears that the markets are "broken," and that extraordinary action by the Federal Reserve is needed to get it back on track. 

But from the more dispassionate perspective of the discipline of economics, one reaches a different conclusion. The adjustments taking place on Wall Street, and to a more muted extent, in the economy at large, are evidence that the market is working exactly as it should. We take no glee in that observation, of course, being investors in the markets ourselves. But we take exception to calls for reckless action to prop up the market so that declines will stop. 

The impending signs of a turn in the direction of the stock market have been apparent for some time. But those few forecasters who were bold enough to go on record to predict its demise were so thoroughly discredited by its continued rise that their voices , and even their methods, were effectively silenced. 

The other-worldly nature of stock market growth and personal savings behavior in the last two years has made many longer-tenured observers of the economy wince. Booming growth in valuation of financial assets, fueled by sky-high expectations of future earnings, seemed to almost feed on itself. Price to earnings ratios of the S&P 500 stocks climbed to a 130-year high average in 2000, peaking at 28. They've since fallen to about 20, still well above long-term norms. With the paper values of their portfolios growing, consumers set aside less and less of their income as savings, pushing savings rates negative in 2000, and even more strongly negative in recent months. 

In the real economy, that reduced the price of capital for a wide spectrum of business enterprises to something close to zero. Much has been said in recent months about the valuable lessons that we have learned from the go-go investments made in some now-bankrupt technology companies. Taking nothing away from that, it remains painfully apparent that the economy as a whole invested too much of its scarce capital resources in these ventures, and that prices and returns are now adjusting to reflect that fact. 

The task now for those charged with managing the economy is to provide the stimulus to nurture the economy in the next few months until now-deflated expectations recover. Given the imperfect tools at its disposal, this is a tall order for the Federal Reserve. Let's hope it is up to the job.