This morning the Fed announced a surprise rate cut of 75 basis points, the biggest cut in 24 years.  Yet the stock market nosedived anyway, with the S&P 500 shedding 1.1% during the session, bringing its total losses to 10.75% for 2008.  The Fed is finding that it has lost control over the market:  If it stays pat, investors gripe about a credit crunch and stocks plunge, while if it cuts aggressively, then investors assume things are worse than they realized and rush to Treasuries.

Although one sympathizes with Ben Bernanke—after all, it wasn’t his fault that Greenspan handed him an economy rigged with ticking housing and mortgage bombs—the harsh reality is that the Federal Reserve can’t create prosperity.  Strip away all the pomp and glamour of “open market operations” and the like, and we’re left with the simple fact that the Fed creates money out of thin air.  This power allows it to give a gentle nudge here and there to make the economy appear prosperous, but ultimately green pieces of paper (or electronic deposit entries in the Fed’s computer) don’t create real output, wealth, or prosperity.

The U.S. economy is showing many dangerous parallels to the dark days of the 1970s.  During 2007, consumer price inflation was 4.1 percent, the highest it’s been in 17 years.  The dollar is near record lows against the euro and a basket of foreign currencies.  Gold and oil prices, expressed in dollars, have set all-time record highs in the past few months.