The leeway the Fed enjoys on the inflation front is particularly important in case of a stock market disaster. But if a massacre gets underway, just as in 1987, Mr. Greenspan is sure to act very quickly. This ensures that markets won't melt down, which in turn rules out one potent source of recession, namely a precipitous unbounded loss of confidence. Still, if the effectiveness of monetary policy is unduly hampered by long time lags, then the levers of fiscal policy can always be put to use. There is a budget surplus waiting to be raided.
Tax cuts burn holes in pockets as households rush out to spend and firms add to the capital stock.
And fiscal policy works fast, since it can always be made retroactive. In fact, there is a race between President Clinton and the Republicans in Congress to see who will offer antirecession tax cuts first. For policy makers living with budget surpluses and without inflation, a recession would be an unforgivable mistake. They in turn carry the potential of a virtuous circle, in that monetary and fiscal policy are free to keep the economy from being accidentally derailed. That feeds back to longer horizons, deeper confidence, higher valuation and better performance.