Averting a crisis.(THE ECONOMY)(financial crisis)

THE journalistic consensus of the moment is that we are in the middle of an economic crisis. But it is not clear that we are even in a recession. It is worth remembering that financial commentators have predicted ten of the last four recessions. In the winter of 1995-96, the chatter was about downsizing. Republican politicians accused President Clinton of causing a "middle-class crunch." In 1998 the worry was about "Asian contagion" spreading to our financial markets, and the federal bailout for the hedge fund Long Term Capital Management was supposedly a sign of troubles to come.

The price of housing has been flat or dropping for a year now, and the economy has kept growing. The last few months' worth of jobs numbers have been disappointing, and probably mean that we are having sluggish growth. But the numbers were just as bad in early 2003, and they did not signal a recession then.

The housing bust is in part the result of misguided government policies. Restrictions on homebuilding have made the market less responsive to price signals, and thus more volatile. The Federal Reserve, by keeping monetary policy too loose during the boom, encouraged inflation in that market.

We understand that politicians feel the need to "do something." But what they most need to do is get out of the way of a market adjustment. Housing prices need to fall far enough for people to start buying again. People who cannot afford to own homes should go back to renting.

The Federal Reserve, too, should be careful not to make things worse. It loaned the money for J. P. Morgan Chase to buy out the brokerage house Bear Stearns. That intervention may have made sense as a ...