Measures Against Malaise: How to keep the good times rolling.

A growing number of observers say that we're in for a prolonged period of tough economic sledding: The NASDAQ has wiped away $4 trillion of wealth, and the rest of the stock market is being hammered as well; consumers and corporations are up to their eyeballs in debt; the rest of the world looks blah or even bleak. We went on a binge-dot-coms, this time-and now we are suffering the inevitable, head-splitting hangover.

Hogwash. The doomsters will be right only if we make major policy errors. If the correct steps are taken, we should see the markets rebounding by fall, and the economy expanding smartly by the turn of the year.

The principal villain at fault for these storm clouds is the Federal Reserve. From the summer of 1997 to the summer of 1999, the Fed inadvertently embarked on a deflationary course. Not enough dollars were being created to meet demand in the marketplace. The Fed apparently forgot that the dollar is now an international currency; over two-thirds of our printed greenbacks end up being used offshore. The Fed blunder initially hurt the rest of the world more than it did us-that deflation was an unindicted co-conspirator in Asia's crisis of 1997-98 and in Latin America's of 1998-99-but American farmers began to feel the impact 18 months ago. Then the Fed went further, deliberately deciding to squeeze the economy by ratcheting up rates, because of a mistaken and deadly belief that prosperity causes inflation.

Fed economists confuse price changes that are a result of routine supply-and-demand pressures with price changes that are a result of a debasement of the currency. The oil spikes of the 1970s did not occur because of a sudden surge in demand; inflation was the cause. Conversely, the 1997 jump in the price of some commodities was not related to the money supply, but to the fact that capacity was not keeping up, for a while, with demand.

Greenspan & Co. were also working themselves into a lather over the booming equities market. Greenspan's now-infamous "irrational exuberance" speech in 1996 was given when the Dow was around 6,400. The Fed does not have a mandate to guide the stock market, but Greenspan felt we were in danger of a bubble similar to the one the Japanese had experienced in the 1980s. For a long time, he was oblivious to the real and extraordinary technological breakthroughs being developed. The Fed has done to our economy, in a milder way, what the Bank of Japan's stringent monetary policy did to Japan's: starved it of sufficient credit.

Greenspan's recent rate cuts are not working, because the Fed still isn't creating enough credit to alleviate the economy's dehydration. It's like going to a gas station and finding that the price of fuel is lower, but the gas station won't sell you more than a gallon of gas at a time, and even that only once a month. You are still not going to drive very far, very fast.

After a decade, the Bank of Japan is finally reversing course and will start pumping yen into Japan's parched economy. The Fed should follow suit here. Forget about pegging interest rates; just give us enough fuel to get the American economy humming again. (A good gauge is the price of that much-maligned metal, gold. When it gets up to the $300- $325 level, breathe easier; the Fed is truly easing up.)