Market tremors don't bode well

It's rarely wise to pay too much attention to the daily ups and downs of the financial markets. But in recent days stocks have been bouncing around like pinballs, causing bystanders to worry that sooner or later the global finance machine will once again signal "tilt."

All this volatility -- including right here on Wall Street -- is an ominous sign that politicians on both sides of the Atlantic just can't get it together to solve some very big problems. The United States and Europe are afflicted with anemic growth, which will only make their debts harder to manage, and lately there are signs both might be headed into another recession. Yet their leaders seem unable to grapple effectively with the joblessness, deficits and trade imbalances that afflict societies here and abroad.

The debt-ceiling debacle in Washington, followed by the downgrade of U.S. debt by Standard & Poor's, set off the current round of market jitters, which continued yesterday with a 4 percent drop in the Dow Jones Industrials. But the festering debt crisis in Europe is surely helping to sustain it. What began as a problem in one country -- Greece, whose citizens like government services better than they like paying taxes -- has spread like gangrene across the continent. Unless the eurozone is willing to guarantee the debt of all its member-states, it's hard to see a happy ending to this mess, which European leaders worsened by dithering.

The European Central Bank staved off disaster by buying Spanish and Italian bonds. It should also cut interest rates. But these are delaying actions, and austerity programs adopted by Greece, Italy and others will only make the problem worse by slowing growth, reducing tax revenue, and making sovereign debts harder to repay. Staying the course is not an option; an uncontrolled chain of European defaults could trigger another global banking crisis.

On this side of the pond, some way must be found to stimulate hiring and resolve the lingering foreclosure mess. But progress on anything but further austerity seems unlikely given the poisonous climate in Washington, where nothing seems to happen that could give comfort to anyone but ideologues.

Jittery markets, meanwhile, not only reflect investor concerns but also exacerbate them, since plunging stock prices make people nervous even if prices rebound the next day. This corrosive volatility may be worsened by the participation of high-speed traders, who use supercomputers to exploit small market movements by placing buy and sell orders in the span of millionths of a second. Such techniques, which are especially lucrative at times of high volatility, now account for about two-thirds of U.S. stock trading.

There are no easy answers. For the time being, U.S. regulators can provide some reassurance by seeing that banks and money market funds remain liquid -- just as Federal Reserve and New York officials have done in monitoring the U.S. operations of European banks. Uncle Sam must also figure out -- fast -- if high-frequency trading should be abolished or reined in. It's bad enough when global markets function like casinos. We surely don't need them to act like pinball machines. hN