“Markets open for trading today in a new quarter and a new world, one where Washington, and not just the Federal Reserve, matters more than it has in many years,” writes Alex Berenson in today’s New York Times.

“Stocks have just finished their worst quarter since the crash of 1987. The Standard & Poor’s 500-stock index gave up 15 percent of its value, a total of more than $1 trillion, while the Nasdaq composite index fell nearly 31 percent.”

“At least for now, the steepest part of the slide appears to be over. Stocks recovered last week, and many professional investors say that if the United States can avoid a deep recession over the next year, they are reasonably valued, perhaps even cheap. But that is a very big if, and it may well depend on smart action from lawmakers, they say. “

“Jeffrey Applegate, chief investment strategist at Lehman Brothers, said yesterday that the markets needed Washington to move quickly, both to ease interest rates and to stimulate the economy with tax cuts and additional spending. ‘We’re talking about not just monetary response, we’re talking about fiscal response, and we’re talking about military response,’ Mr. Applegate said.”

“The Federal Reserve Open Market Committee, for its part, will meet on Tuesday, and most analysts are counting on another half-percentage point cut in short-term interest rates. The Federal Reserve also cut rates by half a percentage point on Sept. 17, the day the markets reopened after the terrorist attack on the World Trade Center.”

“But for much of the 1990’s, Wall Street paid only passing attention to other broad federal actions. To many in Silicon Valley and on Wall Street, the dramas of the government shutdown of 1995 and President Bill Clinton’s impeachment proved only that the federal government had become little more than a sideshow. Even before Mr. Clinton was acquitted in February 1999, the Nasdaq had begun its run to 5,000.”

“Last year, investors hardly seemed to care about whether Al Gore or George Bush would succeed Mr. Clinton as President. The conventional wisdom held that the need to keep bond traders happy and interest rates low would prevent either man from frittering away too much of the government’s budget surplus with new spending or tax cuts.”

“Despite the tax cuts pushed through by Mr. Bush this spring, before Sept. 11, the federal government remained on course to run very large surpluses for the next decade (although for the next couple of years, the surpluses would have come largely from Social Security taxes).”