The King Canute of the Stock Market Who Tries to Stop Volatility : Economy: The President has as much control over the Dow Jones Index as the legendary monarch who tried to stop the waves.

Every few years or so, somebody walks into a fast-food restaurant and starts shooting at random. Just as predictably, in following days, psychologists, sociologists and other pundits search for the “meaning” in the tragedy.

And every two years or so there is a sharp break in the stock market--as predictably “as snow in Minnesota in winter,” as one stock expert put it. And just as predictably, the financial pages swell with furrow-browed searches for the “meaning” of the event and a flurry of new ideas to save the economy.

Sudden stock-market breaks are essentially random events, but they can be counted on to induce panic attacks in a President, particularly when, as now, elections are looming. Certainly, great whooshes of relief were gusting through the White House in mid-week as the markets appeared to stabilize.

It is one of the cherished myths of modern politics that an Administration can alter the near-term course of the economy. It is a myth assiduously cultivated by Presidents during good times, and desperately denied during recessions. But since the American economy typically experiences four or five good years for every downturn, the myth is much more cultivated than denied.

The expectation for precise presidential economic management was fixed in the mythological firmament when John F. Kennedy came to Washington with a high-powered team of Ivy League economists and vowed to “get the country moving again”--a promise that was ringingly reinforced when a stock-market break in 1962 induced a considerable panic attack of Kennedy’s own.

Yet the Kennedy and early Johnson years were a time of unparalleled economic success. The five-year period from early 1961 through mid-1966 turned in the finest economic performance of the century. Real growth averaged 4.5% a year. Inflation fell to only 1% a year. Personal income increased by one-third. Corporate profits doubled. Exports and capital spending boomed.

In cold-eyed retrospect, however, it’s hard to find any connection between Kennedy’s policies and the boom. The major, single Administration initiative, a broad-based tax cut, was not even enacted until 1964, when the upturn was already maturing.

The “fine-tuning” myth disguises the uncomfortable truth that the only economic tools available to Presidents are sledgehammers. When Richard M. Nixon’s attempt at Keynesian micromanagement failed miserably in 1970, he slapped on wage-and-price controls, gunned up the money supply, broke the link between the dollar and gold and clubbed the country into a superheated boom just in time for the 1972 election. The price of spigoting an unlimited supply of dollars was a decade of global financial instability and wildly gyrating interest rates.

Jimmy Carter, Ronald Reagan and former Federal Reserve Chairman Paul A. Volcker also resorted to the sledgehammer when they collectively drove interest rates to 20% in 1981, to choke off the economy’s powerful inflationary impetus. That policy worked, but at the cost of one of the nastiest recessions in years.

The ineffectiveness of presidential fine-tuning is nicely illustrated by George Bush’s plaintive attempts to encourage bank lending by pushing down interest rates. Lower rates, it is assumed, will increase bank liquidity, encourage them to open the lending sluices and, presumably, “jump-start” the economy.

Obligingly, Alan Greenspan’s Federal Reserve has pushed rates down as hard as any central bank in recent history, but with little obvious effect on bank lending. The Fed, in fact, can control the level of only the shortest-term rates. Medium- and long-term interest rates have stayed stubbornly high, partly because the financial markets mistrust the good intentions of a politically compliant Fed.

Such limited interventions often produce perverse results. Because of Greenspan’s activist policies, banks can now borrow from the Fed at only 4.5%; but, at the same time.. they can invest in U.S. Treasuries at yields of from 6.5% to almost 8%. Quite reasonably, banks are loading up at the Fed borrowing window and round-tripping the money into Treasuries. With a nearly risk-free 2% profit margin, why should they waste time lending to business?

Meanwhile, what is the likely direction of the stock market? There is a good argument now that stock prices are high. Big-board stock prices suggest that investors are valuing companies at almost 20 times their current earnings. Historically, valuations of 15 times earnings have been considered quite aggressive. Bringing the market back to a normal price-earnings ratio would imply a 25% market drop, which would knock the Dow Jones Industrial Average, the most widely followed index, down from its current near-3000 level to about 2250.

But there are also good reasons why stocks may stay high. For one thing, corporate earnings are now depressed. When the recession ends--as, sooner or later, it must--and earnings recover, price-earnings multiples may suddenly look normal. And since interest rates are so low, investors have little incentive to move their money out of stocks and into cash to wait for the recession to end.

In other words, it is equally plausible to assume that the recent market break is just the first staggering of a market ready to pitch off a cliff, or to expect the market will stay about where it is until the recovery gets under way. That much uncertainty merely underlines that betting on short-term swings is a mug’s game--it is the long-term investor that, historically, has made out best.

The longer the recession, the heavier its costs. But one danger, particularly in a presidential election season, is that it will start politicians reaching for the sledgehammers. The importance of sharp stock-market breaks, then, is not the clues they give to the direction of the economy--almost always false--but that they can induce panic in Presidents, and that can have baleful consequences for the whole world.