1. Global stock markets plunged this week (until the Fed rode to the rescue) "on recession fears".
You can argue the "decoupling" toss as much as you like, but there was absolutely no correlation between the degree that any given stock market went down, on the one hand, and the strength of that country's economic ties to the U.S. economy, on the other. This was about markets, not economics: the frothier the market (Hong Kong, India), the greater the fall. Everybody seems to be looking at the percentage-off-highs number, so it's worth pointing out that by that metric, the worst-affected economies are Ireland and Sweden. Hm.
And if the trigger had really been something U.S.-related, the market plunge would have started in the U.S. It didn't: it started on a U.S. national holiday.
2. Plunging stock prices are bad for the economy.
With the exception of the dot-com bubble, the economy has rarely relied overmuch on the ability of corporations to raise equity capital. All of those stocks trading on the stock market represent money that their companies have already raised, usually at prices far below the stocks' present levels. And again, with the exception of the dot-com bubble, there's rarely much of a wealth effect which translates higher stock prices into higher spending, or lower stock prices into lower spending. Falling stock prices are an effect, not a cause, of future economic slowdown.
3. The Fed's role in all this is to set the level of overnight interest rates at its optimal level.
The Fed's role right now is to prevent market panic and try to preserve liquidity. And the best way to do that is rate cuts, more than it is low rates. It's an important distinction, and it explains why the Fed is going to cut rates again at its regularly-scheduled meeting next week. The Fed was probably going to cut rates by 75bp at its next meeting all along. So if it's the Fed's job to set the level of overnight interest rates, and if the worst stock-market panic is behind us at that point, then one might think that the Fed would say "we just gave you your present on Christmas Eve, you don't get another one just because it's Christmas Day". But they won't. Instead they'll cut again, probably by 50bp.
Over the long term, as we saw with the Greenspan-fueled housing bubble, low nominal interest rates can have an enormous effect on the economy. But as far as 2008 is concerned, the big question is how big and how soon the rate cuts are going to be - not what level interest rates are at. In a weird way, Bernanke is now grateful that he raised rates at the beginning of his time as Fed chairman, since that gave him a tiny bit more room to cut rates now. Remember Japan, hobbled by the fact that interest rates were already at 0% and having no more room to cut.
4. A key downward driver of stock prices was worries over the monoline insurers.
See #1. You really think that the stock markets in Hong Kong and India care especially about MBIA (MBI) and Ambac (ABK)? And you really think that, overnight, the global stock markets suddenly became worried about credit - after proving time and time again over the past six months that they're not? I suppose it's possible. But if that were the case, then the lowest-rated companies would have performed particularly badly, and I don't think that happened.
What about those companies with monoline wraps? Aren't loads of investors going to have to sell their bonds in those companies in the event that the monolines lose their triple-A ratings? Well, maybe, but that would hardly be the end of the world. For one thing, the holders of triple-A-wrapped corporate debt constitute a completely different asset class to the holders of unwrapped corporate debt. And the monolines were pretty good about not wrapping plain-vanilla bonds which had any real chance of default.
Corporates in general - at least those corporates which managed to avoid being acquired by private equity - were generally extremely responsible about not leveraging up just because debt was cheap. That's one of the reasons why there was so much appetite for subprime loans and CDOs: the corporate sector simply wasn't issuing nearly enough paper to satisfy demand. It's true that the buy-side firms who invest in unwrapped debt might have the problem/opportunity of having to provide a bid for wrapped debt which is hitting the market. But that's not the kind of thing which worries stock-market investors in general. (Investors in Arsenal FC in particular, though - that's a different matter.)
Besides, credit markets had exactly the opposite reaction to the rate cut that stock markets had. Stock markets generally rose over the hours they were open after the rate cut was announced: the FTSE 100 closed up 3% on the day. The iTraxx Crossover, by contrast, closed the day wider than it had started, the rate cut notwithstanding. Obviously the drivers in the stock market are not the same as the drivers in the credit markets.