Is the Krugman rally an overreaction?

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When last I checked, the Dow was up 6.9% and the S&P 7.5% in reaction to Paul Krugman getting the economics Nobel before trading began this morning. In London the FTSE ended the trading day up 8.26% and in Frankfurt the DAX was up 11.4%.

What? You say there are other possible reasons for global markets’ surge? Something about a trillion-euro bank rescue? Whatever. “Krugman rally” sounds better.

I do worry, though, that this rally may be short-lived. It’s partly just that I think the mechanics of rescuing banks in both Europe and the U.S. will turn out to be far more fraught than anyone seems to be considering at the moment. Remember, we still don’t have a clear picture of what Treasury plans to do in the U.S.

Mainly, though, my concern is that we can learn very little about the future direction of the market from which direction stocks moved in today. But we can learn a lot about the future volatility of the market from the volatility today. Today’s big jump presages more big moves. Which could just as easily be down as up.

Also, I know I really ought to be citing credit market measures rather than stock indices. But bond markets are closed today in the U.S. Plus, I’m starting to wonder whether LIBOR, the much-watched measure of what banks charge to lend to each other, might be totally broken because banks are now just borrowing from the Fed and other central banks rather than from each other.