08 Oct 2008

Surprise! Coordinated Rate Cuts Don’t Magically Fix Years of Malinvestments

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The Fed, in conjunction with other central banks around the world, announced a rate cut. At first the market was up, but as of this writing the S&P 500 is down more than 70 basis points on the day. (Back before the “credit crunch” set in, this would have been an awful day.)

At some point, are policy makers going to realize that certain asset prices need to fall? More and more people are starting to recognize that the Fed’s 1% interest rates under Greenspan fueled the housing boom. And why did Greenspan do that? Well, because it would have been too painful to let the economy readjust after the dot-com bubble and bust.

It would be one thing if lots of analysts were saying, “It’s true, we might be sowing the seeds for an even worse crisis five years from now, but that’s a chance worth taking.” Yet nobody is even saying this. The people who are cheering the rate cuts think price inflation is the only possible downside to massive injections of phony credit.

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