Fed Rate Cut Won't Stop a Recession

by slenderdog | January 30, 2008 at 01:31 pm

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The Federal Reserve on Wednesday cut a key interest rate for the second time in just over a week, reducing the federal funds rate by a half point. It signaled that further rate cuts were possible.
The Fed action pushed the funds rate to 3 percent. It followed a three-fourths of a percentage point cut on Jan. 22, a day after financial markets around the world had plummeted on fears that the U.S. economy was heading into a recession. That decrease had been the biggest one-day move in more than two decades...

In a brief statement explaining their
decision, Federal Reserve Chairman Ben Bernanke and his colleagues said
that "financial markets remain under considerable stress."

No surprise. No, not even the size of the cut. It just smells of panic.

We don't need cheaper rates and more loans. Even lower rates aren't likely to encourage people with excessive debt to borrow more--and hopefully the banks are lending more cautiously. It isn't that we want a recession, but that we need a recession to correct the effects of the "irrational exuberance" that Alan Greenspan first criticized and later embraced. Easy credit is precisely what brought this situation about: too many loans secured against overvalued assets. The bad loans need to be written off, asset prices need to fall. Yes, some people will suffer but they'll survive and they'll have learned that borrowing is not risk free.

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