Thursday, December 18, 2008

Fed: The smell of panic

The Federal Reserve's decision to cut the interbank loan rate to a "target" of 1/4-to-zero was in one sense simply an acknowledgment of reality and in another a sign of real panic. They've pumped hundreds of billions of funny money into the banks over the last few months, but so far the impact has been slight at best. Esmael Adibi, whom I talked to yesterday, said at the Chapman economic Forecast meeting last week that since the banks have to pay 5% interest (or whatever they're calling it) on much of the bailout money, they'll have to start lending soon. But so far they haven't exactly been eager to lend. In some ways that's not too bad; the trouble started with an orgy of government-mandated and -induced dubious loans, so it's not surprising and probably a good thing that they're tightening up criteria. And the government has been so haphazard, changing approaches every couple of weeks, that the lending environment is more than a little unsettled.

Anyway, here's the Register's editorial on the move, worrying that the government is setting us up for serious inflation is 2010 and 2011, and setting the stage for another boom-bust cycle. If it were up to me I would get rid of the Fed. A central bank is (and has been from the beginning) an instrument for creating inflation to facilitate government growth rather than for promoting genuine monetary and/or economic stability.

Incidentally, Chapman, which called the recession last December (just validated by the NBER) thinks we'll start coming out of it by the end of 2009, but doesn't expect a very robust recovery.

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