“Wall Street has a dream: that the Federal Reserve will rescue financial markets with a sharp cut in interest rates.”
That is the opening line in the article, Fed Treads Moral Hazard, published by the Wall Street Journal today -learned of this via The Big Picture.
I am sorry but I don’t want the Fed to cut rates just to bail out Wall Street. I support lower rates and I support tax cuts as I believe that they stimulate the economy, however, this may not be the time to cut interest rates. The article goes on to say:
“Behind that dream lurks a problem, something financial people call moral hazard.
Moral hazard is an old economic concept with its roots in the insurance business. The idea goes like this: If you protect someone too well against an unwanted outcome, that person may behave recklessly. Someone who buys extensive liability insurance for his car may drive too fast because he feels financially protected.”
“Earlier in his term as Fed chairman, Ben Bernanke was seen by a lot of investors as possibly too inclined to bail people out. Mr. Bernanke was dubbed “Helicopter Ben” because of a reference he once made to an economic theory that, if deflation threatens, the Fed’s role is to dump money into the economy as if dropping it from a helicopter.”
Investor’s Business Daily published an editorial in today’s edition titled, Bank On The Fed, which calls for the Fed to cut interest rates immediately and claims that the Fed is not doing enough.
They list statistics from Lehman Brothers which shows that the Fed injected an average of $62 billion per day into the market after September 11 (12th -17th). They injected an average of $18 billion per day last week with a jump to $31 billion on Thursday and Friday.
The editorial goes on to say:
“We don’t believe either the Fed or Congress should “bail out” those who made bad loans. More than 60 lenders have already gone bust, and more likely will. That’s bitter medicine. Even so, that’s not the same as saying the Fed should let the rising portfolios of bad subprime loans turn into a system wide financial panic.”
“Fast action will stave off trouble later. And let’s look honestly at what’s happening. As President Bush noted, the economy remains basically solid — just as it did in 1998 during the LTCM crisis.”
“The worse that could happen right now is for the Fed to do too little, and Congress to do too much. There’ll be plenty of time to fix what’s wrong later. Right now, it’s time for action, Mr. Bernanke.”
– please see today’s edition of Investor’s Business Daily for the complete editorial
Which article do you agree with?
Let’s hear your thoughts on the matter; leave a comment and we can start to discuss and debate!
image via WSJ!
I dealt with this on my blog, but there is now way the Fed is going to lower rates with the dollar in a bear market.
The problem with the WSJ article and so many TV economists view of the current credit issues is that many forget that the Fed has many other roles that they play in addition to stablizing inflation and providing liquidity for a solid GDP number. So I went right to the Feds website and sure enough here is one of their main responsibilities:
“maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.” Including credit!
IBD has the more accurate analysis.
The Feds obligation is and should be the US economy: first to defend against the tyranny of inflation and second to ease unemployment when that is high and rising. Currently, the economy is stable and inflation is not a big concern, although consumers of gas, corn, meat, pizza, starbucks, copper and other items might disagree 😉 Employment is good and no real signs of deterioration despite the decline in the housing market. To ease now would say the recent problems will have a drastic impact if we don’t lower now. That is not a message they want to send. Risk takers are important to our economy and markets, but taking blind risk (moral hazard) cannot be supported by bail-outs. Let some people burn, let some mortgages fail, let the wall streeters only get a few million each in bonuses this year. Thin the herd, but save the economy.
I think the Fed is part of the problem to begin with. Injecting cash into the economy whenever they so choose is what causes the boom and bust cycle in the first place.
No FED rate cut please….but GS is staring to look really attractive at these levels…watching and waiting to nibble on it…this is a traders market right now…no buy and hope.