Jay Reding.com

Feeding The Panic

Larry Kudlow has effusive praise for the Fed’s massive rate cut which slashed interest rates this morning.

I’m not so sure. Right now the markets are panicking, and such a massive rate cut reinforces the idea that there’s some major short-term problem on the horizon. We got into this mess because of over-lending, and it’s hard to imagine how over-lending will get us out of it. The markets are correcting, which is what a market should do in this situation. What I’m concerned about is that the Fed has bought into the panic psychology and is trying to get a quick fix in that will make things worse rather than letting the storm pass.

A rate cut and an economic stimulus package are both short-term solutions that will only blunt the effects of an economic downturn. We have a set of policies that are based on trying to calm fears in an election year rather than making the set of structural reforms that would actually solve the underlying problems in the US economy.

There are things that can be done—such as reducing taxes on business assets, fixing depreciation tables and reducing unnecessary regulation. Instead, we’ll get a “stimulus” in the form of a couple hundred dollars in tax rebates that will end up being used to pay down credit cards and the like. Depreciation tables don’t make for good campaign ads, but tax rebates do, even though tax rebates don’t do anything to fix recessions.

The fundamentals of the US economy remain strong, but the Fed keeps sending the wrong signal and is feeding the global panic. Even if an additional shot of liquidity is the right prescription, the Fed’s dramatic rate cut may only make nervous investors even more skittish rather than reassuring them into stopping the fall of global markets.