Jay Reding.com

Bernanke Wisely Holds The Line

BloggingStocks congratulates Ben Bernanke for not lowering the Fed prime rate today. He deserves it. It would have been easy to cut rates and hope that a shot of liquidity would help the markets.

It wouldn’t. Instead, it would have created an even bigger inflationary threat than we have now. Cutting the interest rate would further threaten the weakened dollar, making things even worse for the economy. Our current problem stems from too much money being unwisely given out. Making it easier to hand out more loans is like giving an alcoholic a little hair of the dog to cure a hangover.

Like any good hangover, the only real cure is time, and the markets are going to be reeling for a while now. Then again, one of the purposes of a hangover is to remind us not to drink too much—and the markets need to learn that lesson if we’re to move forward and get our financial house in order. More bailouts, like a Fed bailout of AIG or New York’s idea of letting AIG borrow against its own subsidiaries will only exacerbate the situation. The Fed could ruin that recovery by subsidizing risky behavior—and thankfully the Fed doesn’t seem inclined to do so.

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