Reaction to Fed Interest Rate Cut from Davos

I always thought that economists were supposed to be worshippers of the free market. Shouldn't the government just keep its hands off and let the discipline of the market punish all these evil doers!!The Invisible Hand is supposed to give them a good spanking for being such reckless lenders and borrowers.


Financial Times - January 23, 2008


Davos 2008
FED'S CUT TRIGGERS HARSH WORDS FROM DAVOS

Reactions to the US Federal Reserve's dramatic 0.75 percentage point
cut in interest rates ranged from hostile to lukewarm as
policymakers, businessmen and economists gathered at the World
Economic Forum on Wednesday.

Economists at the meeting warned that the monetary easing announced
on Tuesday would not succeed in boosting a sickly US economy.
Moreover, they said, by reacting to turmoil in equity markets, the
Fed seriously risked creating the impression that it was most
concerned with ensuring investors did not lose money.

Stephen Roach of Morgan Stanley said that the Fed's policy of
cleaning up after a bubble has burst was "a dangerous and reckless
and irresponsible way to run the world economy". "It was market-
friendly action," he wrote in his FT.com blog from Davos, asking: "Is
that the way to run a central bank?"

Sir Howard Davies, the director of the London School of Economics and
a former chairman of the UK Financial Services Authority, the UK
financial regulator, agreed with Mr Roach. He said the move reminded
him of the character Corporal Jones in the long-running UK sitcom
Dad's Army, who always shouted "don't panic" just when he and
everyone else were doing just that.

In one session, almost 60 per cent of the delegates voted in favour
of a motion saying central banks had lost both their focus and
control with respect to economic governance.

The reactions among delegates were not entirely negative, however.
John Snow, chairman of Cerberus Capital Management and the former US
treasury secretary said the emergency rate cut showed that "the
question of whether the central bank is capable of bold action was
answered yesterday".

Jacob Frenkel, vice-chairman of AIG, added the cut was "on the mark",
indicating the drama and the severity of the situation.

But they were in a minority.

Professor Lawrence Summers of Harvard University - another former US
treasury secretary - said: "It is hard to give central banks a high
grade over the past two years on recognition of incipient bubbles or
on their action to address them. Nor in the last six months when they
were behind the curve."

Professor Nouriel Roubini of New York University, a long-standing
bear on the US and global economies, agreed and called for a more
symmetric approach from the Fed. "There was a Greenspan put and now
there is a Bernanke put," he added, in reference to the perception
that Fed chairmen always cut interest rates when investors lose money.

But the more worrying suggestion was that the action would not work.
Professor Joseph Stiglitz of Columbia University, a Nobel prize-
winning economist, thought the Fed had acted "too late". With
structural forces in the US housing market and financial system
likely to bring a contraction, it would be as effective as "pushing
on a piece of string".

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